Attorney Partnerships Explained
Attorney partnerships generally refer to a specific type of law firm ownership. Many lawyers will begin as sole practitioners and eventually become partners with one or more other attorneys when they feel that joining forces or pooling resources would be better for their clients and firm. Those who form partnerships with only a few others are often known as small firm partners; larger partnerships emerge when several small firms join together. Many large law firms today have large attorney partnerships.
There are plenty of reasons why attorneys elect to form partnerships with others, but the most likely reason involves going into practice with a trusted friend and/or colleague. Attorney partnerships also provide younger lawyers with mentorships through older partners, while sometimes allowing another attorney the flexibility to focus on family obligations. Some attorney partnerships blend practices, while others simply allow firms that are unused to working together to do so more comfortably by partnering than collaborating as separate firms.
Some of the advantages of forming partnerships include the ability to create a cohesive practice that offers the public a long-term commitment to better serve a market . A small firm, for example, is limited in its ability to create specialties because it usually has only a few attorneys working for it, but several firms can combine into one cohesive unit to offer particular services even if those practicing separately might not have been able to offer the particular type of service before (such as real estate, family law, etc.). Other advantages include the positive reputation of a larger law firm, more clients to serve, a larger budget, and a greater ability to benefit consumers in a number of ways.
Attorney partnerships with a few members or fewer are the most common method for forming a larger firm. While most law firms are solo practices across the nation, a few attorneys can decide to go into practice together as a way to continue to provide clients with the same quality service despite having to share a space and, potentially, clients. Large attorney partnerships, on the other hand, usually refer to firms with several hundred members. The majority of these firms are located in large urban centers with plenty of work to go around for everyone. Elite partnerships even employ hundreds of attorneys and serious workers in other roles that allow the firm to run well.
Elements of a Partnership Agreement
To ensure that a partnership is functioning optimally, it should include at a minimum, the following:
Profit and Loss Sharing: A clause stipulating how profits and losses are to be divided fairly between the two or more attorneys, as well as within the firm as a whole is crucial. While most people agree that profits should be split evenly among partners, in practice it is sometimes necessary to devise unique ways to divide up profits. For instance, younger attorneys may be expected to accept a smaller share of profits while they build their practice. Other partners that carry a heavier workload may need to receive a larger portion of profits. In any case, it is important that all parties are in agreement as to how profits are to be divided.
Decision-Making Structure: A partnership agreement should make it clear how decisions are to be made. It should set forth how many votes are required to make different decisions, and who gets to vote on them.
Capital Contributions: A partnership agreement should set out whether anything other than funds or capital assets of the firm will serve as a contribution of value sufficient to give the partner an ownership interest in the business. In some cases, the contribution may even be nothing more than time spent working on the business.
Dispute Resolution Mechanism: No business can function successfully without a method for resolving disputes. If each and every disagreement between partners is decided in court, the relationship is likely to be both expensive and likely to break down. Instead, the partnership agreement should provide a method for resolving disputes short of ending the relationship between the parties. Ultimately, only the partners can decide what method of dispute resolution is best, but the method should be clearly set out in the agreement.
Safeguarding Interests Through Legal Language
One of the most critical aspects of a partnership agreement is incorporating specific legal provisions that protect the interests of all partners. These provisions may detail the process for dissolving the partnership or details relating to the extent of liability for each partner. It is important to define certain terms in the event of a dispute after an attorney enters into the partnership, and liability protection is one area where this attention to detail will pay off substantially over time.
A partnership agreement will often include a clause for outlying conditions for termination. This may include unrealistic contributions by certain partners or misconduct such as substance abuse issues or criminal charges levelled against a member of the firm. In the event of a serious dispute, partners may come to an agreement themselves, but it is not always guaranteed. Thus, it is imperative to have a written out provision for termination. In the event that termination is necessary, it may be necessary to determine whether any of the partners may continue working. There are different approaches to this issue, but one is to have it so that the partners have the option to purchase the firm, or their share of it. Another approach may be to build in a compensation package based on a standard business buyout formula into the contract so that the departing partner can be gone quickly from the firm. Defining the process for adding a partner is another area where language is important in an attorney partnership agreement. Language that provides options for how new partners are to be hired and under what conditions may be necessary. It may be good to insert language that allows existing partners to review new hires, taking the opportunity to quiz them on their experiences and why they would be a good fit for the firm’s future. Any vague language in this area may result in a protracted agreement to male a decision on a newly hired attorney. While thinking about how to go about hiring an attorney, lawyers should also think about how to go about dismissing a colleague. Contracts drawn up with different provisions for this process may be useful in case any dispute arises. Issues relating to how the firm will be dissolved in the event that two partners choose to go into business on their own may arise, particularly if they have developed a close working relationship and may consider getting unfair advantages in court cases.
