Define: Law Firm

Quick Summary of Law Firm

A law firm is a business entity formed by one or more attorneys who provide legal services to clients. Law firms typically offer a wide range of legal services, including advising clients on legal matters, drafting legal documents, representing clients in court proceedings, and providing legal guidance and assistance in various areas of law. Law firms may specialise in specific practice areas, such as corporate law, criminal defence, family law, or intellectual property, or they may offer a broad range of services to meet the diverse needs of their clients. Law firms may vary in size and structure, ranging from solo practitioners to large multinational firms with hundreds or thousands of attorneys and support staff.

A law firm is a company that one or more lawyers establish to engage in the practice of law. The primary service provided by a law firm is to advise clients (individuals or corporations) about their legal rights and responsibilities and to represent their clients in civil or criminal cases, business transactions and other matters in which legal assistance is sought.

Smaller firms tend to focus on particular specialities of the law (e.g. patent law, labour law, tax law, criminal defence, personal injury); larger firms may be composed of several specialised practice groups, allowing the firm to diversify their client base and market and to offer a variety of services to their clients.

Law firms are organised in a variety of ways, depending on the jurisdiction in which they practice. Common arrangements include:

• Sole proprietorship, in which the attorney is the law firm and is responsible for all profit, loss and liability;
• General partnership, in which all of the attorneys in the firm equally share ownership and liability;
• Professional corporations, which issue stock to the attorneys in a fashion similar to that of a business corporation;
• Limited liability company, in which the attorney-owners are called “members” but are not directly liable to third-party creditors of the law firm;
• professional association, which operates similarly to a professional corporation or a limited liability company;
• Limited liability partnership (LLP), in which the attorney-owners are partners with one another, but no partner is liable to any creditor of the law firm nor is any partner liable for any negligence on the part of any other partner. The LLP is taxed as a partnership while enjoying the liability protection of a corporation.

In many countries, including the United States and the United Kingdom, there is a rule that only lawyers may have an ownership interest in, or be managers of, a law firm. Thus, law firms cannot quickly raise capital through initial public offerings on the stock market, like most corporations. In the United States, this rule is promulgated by the American Bar Association and adhered to in almost all U.S. jurisdictions.

The rule was created in order to prevent conflicts of interest. In the adversarial system of justice, a lawyer has a duty to be a zealous and loyal advocate on behalf of the client. Also, as an officer of the court, a lawyer has a duty to be honest and not file frivolous cases. A lawyer working as a shareholder-employee of a publicly traded law firm would be strongly tempted to evaluate decisions in terms of their effect on the stock price and the shareholders, which would directly conflict with the lawyer’s duties to the client and to the courts.

In the United Kingdom, lawyers are divided between barristers, who plead in the higher courts and give expert opinions on points of law, and solicitors, who act directly for clients. Even though barristers are traditionally seen as the senior branch of the legal profession, and the most distinguished British lawyers are generally barristers, most barristers are self-employed sole practitioners (although they share facilities in sets of rooms known as “chambers”, usually at one of the four Inns of Court). All the main UK law firms are firms of solicitors.

Big law firms usually have separate litigation and corporate departments. The corporate departments advise companies on corporate deals, and the litigation departments deal with the problems the firms’ clients face.

Structure And Promotion

Law firms are typically organised around partners, who are joint owners and business directors of the legal operation; associates, who are employees of the firm with the prospect of becoming partners; and a variety of staff employees, providing paralegal, clerical, and other support services. An associate may have to wait as long as 9 years before a decision is made as to whether the associate “makes a partner. Many law firms have an “up-or-out policy” (pioneered around 1900 by partner Paul Cravath of Cravath, Swaine & Moore): associates who do not make partner are required to resign, either to join another firm, go it alone as a solo practitioner, go to work in-house in a corporate legal department, or change professions (burnout rates are very high in law).

