Law Firm Partnership Types
The most commonly used model for law firms, particularly those that operate domestically within a single state, is the General Partnership. In this model, partners have unlimited liability. That is to say, if the partnership comes under financial duress, individual partners are potentially liable for the firm’s debt. This arrangement allows partners in a general partnership to participate in the management of the firm without jeopardising their personal assets. A good example of this is Baker McKenzie, a global law firm with over 13,000 employees, and who operated as a general partnership.
Limited Liability Partnership (LLP) is another partnership model. This model aims to ensure that there is a limit placed on the personal liability of each of the partners. Each partner’s debt to the firm is limited to their investment in the partnership. The LLP also allows each partner to participate in the management of the firm. An example of a global law firm under this model is White & Case. White & Case, with over 2,500 lawyers and 43 office locations around the world, operates as a Limited Liability Partnership .
Even with more protection from individual liability there are still challenges. For example, payment trigger events such as withdrawal or dismissal of a partner from a firm, or the firm’s financial situation could impact on the liability of the partners. These are thus similar in liability to a general partnership.
A Limited Liability Company (LLC) is where one or more of the individuals has some level of protection against personal liability. This model is less common with law firms. The individual liability of the partners is limited, but in the event of a default the firm assets remain liable.
However, partners of an LLC can become liable if their actions are under review. A common reason for this is when a partner is negligent in their service or advice to clients and this negligence results in a loss to someone. A limited liability company may have a corporation tax treatment where profits are taxed at the corporate rate instead of the personal tax rate of the partners. An example of a global law firm operating as a Limited Liability Company is DLA Piper, with over 3,700 lawyers and 46 offices across many countries.
Equity Partners vs. Non-Equity Partners
When it comes to the models employed when adding a new law firm partner the two most common are equity and non-equity partnerships.
Equity partners in a law firm are those who generally purchase into the partnership. With equity participation also usually comes a much larger investment of time and money into firm decisions, and in return they are compensated more than an employee level non-equity partner. Non-equity partners generally have limited control over firm decisions and do not have the vested interest that equity partner may have in policy decisions and long term results and thus may be paid an employee level salary. However, nothing is to suggest non-equity partners cannot have significant control over firm decisions if the firm wishes it.
While the amount and percent of each partner’s compensation will vary depending on their contribution and skill set that is brought to the firm, one big question is how large of a compensation pool does the firm take from profits to reward equity to its members. This can vary greatly from firm to firm. Some pay equity partners 10% and other firms have been known to pay up to 50%. For example in 2010 the American Lawyer published their annual compensation survey and they listed Chicago’s Kirkland & Ellis and Louisiana’s Jones Walker as among some of the almost dozen firms who share up to 34% to as high as 50% of their profits to equity partners.
Whether you are the sole shareholder or a director or member of the board who has the responsibility to choose who are deemed equity or non-equity partners for the firm, it is advisable to spend the time and do the appropriate analysis to ensure the model you choose is the right one for your firm. In addition to the compensation formulas mentioned above there are other factors which will affect the level of compensation which a law firm will offer its partners. Some of the factors in determining the level of compensation may be:
• Firm profitability
• Level of business development by the partner
• Amount of time the partner devotes to client work and other firm work
• Connect and engage with clients through their business networks, thought leadership initiatives, business contacts and referrals
• Provide input into the firm’s business strategy
• Coaches and mentors less experienced lawyers
• Leads practice group or office
• Acts as a role model to the firm’s younger lawyers
• And more. . .
Some firms employ an equity membership committee who decides who will be made the prestigious designation of equity partner. Businesses that do not hire equity members due to length of employment or experience expect longer-term employment in return for the largers compensation to be paid to equity members. This is a trade-off that should be considered when deciding who will be offered the equity partnership. When considering this issue you would be well served to consult with a legal professional who can provide guidance.
