Lawyers as Partners

Considerations for an effective partnership agreement*

Lawyers as Partners

So, you’ve decided to give up the solo life and bring a partner into your practice. Or perhaps you’re leaving a bigger firm but don’t want to go it alone just yet. Having a partner can definitely be a huge benefit, as you’ll have someone to share the management duties, expenses and even confer with over case strategies. But, as with any relationship, it’s never wise to jump in too quickly. And, even though you may have read the Partnership Act, RSBC 1996, c. 348, and followed the CLE checklists, there are some other factors to consider that you won’t find in any of those. In my four years of running my small business firm, I’ve had countless clients in partnerships (or ex-partnerships!) come to me with tales of woe, and these tips will hopefully save you from the same fate.

One of the biggest pieces of advice, which is ingrained in all of us as lawyers but which we seldom actually follow, is to “get it in writing.” Your new partner may be a law school classmate, or even your best friend, so you may comfort yourself with the thought that you know them well and they would never betray you. That may be the case, but I can assure you without a doubt that business changes people. Your relationship as business partners will be vastly different from your friendship. And, although things may never turn sour, if a problem does arise in the partnership, the friendship element tends to escalate the dispute even further as most people respond with greater intensity when there is a personal connection to their partner. The time to write out your rights, responsibilities and dispute resolution strategies is at the start of the relationship when everyone is happy.

However, many people worry that asking their partner to sign an agreement is a signal that they don’t trust that person and they avoid the issue in an attempt not to offend. If you’re concerned about broaching the subject with your partner, take this approach: a partnership agreement is for the benefit of both of you. A proper agreement will be drafted fairly and not be overly one-sided. Even if each partner has unequal ownership rights, both parties have interests to protect. So, if you assure your partner that you’re looking out for both of your best interests, you will likely get a positive response.

Once you’ve agreed to draft a partnership agreement, what do you include in it? As mentioned above, there are many precedents available online and in CLE materials that will give you the framework for a solid agreement. But, logistics aside, there are a few key issues that tend to arise in a lot of partnerships that you’ll want to keep in mind. The first one is – yes, you guessed it: money. If only one of you has it, there can end up being a feeling of inequality no matter how much “sweat equity” you both contribute. Decide early on if a monetary contribution is to be considered as equity or a loan, and record this properly. If it’s considered equity, how does a partner without financial means make an equivalent contribution? If it’s a loan, does payback come from the other partner or from the general revenue? Does the loan get paid back first before the partners can participate in any profit sharing? It can also be a good idea to discuss these options with an accountant to maximize tax strategies.

Feelings of inequality can arise based on workload as well. While many sole practitioners handle all the administrative, managerial and legal work themselves, partners may choose to divvy up these tasks rather than having each person become an expert multi-tasker. But when each person has distinct responsibilities, it can be tough to measure if the work is equal. For instance, a partner handling back-end work, such as bookkeeping or administrative tasks, may feel like they are working a lot harder than a partner who handles marketing and social media, or vice versa. Therefore, it can be a good idea to include some general managerial duties in your partnership agreement. Not to an extent that it completely boxes you into a strict role but enough that, should your partner accuse you of not contributing sufficient time or effort into the practice, you can point to the agreement and demonstrate that you are completing the role that you were given.

Even if things end up running smoothly, one partner may choose to leave the partnership. Deciding on mechanisms for termination at the start of the relationship will save a lot of headaches down the road. While I don’t suggest including specific formulas for valuation, as a formula may work well in year one but not be as useful in year 10, it can be a good idea to outline a general process to be followed. The first step should always allow for determination of value by mutual agreement. Formal valuations can be expensive, so it’s best to give yourself the chance to agree on the value on your own before you have to take that step. I also recommend that you include the option for a second valuation, which can be triggered at the request of one partner if they dispute the first valuation. The second, or any further valuations, will typically be paid for by the person that requested it.

Along with buy-out provisions, don’t forget to deal with other partnership assets on dissolution, both tangible and intangible. Make sure to talk about what each of you is bringing into the partnership, and whether it is to become partnership property or will be leaving with you. If you ran the firm on your own before bringing in a partner, you’ve likely built up the brand so you may want to retain the intellectual property that goes along with it. For a practice that operates under a name other than your personal one, decide which partner, if any, will be permitted to continue using that name if you go your separate ways. And, while you certainly can’t prevent your ex-partner from practising law, you can prevent them from practising it in the office next door! A reasonable non-competition provision should always be considered.

Even with a solid partnership agreement, there’s no guarantee that you won’t have issues with your partner, and you may even experience a failed partnership or two before you find your perfect mate. Before you take the plunge, always make sure to take the time to really get to know your potential partner, and don’t ever feel pressured into giving up equity unless you are certain that you’re ready.

*Note: most of these tips will also be applicable to Shareholder Agreements.