Law Firm Partnership Agreement: A Step-by-Step Guide

 

If you’re thinking of creating a partnership for your law firm, you’re on the right page…

A Law Firm Partnership Agreement is a partnership agreement that defines your roles and responsibilites when you’re entering a partnership to start a law firm.

Running a law firm with other like-minded partners sounds like bliss…

The problem is that during times of crisis your law firm partnership agreement will become the contract that will protect you during those times.

Disputes with law firm partnership agreements can lead to disagreements, conflict, and chaos.

If you’re looking to get your Law Firm Partnership Agreement drafted or reviewed, send me an email at sam@mollaeilaw.com

On this page, I talk about what should be included in your Law Firm Partnership Agreement and why you should hire a independent contract lawyer, like me, to draft your law firm partnership agreement for you.

So, let’s get started…

If you prefer for an experienced contract lawyer to draft or review your Law Firm Partnership Agreement, email me at sam@mollaeilaw.com

 

What is a Law Firm Partnership Agreement?

A law firm partnership agreement is an agreement that spells out the various responsibilities and duties of every partner involved within the law firm.

This is crucial because a partnership agreement for law firm must have something that resolves conflicts and crises when they happen. In the beginning, it might seem like a pointless piece of bureaucracy, but you’ll find it essential later.

Furthermore, a partnership agreement for small law firm helps to prevent those conflicts and crises in the first place.

As you can see, a partnership deed is essential for any partner within a law firm. So, we’re going to explain what you must include within your own agreement.

 

Who Can Be a Partnership Lawyer in Your Firm?

The process by which new partners are admitted, and what they must do gain entry, should be clearly spelled out within your partnership agreement.

A new partnership lawyer should know what they need to do to get in and existing partners should understand what’s expected of new applicants.

That could include specific qualifications, specific levels of experience, and whether there must be a buy-in amount for the partnership.

Why is this so relevant?

It preserves the quality of the law firm and prevents nepotism. Imagine if one of the original partners simply wanted to bring in their newly qualified lawyer friend. That can’t happen with this agreement.

Make sure your partnership agreement clearly states who can be a partner at your firm by emailing it to me at sam@mollaeilaw.com for review.

 

How Long Can Your Partnership Agreement for Small Law Firm Last?

Did you know that the Uniform Partnership Act can automatically terminate a partnership unexpectedly? A partnership automatically terminates on the death of a partner.

Under the act, the death of a partner would automatically terminate a partnership. That’s why if you look at any partnership agreement between two companies or a partnership between individual people there will be a clause that prevents this.

Make sure that you specify the duration of the partnership so the death of a partner stops the termination of the partnership.

You can always extend and renew the duration later.

For assistance with your partnership agreement send me an email at sam@mollaeilaw.com

 

Do You Have a Capital Contribution Requirement for Your Partnership Deed?

Capital contributions are essential for keeping the partnership capitalized. These contributions must come from all partners, and should be laid out within the agreement.

Not a lot of people realize that it’s actually illegal for law firm partnerships to have outside investors in the US, as of this writing. That means all contributions must come in the form of loans from financial institutions and the partners themselves.

So how should you handle this?

It’s quite simple. Spell it out within your deed of partnership. The agreement format should reveal the level of capitalization that the partnership should have at all times.

We touched upon it earlier when it comes to the buy-in requirement for new partners. But you must go further than this.

Don’t just create a required capitalization level. Ensure that it matches pace with inflation.

I’m available to help. You can contact me at sam@mollaeilaw.com

 

How Does Voting Work for the Partnership Lawyer within the Law Firm Partnership Agreement?

You have two options for voting: weighted voting and per capita voting. Choose one for when the entire firm votes on major issues.

Per capita voting is the most common voting system in place. It’s one vote for each partnership lawyer. It’s that simple. A majority wins, although you can specify if certain big decisions require a two-thirds majority.

An agreement format could also specify that weighted voting is in place. This is where things can get complex.

A weighted vote means that more experienced partners can vote and their vote counts more than once.

For example, let’s say you have a partnership with five lawyers. The original founder may have three votes, so they could easily overrule a decision they don’t agree with.

Weighted voting is a complex system and requires a specific set of rules for your law firm partnership agreement.

Do you have more questions about weighted and per capita voting? Shoot me a message at sam@mollaeilaw.com.

 

How Should Your Partnership Agreement Deal with Profits?

You can be specific or you can simply put the distribution of profits to a vote a few times every year.

Some firms decide to create complex rules regarding profits. I advise against this because if there’s ever even a slight change you’ll have to keep amending your partnership agreement for law firm.

Most partnership agreement for small law firms determines that profit distributions are decided by a vote between partners each time. This is a far more efficient system.

Still not sure how to your partnership agreement should deal with profits? I’m available via email at sam@mollaeilaw.com to help.

 

What Should a Partnership Agreement for Small Law Firm Do About Retirement?

Retirement clauses should reveal a specific age for mandatory retirement and a system in place for maintaining partners above this age on a case-by-case basis.

According to one survey, within the US today only 4% of lawyers plan to never retire. For these individuals, you must have a mandatory retirement clause.

