Q&A: Your partnership agreement needs another look

You've probably seen every way a law firm can structure itself, and every way that structure has blown up. What's the most common mistake you see attorneys make when they're starting up a firm?

One big thing that many attorneys don’t think about early on is what the firm may look like one, five, 10 years out. It is going to change. But early on, there is so much to do that there seems to be no time to do or think about anything else. I always encourage people to think about where they want to go with their firm from the very beginning. 

Is there a textbook way firms should be structured? And if your answer is “it depends,” on what?

This does depend on a variety of factors, like how many owners there are, what tax treatment you want and what state the firm is being formed in. It is not a one-size-fits-all approach. 

What works for a small firm will almost never work for a bigger firm, at least in terms of adding partners. At a minimum, governance will need to change; partner compensation will need to be revised.   

It’s not a set it and forget it kind of deal.

I’ve talked with countless lawyers over the years who say they have a written agreement somewhere that they threw together and haven’t looked at since. Any time there is a change in the firm partnership (adding or subtracting partners, changing ownership percentage, etc.), the firm should dust off the agreement and have it reviewed and revised. 

If a firm owner reading this has never looked at their partnership agreement since signing it, what should they do this month?

Go find it and review it. Does it fit the current state of your firm and your partnership? If you’re not sure, reach out to a lawyer who knows the right questions to ask and the issues to address. 

What's the one clause in the typical law firm partnership agreement that gets ignored until it's too late?

It’s not just one clause, but a group of clauses. I call them the exit ramp provisions. Basically, all the ways a partner could leave the firm or the firm could dissolve. 

Many of the “self-drafted” partnership agreements I’ve reviewed do not adequately address these. And if they do include these terms, they often miss essential pieces.

Like what?

Here’s one: In 50-50 partnerships, you need a tie-break mechanism. This is another thing lawyers don’t really think about when setting up a new firm with another partner. I get it, early on, it’s nothing but sunshine and rainbows. They can’t imagine anything ever going sideways. But this is the exact time to address this and all the other issues that might come up. 

Here are a few more: What kind of notice does a departing partner have to give the firm? How will a departing partner be bought out? How will the buyout be valued? How will it be paid? Are there any offsets? 

So what does a "good" separation or dissolution actually look like?

A separation or dissolution, even when amicable, can get tense. The ones that I would call “good” involve partners that respect each other and the time they had together as partners. Usually, they have little or no disputes over what clients go where and, of course, they agree on the fairness of splitting up any assets or future fees.

If a mid-career attorney is thinking about leaving their firm to start their own, what should they nail down in month one, not year one?

Lawyers that are leaving a firm need to make sure they comply with any contractual terms that may apply, common law fiduciary duties and ethical rules. Before they start taking actions, they should review all of these to make sure they don’t step on any landmines. 

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