What Is a Law Firm Partnership Agreement?
A law firm partnership agreement is the legal contract that defines the relationship among the partners of a law firm. At its core, this foundational document sets forth how the firm will be run, responsibilities of each partner, and how profits are to be divided.
Typically called just a partnership agreement, it is extremely important to any law firm and should be carefully drafted to not only adhere to all relevant rules of professional conduct, but to protect each partner. Where partners are going to be investing many years of their professional lives into firm , and contributing capital and goodwill to the business, there needs to be clarity in terms of their rights and obligations to other partners.
Further, a well-drafted law firm partnership agreement minimizes the risk for future conflicts by establishing a clear framework that can effectively address matters such as admission of new partners, expulsion of partners, withdrawal of partners, transfer of partnership interest, voting and management responsibilities, and firm dissolution, among other items.
Components of a Partnership Agreement
A law firm partnership agreement is an integral component of the relationship among partners. Understanding its major elements is critical to establishing a sound working relationship within the firm. The agreement should clearly define the companies and attorneys included in the agreement, specifying the roles of each partner. A strong partnership agreement will generally spell out how profits are shared, how decisions are made (collegially or unilaterally), and how disputes are resolved. Here are some common areas covered under this contractual relationship:
Basic components of the partnership agreement:
· What partners must contribute to the firm made. (e.g. capital, lease space, equity in the firm).
· How profits are shared.
· How new partners are let into the firm.
· How partnership may be dissolved by vote or other mechanism.
· How assets and debts are divided (e.g. services, personal services)-time off for sick leave.
· How working capital is maintained.
· Retaining the right partner should the equity of the remaining partners be diluted.
· Compensation items (e.g. draws).
· Dissolution criteria.
A partnership agreement not only serves as a binding element for the terms and conditions of the relationship between law firm partners, but it can be used as a means of protecting both the firm and clients with regard to liability and responsibility. A sound partnership agreement helps to remove uncertainty from the equation and helps to stabilize relationships within the firm.
Why You Need a Written Agreement
A written agreement can make all the difference between a successful, harmonious partnership and one that is fraught with pitfalls and problems. A written agreement clarifies what is expected of the partners, both individually and overall. It can provide a clear set of rules to be followed, whether as to projects, as to how the business is to be run, or as to division of profits (among other things).
When everyone knows what is expected, there is less chance of problems arising. If there are problems, however, due to any of the many reasons that can occur in the law firm environment, the written agreement can go a long way in correcting or addressing them.
The agreement also provides legal protection to the partners, if it is well-drafted and covers all relevant bases. Without it, the partners could be faced with all kinds of problems, especially in case of a partner’s death or disability, or if a partner wants to leave the firm, as discussed elsewhere.
Common Pitfalls
One of the most critical, yet most common mistakes when it comes to law firm partnership agreements is for new partners to proceed without a fresh and comprehensive review of what they are signing. This is particularly dangerous in law firms where the same document is used almost as a "one size fits all" agreement. Such documents are rarely suitable for different groups and should be reviewed thoroughly by an outside legal entity to ensure no lapses in judgement.
Another mistake comes in the form of too much trust. Some partners will enter into, or go through with agreements due to the fact that they know each other well enough to believe that the other party intends to hold up their end of the bargain. This is a colossal mistake. Something as simple as a reliable payment period can be restructured around trust, but if certain aspects change, then the entire agreement could become untenable.
A third mistake that is often made is underestimating the length of the negotiation process. In some cases, a latent clause buried deep in an agreement could nullify the entire contract. Legal agreements take time to review thoroughly, and it is these details that should not be overlooked because of impatience.
How to Write a Law Firm Partnership Agreement
A partnership agreement is one of the most important documents a law firm can have. When drafting a law firm partnership agreement or an agreement for any other type of legal entity, it is important that law firms do the necessary due diligence in the drafting process to address all potential issues. Before drafting a partnership agreement, law firms should consider the following steps:
Consult a trusted adviser: It is important to contact a trusted legal accountant or lawyer to ensure that partnership proposals cover legal issues. These issues can include such items as each partner’s contributions, salary and bonuses, decision-making roles, entitlements to current profits and sales of their interests, and exit strategies. Experienced legal accountants and lawyers know what provisions can help law firms avoid litigation and wind up affairs in the event of a law firm breakup or dissolution.
Understand the fiduciary duty: Partners owe each other a fiduciary duty, which means that they must act in good faith to help the firm succeed, advance its business interests and put the firm’s interests ahead of their own. While the laws often do not treat employees in this way, a solid partnership agreement can establish the standard of care and loyalty expected of partners , and define what constitutes appropriate behavior and give remedies for inappropriate actions.
Customize your provisions: Many law firm partnership agreements are directly cut and paste from the American Bar Association model partnership agreements. Law firms may not work well with the American Bar Association model agreement, so it is important to customize the provisions of the document to meet the firm’s needs. This helps encourage loyalty to the firm instead of to fellow partners and identifies the objectives of the firm.
Clearly define the contributions of each partner: It is important to identify who contributes what to the firm, including money, property, holdings, land and clients, and to clarify how these contributions are valued. Sometimes contributions can be made in either cash or services, so clearly defining what is accepted as a contribution can go a long way in a law firm partnership agreement.
Include risk-mitigating provisions: Law firms should include non-compete restrictions in a law firm partnership agreement, which are sometimes difficult to enforce in some jurisdictions, and it may be easier to evaluate said risks after consulting with legal counsel.
Partnership Agreement Templates
Partnership agreement templates for law firms can be found in various places around the web, and it is important to identify reliable sources when using them. Notable websites that house partnership agreement templates include the American Bar Association (ABA) and the Practice Management Advisory Service (PMAS). The PMAS and other government agencies are useful sources because they update the templates regularly, according to changes in the law as well as solid legal drafting standards.
It’s important to remember that while templates are a good start, it is our recommendation that you hire a professional lawyer to make sure your law firm partnership agreement meets both the requirements of your specific firm and the law. You do not want to use an outdated template agreement that will not accomplish what you need it to accomplish.
The Function of a PDF for Partnership Agreements
The popularity of the PDF format for law firm partnership agreements stems from a host of factors: security, convenience and the ease with which a digital document can be shared and stored in soft copy. PDFs are easy to e-mail, they do not become bloated if they become lengthy and their formatting remains stable when transferred from one computer to another.
The same size issue applies to paper documents, but there is a material cost differential between storing paper documents and storing soft copies.
A material – some would say disproportionate – portion of lawyers have historically maintained both a soft copy and paper copy of each critical document, so that they could offer either in the course of negotiations or maybe even as part of a litigation process. But , most lawyers no longer maintain so-called "historic" files in hard copy. Even those who do can review and print from their computerized databases. Paper copies, however, have a way of being "missing" without notice and paper copies can be manipulated and/or destroyed and sometimes persuaded to disappear altogether. They are an inferior method of filing documents. Soft copies are superior, albeit these four considerations regarding the pitfalls of paper copies can still apply to soft copies too:
For the above reasons, documents that can be delivered as a file, sent by e-mail and received as a file are superior, in many respects, to any other format.
The impact of these four considerations on compensation negotiations, on the one hand, and equity partner decisions, on the other, can be significant. For example, a partner will want a record that a decision was based on a specific document.