UK: HOW TO AVOID THE PRESSURES OF UNLIMITED LIABILITY.

UK: HOW TO AVOID THE PRESSURES OF UNLIMITED LIABILITY. - When the business of a partnership expands, the increasing scale of its clients' affairs exposes partners to increasing professional liability risks. As one accountant puts it, 'every partner's cuf

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Last Updated: 31 Aug 2010

When the business of a partnership expands, the increasing scale of its clients' affairs exposes partners to increasing professional liability risks. As one accountant puts it, 'every partner's cuff-links are on the line' when it comes to negligence suits.

The risk of being sued for astronomical sums (for example in the case of some of the controversial Lloyds insurance syndicates, or of bankruptcies such as Polly Peck, in which every legal channel will be pursued in the attempt to mitigate losses) has led major accounting firms to examine the possibility of incorporation with limited liability as a defence mechanism.

The first of the Big Six firms to contemplate this step is KPMG, which is planning to propose to its 600 partners a scheme to transfer the firm's listed company audit practice into a limited company vehicle.

Tim Roberts, KPMG's partner in charge of corporate affairs, comments on the transition: 'Partnership is the traditional formula within the professions; it has tax advantages, and advantages in terms of the limited disclosure of financial information; and it makes each partner his own decision-maker.

'Of course we have procedures to ensure proper standards across the firm, but in the partnership format there is always some risk of individual lapses.

In incorporated form, not only is the liability limited, but a more vertical management structure would perhaps ensure that some errors would not be made in the first place.

'And,' Roberts continues, 'it may be an incentive to those joining the profession and looking for promotion within it: they can aspire to join a board of directors rather than simply becoming one of a large number of partners.' To the suggestion that this sounds like an argument for running the whole firm within a limited company venture, Roberts comments: 'This is a step-by-step process. If it works successfully, maybe limited liability is the way forward in other areas of our business.' Leading management consultancy firms have had to address the same issues, and come up with their own solutions.

McKinsey, for example (traditionally very secretive about its internal affairs) is a limited company which operates - in all respects except that of personal liability - as though it were a partnership: although partners may hold differing numbers of shares according to seniority, they have only one vote each, and shares may only be held by working partners.

Booz Allen has a similar structure, but a more complicated past. At an earlier stage the company went public, but the outcome proved unsatisfactory in terms of both internal morale and external reputation: in due course the firm decided to go private again.

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