The Benefits of Forming Partnerships
One of the major advantages of forming a partnership is the array of shared resources that becomes available. When attorneys join together they share their knowledge, relationships and network. This increases the collective client base, as they are able to provide services to both existing and potential clients. Through the ability to pool resources, a partnership increases the number of attorneys available to handle assignments, which means that even large cases can now be handled in essentially real time. They also now have access to a variety of resources from other firms that can be shared. For example, one attorney with specialty expertise can refer their clients to the firm, and vice versa. This benefits both.
It also increases the reputation of the firm. Its combined knowledge, expertise and influence in the legal community increases significantly. The network created by other firms may include high profile cases or clients, high profile names in the legal community, or related practice areas that have overlapping interests. High profile clients may give the partnership a level of prestige that will bring in more high profile clients, as well.
The sharing of attorney referrals can increase the scale and type of clients of a firm, allowing them to attract larger clients to the firm. More business typically means that the attorneys involved will receive increased economic and professional benefits, including higher compensation, prestige and generally, a higher level of legal practice.
Law Firm Partnership Challenges
Potential conflicts in profit-sharing and decision-making power have long recognized as challenges to law firm partnerships. Historically, these challenges have often proved intractable to resolve, leaving averages of only 53% of law firms operating today with a partnership structure. Nevertheless, promising alternative partnership structures continue to attract potential candidates into the legal partnership arena.
Profit sharing disputes plaguing a typical partnership are often not as simple as their name suggests – they can occur in many forms, the most obvious being the issue of pay. A more subtle type of conflict can involve power struggles that can be quite political – with one or two partners monopolizing lucrative clients, always allowing their voices to dominate strategic and operations decision meetings, or holding undue influence over hiring and firing decisions. Covert negotiations can occur when key people – partners, associates or even customers – feel unfair distribution of firm resources is likely to occur in the future. And because partnership is generally regarded as a life-long award for merit, it’s normally pretty difficult to exit from a partnership, even if that relationship has outlived its usefulness or a law firm’s economic performance has initiated a period of decline.
But there’s more. Non-economic issues can also be a source of vexation for partnerships. In firms with gender as a significant cultural issue, like Minter Ellison’s Australian offices have been beset by allegations of sexism and harassment in the past few years, it is common for power struggles to devolve into generational and ethical disputes, which can splinter a workplace. For example, a rival to former Barlow Lyde & Gilbert senior partner David Hayes and his former senior colleague Ben Daniel has claimed: "What I know is that David Hayes was destabilizing the firm as a whole and myself and others in particular." That "rival" was an employee, and previous business partner of Hayes and Daniel; not another partner. In the end, this particular battle was short-lived, when the firm made the decision to dissolve last year in the wake of poor economic performance in the UK and the high cost of litigation against the firm for failing to meet its equality targets. Clearly, naming the firm as a defendant was to the UK Office of Discrimination and Equality (ODE) what the brute-force tactic to sever the relationship became for Mr. Hayes and Mr. Daniel.
Relatively new model partners promise to solve complementary issues such as fairness, enhanced client service or niche expertise. But they also face inherent challenges to successfully engage their partners or external associates to create a new type of bond. The solutions to those challenges may well involve appealing to idealism or emotional connection as much as high-minded respect for the law and its ethics. So too are the benefits of new types of partnership.
Case Studies on How to Make a Successful Partnership
To create successful law firm partnerships, your firm should prioritize:
Respect: Well-designed partner agreements ensure respect for your partners’ individual autonomy and reputation. A partnership model designed for absolute consensus will often breed contempt or apathy of the partners – two emotions that ultimately will erode the sense of organization within your firm. Respect for the individual is key to successful partnerships. This is why you need to respect your partners’ role in the firm so that they can respect the firm’s goals as a living being.
Commitment: Your law firm partners must be willing to commit themselves to the value your firm provides to your clients . Successful partnerships require a commitment to professional development – building relationships with other law firms in the area, learning and using best practices, becoming the go-to source for clients, etc.
Partnership models are forever evolving, and it is more important than ever to put forth the effort to implement the types of partnership models that are most effective for your firm as a whole. Especially as your firm expands its footprint across state lines and beyond, knowing how your partners can work together will be the cornerstone of a strategic plan for success.
