But it’s also very much like a marriage: You are not going in expecting it to dissolve, but time and circumstances, some totally out of our control, have a way of upending our best-laid plans. So having a document in place that sets forth the guidelines and parameters of your partnership from the outset is important.
You Need a Written Agreement
First, you should always have a written agreement, even though under prevailing interpretations of partnership law, you don’t have to have a written agreement in order for your entity to be legally considered a “partnership.” This is important to keep in mind, since if you join together with another individual for profit, or even hold yourself out as having done so, you have formed a legal partnership.
If you don’t have a document in writing, you might be held to standards that you never approved or wanted. A number of cases on implied partnerships provide that, if you hold yourself out as a partnership, then the general rules of partnership law apply. As a result, all partners are jointly and severally liable for each other’s torts, and a client has a right to rely on the authority of a partner to act on behalf of the partnership.
What Needs to Be in the Written Agreement
Much has been written about the terms that should be included in a written partnership agreement. However, if a particular provision is not contained in the written agreement, the agreement will normally default to the applicable portion of the Uniform Partnership Act, which has been adopted by every state except Louisiana, or the Revised Uniform Partnership Act, which has been adopted by a majority of the states. This could result in unintended consequences. Most notable is the provision in the Uniform Partnership Act providing that, if one of the partners dies, the partnership is terminated.
This brief article does not aspire to exhaustively explain what should be contained in a partnership agreement. However, your partnership agreement should clearly spell out a number of provisions, including the amount of capital contributions from each partner, how salaries and distributions of profits will be handled, what occurs if a partner dies or is disabled, and the mechanics of dissolving the partnership if one or more of the partners want to move on.
Explaining how important decisions will be made is also key. This includes articulating the voting rights of partners and what those rights are based on. If a partnership requires a unanimous vote on every issue, you may not be able to resolve important issues that relate to the management and operation of your firm. This will result not only in a waste of time and resources but also can create unnecessary strife and prevent your firm from flourishing.
Small law firms usually note in their written agreements that the management of the firm resides with the founding partners. Whether it is a good idea to designate a managing partner or committee is something you’ll have to decide based on your own firm’s individual circumstances and culture. Some firms may utilize a rotating managing partner schedule, such as switching to a different founding partner every year, while others may find that a term of several years is more appropriate. However this is handled, it should be written in the partnership agreement to avoid later disputes.
Additionally, whether calling for a managing partner, or in larger firms a management committee, the agreement should establish how governance powers will be determined. Some firms may find that decisions regarding priority matters of the partnership—such as entering into lease agreements, establishing new offices and admitting new partners or even associates—should be addressed by all of the partners, especially in a small firm. However, there may be some issues, such as expenditure of funds below an agreed amount (say $1,000) or representation of new clients, that can be handled more efficiently by a managing partner, without requiring a vote or some other form of consensus on every minute management issue.
Every partnership agreement should also address retirement. Although commonplace in older partnership agreements, provisions for unfunded retirement benefits have largely disappeared from partnership agreements today. Those agreements customarily provided that retired partners were guaranteed income and distributions from the firm profits for a certain period of time after they stopped actively practicing with the firm; however, over time these arrangements have proved to be financially unrealistic and have largely disappeared.
However, if you plan on joining a firm as a lateral partner, which is becoming more common in today’s legal climate of portable business, be sure to check the partnership agreement of your new firm to see if you are going to be responsible for paying the retirement benefits of partners whom you never worked with or even knew.
Other retirement issues that should be dealt with in a partnership agreement include whether you will have a mandatory retirement age—something that’s very hard to focus on when you are starting a firm in your 20s or 30s—and whether retired partners will be able to continue to work on a contract or of counsel basis once they retire.
So What Should You Do?
If you haven’t reviewed your partnership agreement lately, it’s time to take it out of the filing cabinet and go over it with your partners at your next meeting. Determine whether it still meets your firm’s needs, and take the sobering and necessary steps to revise or amend it if it doesn’t. The Revised Uniform Partnership Act provides that you can amend your agreement with the unanimous consent of the partners. To ensure smooth firm management, do so now, when you can all see a problem and agree on how to fix it, not later after disagreement and discord set in.