Customizing Agreements for Practice Specifics
Not all attorney partnership agreements are created equal. The fundamental principles on which they are drawn up might be similar, with nearly all of them addressing decisions related to profit-sharing, loss distribution and other financial matters. However, when it comes to the details of attorney partnership agreements, there are many aspects that can be tweaked to better suit the particular shape and needs of a firm. The appropriate length of the agreement, the degree to which it covers duties and responsibilities other than billing for billable hours, the type of compensation plan and other issues can follow individual firms’ needs.
While a small, two-attorney practice may be able to get by with a two-page attorney partnership agreement, a 100-attorney firm is obviously going to require a much more detailed attorney partnership agreement. In the case of the larger firm, positions such as senior managing partner, managing partner and junior partners may need to be defined as to requirements and responsibilities. Size, specialty and age of a firm may also have a bearing on the attorney partnership agreement and how it is drawn up. For example, a firm specializing in personal injury, where attorney fees are typically contingent and the amount of the attorney’s fees are set via insurance regulations, may require less in the way of financial details in its attorney partnership agreement, since its attorneys’ compensation is fairly cut-and-dried.
It is almost impossible to draw up an attorney partnership agreement that will never require updating. Frequently, it becomes necessary to make changes to this document, keeping in mind that when changes to the terms of an attorney partnership agreement are made that are beyond the normal updates that keep pace with law changes and things of that nature, to have the new version signed by all of the current partners to ensure that they are all on the same page. The only warning we offer in this regard is that attorney partnership agreements should be long enough to actually cover all of the points that the firm wants to regulate, but short enough that they are, indeed, more of a broad outline that can be easily amended without needing to be completely rewritten on a regular basis.
Steps for Drafting a Successful Agreement
To draft the appropriate attorney partnership agreement a practitioner should follow these six steps:
Step One: Discuss Key Terms and Review Alternative Partnership Agreements. A range of alternatives exist for the form of a possible partnership. Among the alternatives are equity partnerships, non-equity partnerships and two tiered or staggered partnerships. All of these options provide differing levels of partnership ownership. Discussing what type of legal entity the partnership will be can make the drafting process more efficient.
Step Two: Begin Agreement Drafting. Once the basic partnership agreement terms have been identified, begin drafting the agreement. All of the relevant points should be available for incorporation into the document. An attorney drafting the agreement may want to use a template for another similar agreement. A template document can definitely shorten the drafting process, but an attorney must ensure that the agreement accurately reflect their clients’ intentions.
Step Three: Identify Triggering Events . Certain trigger events such as withdrawals from the firm, termination of employment, and movements between partnership classes should be included in the document. There should be clearly defined consequences to each triggering event, including the identification of the beneficiary of the partnership ownership where applicable.
Step Four: Draft Agreement Provisions. Your firm should include provisions governing how partnership agreements can be amended. The terms of the agreement may further require amendments to the agreement to be signed by all owners. Be sure to keep in mind other ways (not listed) that the agreement can be amended.
Step Five: Review the Draft Agreement with Fellow Partners. Be sure to review the draft agreement with your fellow partners; the agreement should be signed by your fellow partners after you and the firm’s other owners agree to its terms.
Step Six: Review Partnership Agreement With Antitrust Counsel. Common sense dictates that the partnership agreement for the firm be reviewed by antitrust counsel. The legal work on this step can save you money and help the firm avoid any legal issues regarding the firm’s pricing strategy and other practice terms.
Common Pitfalls and How to Avoid Them
When creating an attorney partnership agreement, it is important not to overlook certain critical elements that are often neglected. An unfortunate tendency for those drafting a Partnership Agreement for a law firm is to place thorough emphasis on the methods by which the firm is owned and operated, and then take shortcuts when it comes to the provisions which outline the responsibilities of the managing partners and the rights of recourse (either to an exit strategy, or, in the event of a dispute between partners). Another common mistake is to draft a Partnership Agreement which makes inadequate provision for situations in which the composition of a partnership changes. For example, if a retiring partner wants to roll his or her equity into an Agency LLC, the Partnership Agreement must outline the process by which this can be achieved. A third common omission is a provision for the dissolution of a firm when one or more of the partnership members has failed to comply with the rules of their licensing agency. If one or more partners undergoes disciplinary action, the issue must be dealt with in accordance with the terms of the Partnership Agreement.
The Importance of Mediation and Arbitration
Dispute resolution clauses are critical in any legal business relationship, including attorney partnerships. A well-drafted dispute resolution clause provides an agreed-upon process for addressing problems as they arise. Depending on the needs and goals of the partners, a variety of options are available to help guide an attorney partnership through a conflict. First, mediation is often a cost-effective way to resolve disputes within an attorney partnership. Here, the parties are guided by a neutral party to reach consensus. In contrast , arbitration involves sending the matter to a third party who will make a decision and present it to the parties as an award. Either way, these mechanisms serve as alternatives to litigation, reserving court involvement for only the most serious situations. Of course, other factors may cause a partnership dispute, including the division of assets. For example, one party may want to split up the client list while the other wants to maintain all clients when the firm is terminated. Perhaps the business wants to terminate a business entity or buy out the partners. Regardless, we have the experience that you need to come to terms with closing a firm.