Do the Owners of Small Law Firms Benefit from Limited Liability?

by John A. Romley, Eric Talley, Bogdan Savych

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Beginning in the 1990s, states permitted law firms to organize as Limited Liability Partnerships and Limited Liability Companies. These organizational forms preserve many of the attractive features of a partnership while shielding each of a firm’s owners from liability for the malpractice of other owners. Some observers have asserted that this liability shield should be especially helpful to small law firms. If so, the authors would expect small partnerships to reorganize under the new forms and grow. This paper examines how the availability of these new organizational forms affected the organization of law firms during the period 1993-1999. It also explores how growth (measured in terms of number of lawyers) has varied between firms that reorganized into one of the new firms and those that did not. They find that smaller firms were much less likely to reorganize compared to larger firms, but small partnerships that reorganized grew faster than those that did not. Limited liability appears to be modestly beneficial to the owners of small law firms.

The research described in this report was completed under the auspices of the Kauffman-RAND Institute for Entrepreneurship Public Policy and was funded by the Ewing Marion Kauffman Foundation.

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