Making partner is very prestigious, especially at a large or midsize firm. Such firms take out advertisements in legal newspapers to announce who has become a partner. Traditionally, partners shared directly in the profits of the firm after paying salaried employees, the landlord, and the usual costs of furniture, office supplies, and books for the law library (or a database subscription). However, many large law firms have moved to a two-tiered partnership model, with equity and non-equity partners. Equity partners are considered to have ownership stakes in the firm and share in the profits (and losses) of the firm. Non-equity partners are generally paid a fixed salary (albeit much higher than associates), and they are often granted certain limited voting rights with respect to firm operations. It is rare for a partner to be forced out by fellow partners, although that can happen if the partner commits a crime or malpractice, experiences disruptive mental illness, or is not contributing to the firm’s overall profitability. However, some large firms have written into their partnership agreements a forced retirement age for partners. This age can be anywhere from age 65 on up. In contrast, most corporate executives are at much higher risk of being fired, even when the underlying cause is not directly their fault, such as a drop in the company’s stock price.

In the United States and Canada, many large and midsize firms have attorneys with the job title of “counsellor,” ” “special counsel,” or “of counsel.” These attorneys are employees of the firm, like associates, although some firms have an independent contractor relationship with their own counsel. But unlike associates, and more like partners, they generally have their own clients, manage their own cases, and supervise associates. These relationships are structured to allow more senior attorneys to share in the resources and “brand name” of the firm without being a part of management or profit-sharing decisions. The title is often seen among former associates who do not make partners,  who are laterally recruited to other firms, or who work as in-house counsel and then return to the big firm environment. At some firms, the title “of counsel” is given to retired partners who maintain ties to the firm. Sometimes an “of counsel” is a senior or experienced attorney, such as a foreign legal consultant with experience in international law and practice, and his own clients. They are hired as independent contractors by large firms as a special arrangement that may lead to profitable results in a partnership. In these situations, an “of counsel” could be considered a transitional status in the firm.

Size

Law firms range widely in size. The smallest law firms are solo practitioners (lawyers practicing alone), who form the vast majority of lawyers in nearly all countries.

The United States pioneered the concept of a large law firm in the sense of a business entity consisting of more than one lawyer. The first law firms with two or more lawyers appeared in the U.S. just prior to the American Civil War (1861-1865).[5] The idea gradually spread across the Atlantic to England, although “English solicitors remained a corps of solo practitioners or very small partnerships until after World War II.” Today, the United States (and the United Kingdom) have many small firms (2 to 50 lawyers) and midsize firms (50 to 200 lawyers).

Lawyers in small cities and towns may still have old-fashioned general practices, but most urban lawyers tend to be highly specialised due to the overwhelming complexity of the law today.

Thus, some small firms in the cities specialise in practicing only one kind of law (like employment, antitrust, intellectual property, or telecommunications) and are called “boutique” firms.

However, the largest law firms have more than 1,000 lawyers. These firms, often colloquially called “megafirms” or “big law,”  generally have offices on several continents, bill up to $750 per hour or higher, and have a high ratio of support staff per attorney. They can, and in some cases do, litigate every issue, burying their opponents in a blizzard of paper in the process; the result has been a kind of legal “arms race” where every large corporation tries to retain the services of the biggest law firm they can afford. Because of the localised and regional nature of firms, their relative size varies. Thus, in New York, several hundred attorneys would be required for a “large firm,”  whereas in Las Vegas, perhaps only 50 attorneys would be needed to be a “large firm.”.

The largest firms like to call themselves “full-service” firms because they have departments specialising in every type of legal work that pays well, which in the U.S. usually means mergers and acquisitions transactions, banking, and certain types of high-stakes corporate litigation. These firms rarely do plaintiffs’ personal injury work. However, the largest law firms are not very large compared to other major businesses (or even other professional services firms) due to the fact that, as law firms, they cannot raise capital from the public markets and, due to ethics rules, cannot represent conflicting parties.

The largest law firms in the world are based primarily in the United Kingdom and the United States. The American system of licencing attorneys on a state-by-state basis, the tradition of having a headquarters in a single U.S. state, and a close focus on profits per partner (as opposed to sheer scale) have to date limited the size of most American law firms. Thus, while the most profitable law firms in the world remain in New York, four of the six largest firms in the world are based in London, in the United Kingdom. But the huge size of the United States results in a larger number of large firms overall; a 2003 survey found that the United States alone had 901 law firms with more than 50 lawyers, while there were only 58 such firms in Canada, 44 in Great Britain, 14 in France, and 9 in Germany. There is an increasing tendency towards the globalisation of law firms.

