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Why Do Law Firms Have Partners?

Why Do Law Firms Have Partners?

If you are planning to hire a lawyer, you may be confused about the many titles found in law firms. Some are partners, some are associates. Some are esquires or J.D.’s. Some are owners or members. But why? This article will explain the business forms of law firms and the rules about how law firms are formed.

Law firms formed as partnerships have partners. They share liabilities and profits of the law firm. Other law firms are formed as limited liability corporations. In those, the lawyer owners are called members. Other business structures are allowable, depending on the state. Bar association rules dictate which business forms that are allowable for law firms.

What is a Partnership?

A partnership defines how a company operates. It establishes the ownership structure. There is usually a partnership agreement that details how much of the company each partner owns, how and when the firm’s profits will be distributed, how liabilities will be handled, and anything else needed to establish the rules of how the partnership will operate. Usually, costs and other liabilities are shared equally among the partners in this partnership model. The same goes for profits.

Law firms are usually formed as limited partnerships where some of the partners do not have management authority or debt obligations. They also can leave without dissolving the partnership. For a traditional partnership, if a partner leaves, then the partnership will be dissolved, meaning the business entity no longer exists and the agreement is no longer valid. Because partners frequently leave large law firms, most law firms choose a limited partnership.

The partnership does not have to be registered with a state and nothing has to be filed to form the partnership. However, the more formal the agreement, the less likely there will be disputes.
If there is a dispute, then the partners will attend mediation or, worst case, file a lawsuit for interpretation of the partnership agreement.

A limited liability partnership (LLP) is different from both a general partnership and a limited partnership. These are useful for law firms because they limit the liability for other partners’ bad actions, but partners still share in debts and other kinds of liabilities. For example, if a partner commits malpractice and is sued by a client, the other partners are not at risk in that lawsuit.

What is a Limited Liability Corporation?

Many law firms are limited liability corporations (LLCs). In a limited liability corporation, the business owners are usually called members instead of partners. This is also different from the partnership because the members are not personally liable for the company’s liabilities. For example, if the limited liability corporation becomes insolvent, usually the members will not have to pay those debts.

Unlike partnerships, limited liability corporations must file articles of incorporation. These are well-written, thorough documents detailing how the limited liability corporation works, how ownership is distributed among the members, what happens when a member leaves, etc.

Another difference from partnerships is that limited liability corporations do not dissolve if a member leaves. Depending on the articles of incorporation, the members’ ownership interest may be divided equally among the other members or distributed in some other way.

A related business form is the professional limited liability corporation. This simply requires that only licensed professionals own the business. Since lawyers are professionals, they can form professional limited liability corporations.

Other Business Forms for Law Firms

Law firms may also be corporations or professional corporations. A corporation is similar to a limited liability corporation, but corporations have boards of directors and bylaws. Although many corporations may have shareholders, law firms may not in states where non-lawyers may not own any part of the business. The reason non-lawyers cannot own law firms in many states is because that requires sharing fees with non-lawyers, which is prohibited by the American Bar Association’s Model Rules of Professional Conduct Rule 5.4.

A professional corporation is similar to a corporation, but it is owned by professionals such as lawyers. This is often allowable in states that do not allow law firms to be traditional corporations.

How is the Business Form Chosen?

In most states, there are rules and laws governing what business form a law firm may take. Two significant states are New York and California. In these states, a law firm may not be a limited liability corporation. In these states, a professional limited liability corporation or another business form must be chosen instead of a limited liability corporation. This ensures the attorneys are still personally liable for their own malpractice.

How do Attorneys become Partners?

Many law school graduates join firms as associates. An associate is generally someone with fewer than ten years of experience. The associate spends a number of years working under a partner doing research, writing, and, eventually, client contact and court appearances. During this time, the associate must demonstrate exemplary work and work long hours, frequently six to seven days a week. Ideally, the associate would learn to generate their own business, usually with current institutional clients.

Depending on the law firm, after five to ten years, the associate may be considered for promotion to partnership. By this point, the associate is likely a senior associate managing junior associates. The senior associate has their own book of business and extensive client-facing experience. Senior associates who have formed strong relationships with others in the law firm are more likely to make partner.

Some law firms may require certain quantitative criteria before an associate may be nominated for partnership. For example, they may require at least 10,000-15,000 billed hours. They may require a certain number of transactions or court appearances.

The process of becoming a partner varies by law firms, but many require an existing partner to nominate the associate for partnership. The nomination will involve a statement of support, a body of the associate’s work and merits, and perhaps recommendations from other colleagues in the law firm. The associate will then attend a number of interviews.

If the associate is offered a partnership position, it may be a non-equity partnership or an equity partnership. A non-equity partner does not share in profit distributions. Usually, associates are first non-equity partners. It takes about ten years of partnership at the law firm before being nominated for an equity partnership.

Not all associates become partners. Some choose to become of counsel, instead. This title implies seniority and expertise without requiring that the attorney is a partner. Sometimes this title is given when a senior attorney joins a new firm. Other times it is given to associates who do not want to pursue partnership tracks. Attorneys who do not become partners or of counsel often form their own firms or seek other work such as in-house counsel at a large company.

What Does a Law Firm Partner Do?

What Does a Law Firm Partner Do?

Partners at a law firm are more involved in the business side of the law firm. They generate business for both themselves and other attorneys at the law firm. They make business decisions, discuss short- and long-term business strategies for the law firm. The partners are often the face of the law firm; they are the first contact for new clients. Finally, they act as managers for associates, paralegals, assistants, and others at the law firm.

Benefits of Being a Law Firm Partner

There are many benefits to being a partner in the law firm. Salary is much higher for partners, usually well into six figures or even seven figures. Partner compensation usually includes a percentage of a firm’s profits. Moreover, partners enjoy more prestige and awards. Finally, in some situations, the partner no longer has to work six or seven days a week and bill thousands of hours a year. Therefore, many lawyers seek to become partners.

Final Thoughts: Why do Law Firms Have Partners?

In conclusion, law firms that are structured as partnerships of some form have partners. Other business forms of law firms may have members or owners. States heavily regulate the business forms of law firms because it is important for lawyers to still have personal liability for malpractice. However, they may allow for alternative business structures that limit other types of liability, such as malpractice of other law firm attorneys and financial obligations.

Making partner is often the goal of new law school graduates, but not always. It takes many years and significant experience to make partner at a law firm. Once an attorney is a partner, they must perform more as a business manager for the law firm. This includes generating revenues, managing employees of the law firm, and creating business development plans for the law firm. Being a partner is often a prestigious honor for attorneys.

When hiring a lawyer, you may want to work with partners to ensure your attorney has the most experience. However, a partner bills hundreds of dollars an hour more than an associate bills. So you may want to keep that in mind.

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References:

https://www.investopedia.com/terms/p/partnership.asp

https://www.investopedia.com/terms/l/llc.asp

https://lawyerist.com/blog/law-firm-business-entity/

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