Advocates/partners who have entered into a partnership with one another are referred to as a "firm", and the name under which their business is carried on is called the "firm name". In practice, we normally refer to this type of set-up as a “law firm”, which name is used throughout this discussion.
Law firms provide legal representation and advice to clients, and are made up of advocates specializing in various areas of law. The advocates/partners are the law firm and are responsible for all profits, losses, and liabilities. This means that no separate legal entity is formed, and each partner is personally liable for any debts taken on by the business or other partners. Profits and losses are shared among the partners, and if there is no provision in place for what happens if a partner leaves or dies, the law firm may collapse.
This traditional legal structure has led to numerous challenges and has prompted the need to consider a more practical structure, such as a Limited Liability Partnership (“LLP”), which is used in countries like Uganda and Kenya. In an LLP, among others, the partners have limited liability for the debts and obligations of the partnership, which provides greater protection for the individual partners. This means that the personal assets of the partners are not at risk if the firm is sued or incurs debt. This can provide peace of mind for the partners and may encourage them to take on more business without fear of personal financial repercussions.
The current structure presents the following challenges:
General challenges of unlimited liability
Law firms are currently structured in a way that exposes the partners to joint and several liabilities for the debts and obligations of the business, as there is no legal veil to protect them. This means that their personal assets can be seized to settle the financial obligations of the law firm. This can be a significant concern for partners, as it may discourage them from taking on certain business opportunities or taking on more risk. To offer a vibrant environment that will promote the growth and success of law firms, it is necessary to consider ways to protect the partners from potential risks and liabilities.
Tax exposure
Law firms in Tanzania face challenges related to tax exposure that can hinder their sustainability, growth and success. Partners are personally liable for the taxes of the partnership. This means that the individual partners are responsible for paying their share of the partnership's taxes on their tax returns. The partnership itself is not taxed on its income, as it is not considered a separate legal entity. Instead, the partnership's income is passed through to the individual partners and taxed at the personal level (normally referred to as a pass-through entity).
There can be significant tax exposure for the partners, as they may be required to pay taxes on their share of the partnership's income, even if they have not received the funds personally.
Overall management by the partners
Another challenge is that traditional partnership structures may lack flexibility in terms of management and decision-making. In the current structure, for example, all partners are typically involved in the management of the business and have equal say in decision-making. This may not be practical for larger partnerships or for partners who have different levels of experience or expertise or for those who have no management skills at all.
Lack of perpetual succession
Law firms do not have perpetual succession which means that the partnership is dissolved upon the death, retirement, or withdrawal of a partner, creating instability and unpredictability. This can be a significant issue for the remaining partners, as they may need to find a new partner or reorganize the partnership to continue doing business.
Many successful law firms in Tanzania have had to close due to the death or incapacity of their partners, resulting in lost livelihoods for employees. To ensure the long-term stability and success of law firms, it is necessary to examine how they can be structured in a way that does not rely on the continued involvement of individual partners, and that allows them to continue serving their clients and employees even in the face of unexpected changes.
Outdated legal regime
The Law of Contract, Chapter 345, Revised Edition 2019 of the laws of Tanzania (the “LCA”), despite having undergone several amendments, is outdated and requires significant updates, particularly in Part XI which pertains to partnerships. The state of the current legal system in Tanzania is hindering the development and stability of law firms due to its lack of vitality. The laws need to be regularly updated and modernized to support the growth and sustainability of institutions formed under them.
It is recommended therefore as follows: -
Note: This is not a legal opinion and the contents hereof are not meant to be relied upon by any recipient unless our written consent is sought and explicitly obtained in writing.
