Law Firm Partnership Agreements
Key Issues to Address in Law Firm Partnership Agreements
Many law firms fail to memorialize their partnership agreements in writing. An oral partnership agreement may work fine when partners agree on everything, but the moment a major disagreement arises, the lack of a written partnership agreement can spell disaster.
Keep in mind that a law firm partnership should be drafted with your individual firm in mind. Thoughtful consideration of the below issues are essential when drafting a law firm partnership agreement. And even if your firm already has a written partnership agreement, now may be the time to review it to ensure it adequately addresses the topics discussed above
Choice of Entity
When forming a law partnership, lawyers must first decide the entity type they want to use. The most common entity forms used for law firms are the limited liability partnership, the limited liability company, and the professional corporation. All of these entity types offer limited liability protection for their lawyer owners. But no entity can shield lawyers from negligence or malpractice committed by themselves or by others under their supervision.
Ownership, Duties, and Management
After an entity type is chosen, partners should clearly outline the duties owed to the partnership by each partner. The partnership agreement should also outline the management, control, and decision-making of the firm.
Compensation systems vary from firm to firm. In many law firms, all partners receive equal compensation. In others, partner compensation varies on a number of factors, such as who originated the file, who handled the file, who is the majority owner of the firm, or some combination thereof. Whatever approach is taken, partner compensation should be agreed to on the front end. Once compensation has been agreed upon, partners should determine the method and timing for payment of draws and distributions.
Partner Departures/Lateral Movement
Law firm partnership agreements should anticipate and account for possible future changes to the partnership, whether it be through withdrawal of one partner or complete dissolution of the firm. When law partners go their separate ways, clients and assets typically get split among the partners. In practice, the process of sorting through which lawyer retains which client can get messy. Lawyers may fight over the good cases, secret away files in the dead of night, or make questionable representations to clients in order to secure the files. Dealing with this issue on the front end can help partners navigate through the often tense and sensitive issues that arise upon separation.
Buyout provisions that govern payments owed to partners after they depart or after the firm dissolves are another way to address the division of fees generated on matters after a partner leaves. A well-drafted buyout provision will set a valuation date and will adjust the buyout amount based on a number of factors including firm debts and liabilities, cash in the operating account, accounts receivable, accounts payable, goodwill, and firm assets.
The use of non-compete and non-solicitation agreements are common in many industries, but agreements prohibiting lawyers from competing are generally unenforceable. Law firm partnership agreements that do not contain explicit non-compete provisions, might seek to curtail future competition from departing lawyers through other means. But provisions that impose restrictions on competition indirectly through “financial disincentives” have been consistently held unenforceable. Not only are restrictive covenants generally unenforceable, in some cases, their inclusion in a law firm partnership agreement could result in a public reprimand. So as a general rule, restrictive covenants should not be written into law firm partnership agreements.
Despite partners’ best efforts to address any potential future conflict, it is impossible to predict all potential disputes. Partners can, however, set out in their law firm partnership agreement a defined procedure for dealing with any unforeseen disputes. Partners should strongly consider drafting alternative dispute resolution procedures for most partnership disputes. In the case of disputes between former law partners, the preferable course may be to keep those disputes out of the public eye.
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