As the legal sector continues to evolve, many law firm owners are exploring new ways to exit their businesses – whether through a sale, merger, or internal transition. One increasingly discussed route is the Employee Ownership Trust (EOT), a model that allows a company to be owned by a trust on behalf of its employees. While EOTs offer attractive benefits, they are not immediately accessible to most UK law firms due to their legal structure.
EOTs: a quick overview
An EOT enables a company to be sold to a trust that holds shares on behalf of its employees. The trust typically pays the selling owners over time, funded by the company’s future profits. This model has gained popularity for its ability to preserve business culture, reward employees, and offer tax advantages to sellers.
The legal structure barrier
Here’s the critical issue for law firms: EOTs only apply to limited companies. The vast majority of UK law firms operate as Limited Liability Partnerships (LLPs) or general partnerships, which are incompatible with the EOT framework.
To pursue an EOT, a law firm would first need to convert to a limited company – a process that involves:
- Legal and accounting costs to restructure the firm
- Potential tax implications depending on how assets and goodwill are transferred
- Approval from the Solicitors Regulation Authority (SRA), which may be required depending on the firm’s regulatory setup
- Rewriting governance and profit-sharing arrangements, which can be complex and sensitive
For many firms, the conversion may be costly, disruptive, and potentially unworkable.
Why consider an EOT?
For existing companies or firms that are able to restructure, EOTs offer several compelling advantages:
- Capital Gains Tax Relief: Sellers may pay no CGT on the sale of shares to an EOT if the transaction qualifies.
- Simplified Sale Process: EOT transactions typically involve less buyer due diligence and fewer post-sale liabilities.
- Employee Engagement: Ownership can foster a stronger sense of commitment and accountability among staff.
- Tax-Free Bonuses: Employees can receive annual bonuses of up to £3,600 tax-free.
- Altruistic Legacy: Selling to employees can be seen as a values-driven decision that preserves the firm’s independence.
Key challenges
Even after restructuring, EOTs come with their own set of challenges:
- Deferred Payment Risk: Most of the sale price is paid over time from future profits. Banks are often reluctant to fund EOT transactions, making payouts uncertain.
- Leadership Transition: A capable management team must be in place to run the firm post-sale.
- Impact on Career Progression: Junior lawyers may feel disincentivised if the traditional path to equity partnership is removed.
Is it right for your firm?
For law firms considering a sale or merger, EOTs may offer a progressive and employee-centric alternative – but only if the firm is a limited company (or willing and able to restructure as a limited company). For firms where partnership remains a key motivator or where restructuring would be prohibitively complex, more traditional sale or merger routes may remain the better option.