In 2004, the largest law firm in the world was the British firm Clifford Chance, which had revenue of US$1.675 billion. This can be compared with $312 billion for Wal-Mart. On the other hand, Clifford Chance employs about 6,500 worldwide (3,200+ of whom are fee-earning lawyers), versus Wal-Mart’s 1,600,000 employees.

Salaries

The salary paid to lawyers in law firms depends on the firm size. In the United States in 2006, the median salaries of new graduates ranged from $50,000/year in small firms (2 to 10 attorneys) to $135/year in very large firms (more than 501 attorneys). According to alreadybored.com, many large firms in major markets such as NYC, California, DC, Boston, and Chicago compensate new associates according to the following pay scale:

First Year: $160,000, Second Year: $170,000, Third Year: $185,000, Fourth Year: $210,000, Fifth Year: $230,000, Sixth Year: $250,000, Seventh Year: $270,000, Eighth Year: $280,000. Other markets, such as Texas, start at $160,000, but the annual increases are much smaller than the foregoing scale. With a few exceptions, markets such as Atlanta, Philadelphia, New Jersey, Florida, Denver, and Seattle generally start at $130,000 or $145,000. With a few exceptions, most other U.S. markets start within $20,000 of $100,000.

NYC bonuses (the top of the U.S. market) in 2007 were as follows: First Year: $45,000 (35K + 10K special bonus), Second Year: $55,000 (40K + 15K SB), Third Year: $65,000 (45K + 20K SB), Fourth Year: $80,000 (50K + 30K SB), Fifth Year: $95,000 (55K + 40K SB), Sixth Year: $110,000 (60K + 50K SB), Seventh Year: $115,000 (65K + 50K SB). Larger markets outside NYC typically match the base bonus without the special bonus. Smaller markets and/or smaller firms pay $5K to $20K bonuses, if any at all.

Location

Most law firms are located in office buildings of various sizes, ranging from modest one-story buildings to some of the tallest skyscrapers in the world (though only in 2004, Paul, Hastings, Janofsky & Walker LLP was the first firm to put its name on a skyscraper). Some solo practitioners practice out of their homes or in offices built as special additions to their homes.

Because their “work product” is often intangible, or at least conceptually difficult for clients to grasp, some firms are notorious for using jaw-dropping interior design (a huge amount of floor space and fantastic views) as a “shock and awe” tactic to impress prospective clients and intimidate opposing counsel. Other firms will find more modest office space, depending on the nature of the practice.

In late 2001, it was widely publicised that one personal injury plaintiff’s firm in the state of New York has been experimenting with bus-sized “mobile law offices.” The firm insists that it does not “chase ambulances.”. It claims that a law office on wheels is more convenient for personal injury plaintiffs, who are often recovering from severe injuries and thus find it difficult to travel far from their homes for an intake interview.

Rankings

As legal practice is adversarial, law firm rankings are widely relied on by prospective associates, lateral hires, and legal clients. Substantive rankings typically cover practice areas such as The American Lawyer’s Corporate Scorecard and Top IP Firms. Workplace rankings are directed towards lawyers or law students and cover such topics as quality of life, hours, family friendliness, and salaries. Finally, statistical rankings generally cover profit-related data such as profits per partner and revenue per lawyer.

In an October 2007 press conference reported in the Wall Street Journal and the New York Times, the law student group Building a Better Legal Profession released its first annual ranking of top law firms by average billable hours, pro bono participation, and demographic diversity. Most notably, the report ranked the percentages of women, African-Americans, Hispanics, Asian-Americans, and gays & lesbians at America’s top law firms. The group has sent the information to top law schools around the country, encouraging students to take this demographic data into account when choosing where to work after graduation. As more students choose where to work based on firms’ diversity rankings, firms face increasing market pressure in order to attract top recruits.

Disclaimer

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 9th April, 2024.