In Part One of this series, I said that becoming a partner in a law firm is no longer the goal of every young lawyer. In Part Two, I wrote about the advantages of equity partnership.
Now, let’s talk about the disadvantages of equity partnership.
To start with, there is joint and several unlimited personal liability for the professional negligence of all firm members, except for the limited exception offered by a limited liability partnership. Of course, good insurance will attenuate that risk.
After that, there is joint and several unlimited personal liability for just about everything else, which can be limited somewhat by good business structures.
Next, there is the need to invest capital and to put it at risk for decisions that will usually be made by other people.
But those issues are relatively teeny-tiny. The real issue is that as a partner in a law firm, you are entering into a business relationship with competitive people who have been professionally trained to argue with each other. Moreover, you will be financially and emotionally invested with them. It may not always be easy to get out if you get involved with the wrong people.
Although I am certain that somewhere there is a law firm where all of the partners are polite, respectful, empathic, ethical, kind, collaborative, and generally a delight to be associated with, that is certainly not the case for most of them.
So, depending upon the partnership that you join, the biggest risk is that you will be financially, ethically, and legally committed to people who you may not respect or like. The best analogy that I can come up with is being married to 5, 10, 20, or hundreds of people who you do not love. The answer is not that you should never get married, but it is to recognize the importance of choosing your partners well.
It can take as little as one partner in a firm to wreak havoc. It always amazes me how ready associates are to ignore some of the difficult personalities in the partnership and jump into business with them.
So with all of these potential risks, how common do you suppose it is for lawyers invited to join a partnership to do the following?
- hire a professional accountant to thoroughly review the financial records of the firm.
- retain a commercial lawyer to review the partnership documents.
- Obtain a clear understanding of the firm’s business plan and financial budget for the next three years (or decline to join a firm which does not have them).
- Figure out how decisions are really made.
- Determine how compensation allocation works in practice.
- Analyze the personalities of the decision-makers and form a realistic impression of how they will fit in.
Not very.
I know of few commercial lawyers who would recommend that a client invest in a business with as little due diligence as your typical lawyer does before joining a law firm partnership.
A version of this article was originally published by Law360 Canada, part of LexisNexis Canada Inc.