For most lawyers, attaining partnership is an achievement, a moment of happiness and relief. However, recent events may be increasing awareness that what seems like a reason to celebrate may actually be the start of a nightmare.
How is this possible?
In addition to receiving recognition and the opportunity to share in a firm's profits, becoming a partner — or at least an equity partner — involves assuming three types of increased risk. First, a new partner may be expected to contribute capital, to pay money into the firm or leave money in the firm for it to use — or lose. Second, a new partner may assume greater responsibility for the firm's debts and liabilities. Third, a new partner may relinquish predictability in compensation. Partners often receive a comparatively smaller monthly payment or draw, and may not learn or receive their full annual compensation until profits and losses are determined at the end of the firm's fiscal year.
In addition to these risks, unscrupulous or opportunistic firms may take advantage of potential partners by:
- Adding new partners to raise capital or cover expenses instead of asking existing partners to pay more.
- Misleading a potential partner to join the firm with the intention that existing partners can usurp the new partner's revenues or practice.
- And adding partners to project confidence, despite knowing the firm may face a potential devastating event — such as a major malpractice claim — that may decimate the firm.
Such problems may arise in firms of all sizes. For example, a solo practitioner client of mine was asked to join a small local firm. These negotiations failed only shortly before the firm itself dissolved, leaving numerous unhappy creditors. Another example involves failed Dewey & LeBoeuf and Steven Otillar, a former partner hired shortly before the global law firm collapsed. Otillar alleges in court pleadings that Dewey and its bank induced him to join the firm as part of a scheme to keep Dewey afloat with funds from newly hired partners.
How can a potential partner avoid such a partner trap? Here are five suggestions:
- Be mindful of the risks. A potential partner should be mindful of the risks as well as the rewards involved in becoming a law firm partner and owner.
Read more...The National Law Journal