These retirement clauses are becoming far more common to prevent a decline in performance. The most common mandatory retirement ages are 65 and 70.

However, if a partner brings a great benefit to your firm then you should also insert a clause that allows you to provide one-year rolling contracts to people above the mandatory retirement age on a case-by-case basis.

As well as a mandatory retirement age, you should mention how capital is paid out to retirees. Is it immediately? Is it after three months? Is it after six months?

Email me at sam@mollaeilaw.com for assistance with your retirement clauses.

 

How Should Your Partnership Deed Deal with Death and Disability?

Dealing with death and disability should be done in a way that’s both compassionate yet maintains the financial integrity of the firm.

Let’s look at disability first. Disability is difficult, especially if it’s permanent, because partners may feel an obligation to support the disabled, regardless of the financial integrity of the firm.

Your partnership deed should insert a clause providing a cut-off point for disability support. This stops the partnership from perpetually paying out an infinite amount of money.

Most companies deal with this by providing either full compensation or partial compensation for a specified period.

Finally, make sure you have a clear distinction between temporary disability and permanent disability.

In terms of death, we briefly touched upon this earlier with the duration of the partnership. But you must have additional clauses for the estate of the deceased.

The partnership lawyer and their estate must receive their fair share of the partnership. There should be clear provisions in place for the timing and amount that must be paid out.

And one final issue is the continued use of the deceased partner’s name within the law firm. A prevision within the partnership will provide the required power to continue using the name for branding purposes.

Need help adding in the disability and death provision? Contact me at sam@mollaeilaw.com

 

What Should You Do if a Partnership Lawyer Withdraws from the Law Firm?

This is up to you, but you can either have the same provision as death or you can introduce a financial disincentive.

For simplicity, it’s common for a law firm partnership agreement to simply treat the withdrawal of a partner in the same way as death. However, you may decide to offer a financial disincentive.

Withdrawal at short notice with death provisions in place could lead to a serious loss of capital. For small law firms, this can put the existence of the firm at risk.

A financial disincentive provides a few key benefits:

• It encourages partners to stick with the firm.
• It reduces the chances of the law firm entering financial difficulties.
• It protects your clients.

If you experience disagreements you don’t want that departing partner to lobby any clients they have. This can destroy any law firm.

A partnership agreement for law firm with a financial disincentive makes partners think twice. It also stops disagreements from leading to a permanent breakup of the partnership.

This provision should clearly lay out the amount of capital the partner can take with them. It also offers legal protection should the departing partner try to steal your clients.

Hopefully, you’ll never need to use this. But if you do then you know you’re protected.

 

What Happens if a Partnership Lawyer is Expelled?

Expulsion protections decide on capital paid out and protect your firm against spiteful backlashes.

For a start, you should automatically have provisions in place should a lawyer be disbarred. This should be an automatic expulsion without a vote on the issue.

However, what about if a partner is no longer productive or they’re becoming a liability to the company? Like any partnership agreement between two companies you should have a system in place.

It’s likely that it will come down to a simple vote. A simple vote may require a simple majority or a two-thirds majority.

To protect all members, though, there should only be specific circumstances where such a vote can take place. These should be laid out within the partnership deed.

Finally, the section on expulsion must include what happens to any capital. Again, financial disincentives could be present, but this isn’t always necessary.

 

How Should You Handle the Dissolution of a Partnership?

Dissolution of any partnership should protect the rights of both partners and their clients. This also includes giving advance notice of the dissolution of the partnership.

The agreement format you use should always include a section on how to dissolve the partnership. It’s often the most complicated part of the deed of partnership so I’m going to show you how to do it.

This is more common than you might think. Some  law firms are simply tightening up internally, but many law firms are starting to become obsolete, even as Profit Per Partner (PPP) rises, so this may be more pertinent going forward.

Always prepare for the worst-case scenario.

What should your dissolution provisions do?

They should refocus the entire partnership at a time when many may be more concerned with their own careers, instead of the firm. The responsibilities and duties of partners should be clearly spelled out.

Make the dissolution of the partnership as detailed as possible because if something isn’t covered by the agreement, lawyers may simply argue out of self-interest.

Here are some of the duties you’ll need to consider:

• Providing enough advance notice to clients regarding the dissolution of the partnership.
• A transitional process to make sure that clients aren’t suddenly left without legal protection in the middle of a case.
• How capital is distributed upon the dissolution.
• How clients are allocated to individual lawyers, if this is the preferred direction of the firm.

These are just a limited number of responsibilities you’ll have to cover in this scenario. I recommend considering law firm partnership agreement help to make sure that you leave no stone unturned.

The last thing you want is to miss something out and have the partnership break down in chaos.

 

Conclusion

If you’re starting a law firm with another partner, you should definitely have a written Law Firm Partnership Agreement in place.

It’s true that this is an extremely complex part of establishing a law firm.

It’s also true that every partnership will have different expectations and requirements.

However, these provisions represent the foundations of any good partnership agreement. The specifics may be different for every law firm, but that doesn’t mean the individual sections change.

So how should you create an agreement like this?

I recommend that you sit down with an expert in drafting partnership agreements.

Email me at sam@mollaeilaw.com to get your Law Firm Partnership Agreement drafted or drafted