Dissecting Iconic Law Firm Partnerships
Case studies of successful law firm partnerships offer much more insight into the complex nature of such an undertaking. "One of the most successful law firm exit strategies is to sell to another, I believe," says Grewal, "Many firms, particularly those in more recent years, have found themselves in a seller’s market, where they can maximize value by selling to an acquiring firm." Finding a perfect or ideal fit is rare, however, per Grewal, so it’s not unusual that the union doesn’t always work out. "In about a quarter of those, the transactions failed to thrive, mainly because my firm acted as an integrator rather than as a platform when we went looking for a merger. We set out as an integrator, consolidating and integrating two firms into one, we often find unintended consequences that take longer to materialize, such as employee discontent, culture clashes and a loss of morale." An ideal law firm merger must strike a proper balance between economies of scale and a culture that will support a combined organization post-merger, according to Grewal. Such is the case of one of the most noteworthy law firm merger success stories that has endured more than a decade after its inception. One of the most successful merging law firms, headquartered in San Francisco, is and has the resources, personnel and knowledge base that serves a large domestic and international clientele. "Our firm employs about 100 people and has a docket of at least 50 legal matters at any given time in three main practice areas: Real Estate and Land Use, Construction Real Estate and Professional Liability, and Employment and Business Litigation," according to managing partner, Robert M. Anderson. The firm was formed in 1992 following the merger of a 13-person real estate and land use boutique firm and a 12-year-old litigation firm that had previously worked together on numerous projects. Before the merger, both firms had their operations on separate floors of the same high-rise office building (located at 1231 Eastshore Blvd.), per Anderson, who added, "But the two firms shared the same legal approach and had worked together on several projects, mostly involving employment law. The merger, which was fairly seamless, involved allowing both firms to bring their stylistic differences and unique qualities to the new firm." The merger created the region’s largest development and land use law firm, and the combined practices of both firms expanded to include international, administrative and environmental law, contracts, unfair business practices and executive compensation. The merger proved to be a mutually advantageous move for the two firms as they celebrated the partnership’s 10th anniversary in 2002. As consolidation continues to dominate and redefine the industry today, the formation of law firms based on strong complementary force and compatibility is essential.
The Future of Law Firm Partnerships
When considering future trends, the rapid advancement of technology is surely going to play a significant role in law firm partnerships and what the future holds in this regard. One smaller firm that is keeping pace with technology and innovating is Littler Mendelson P.C. The $1 billion firm opened its newest office in Toronto, Canada after forming an exclusive collaboration between Littler and the Canadian labor and employment firm of Whitten & Lublin. Littler is the first international labor and employment law firm to open an office in Canada, making it the first law firm to expand its global reach this year in the country where it has defended its clients’ business interests for more than 40 years. The new office allows the firm to work more closely with its Canadian counterpart to offer employers doing business there expanded access to Littler’s full international research and support platform. Both Celeritive and Littler are great examples of how technology is being advanced in many ways including keeping up with firms that have larger technology budgets. Organizations such as Axiom are also on the cutting edge of helping law firms to be able to access new and bigger possibilities. Axiom is an alternative legal services provider (ALSP) , and it provides legal services at a lower cost than traditional law firms while maintaining a high degree of quality. They have recently expanded their services to include patent litigation via acquisition of Novare Law. Axiom has named Tony West, former chief legal officer at Uber and former U.S. Assistant Attorney General for Legal Policy, as its new CEO. It is Axiom’s first known non-attorney CEO when they hired West. His experience will no doubt help them grow even more rapidly. It appears there is a genuine move towards separation of ownership within the industry. At the same time law firms are maintaining a sizeable focus on M&A, opening new offices and international expansion. The current complexities owners/investors face when selling their firms to private equity firms, or creating de novo "new" ventures with private equity backing via law firm ownership are still very real and face hurdles. These challenges are complicated and lack resolution. Despite the challenges, we see a concerted effort by law firms to innovate, succeed, and be able to grasp the new and exciting world of international scale. We will continue to be paying close attention to firms who are exploring new avenues for partnership.