Six Reasons You’ll Wish You had a Partnership Agreement: With 18 key clauses and 24 essential ingredients. By Marc Rosenberg CPA Firm Management & Governance A partnership agreement contains clearly defined terms and conditions of the firm including, but not limited to, each partners’ responsibilities, their pay and their roles within the business. It also includes rules and regulations that are to be followed by the partners in the business. It is essential for a CPA firm to have a partnership agreement, regardless of how collegial and friendly the partners are with each other. More CPA Firm Management & Governance: How The Structure of an Accounting Firm Changes through the Years | Congratulations! Your Firm Needs a Human Resources Director | The 19-Point Marketing Director Job Description | Checklist: How the Best Managing Partners and Firm Admins Work in Concert | 21 Questions for Managing the Managing Partner | No Partner Vote Needed: 17 Decisions Best Left to the Managing Partner Alone | New Rules: 13 Items that Should be in Your Managing Partner’s Job Description | When Is It Time to Shift Your Firm from Partnership-style to Corporate-style Governance? | Not Every Firm Needs a General Patton | A partnership agreement can prevent potential future disagreements that could occur pertaining to the objectives and responsibilities of the firm. A number of years ago, I was engaged by the managing partner of a firm to draft their first-ever partnership agreement. The firm had three partners: the 57 year old founder, who was a dominant, rainmaking managing partner, and two other younger partners who performed at a much lower level than the founder. After receiving my draft agreement, the founder decided that he and the firm would be better off without an agreement. One reason he gave for this was that he thought the possibility of the other two partners leaving the firm and taking clients was practically zero. Another reason was that he saw his buyout coming from a larger firm he would eventually merge with, instead of from either of his two junior partners. I advised him against abandoning the agreement and gave him these reasons: 1. Should the founder die or becomes permanently disabled, if there is no agreement in place, the other two partners might each be legally entitled to 1/3 of the value of the firm, both tangible and intangible. The agreement I drafted provided for his two junior partners to receive 20% of the value of the firm, combined. * Should either of the two junior partners leave the firm via withdrawal, termination, retirement, death or disability, if their share of the firm’s value is disputed and it gets to a court of law, they would have a good argument for being entitled to 1/3 of the value of the firm. * Because this firm was very active merging in smaller practices, future merger candidates may not be willing to merge unless there was a partnership agreement in place. * Should the firm promote someone to partner, that person may be reluctant to accept a partnership without an agreement in place. * The agreement specifies duties, responsibilities and prohibitions of partners. When these issues are contained in a legally enforceable document, signed by all partners, partners are more likely to adhere to these “rules.” * The way in which the firm is governed is crystal clear to all parties, thereby minimizing arguments. Examples include: * How partners vote. * How partners are compensated. * Authority of the managing partner. * Determining the capital each partner has in the firm. * Method for new partners buying into the firm. * How departed partners get bought out. Partnership agreements have two major sections: * Partner retirement/buyout agreement. * General partnership agreement – everything other than the retirement agreement. I have seen firms with one document that includes both of the above, and I have seen firms with two separate, though integrated, documents. How this issue is addressed is up to your attorney. The following clauses, which are not intended to be all-inclusive, represent the major sections of each agreement. Retirement plan/partner buyout 1. What is paid: Capital only? Deferred compensation only? Both? 2. How is capital payment determined? 3. How is the firm’s deferred compensation valued? 4. How is an individual’s deferred compensation determined? 5. Payout term of capital and deferred compensation. 6. Will interest be paid on retirement payments? 7. Vesting of deferred compensation. 8. When retirement and withdrawal are allowed. 9. Notice of intent to retire or withdraw. 10. Limits on annual payouts to all partners. 11. Funding of retirement payments. 12. Should retired partner benefits be reduced if his/her clients leave? 13. Client transition requirements and penalties for failure to transition. 14. How deferred compensation payments are impacted by the presence of non-traditional and non-annuity-type services. 15. When deferred compensation payments may begin. 16. Health coverage for retired partners. 17. Tax treatment of payments. 18. Clawback – if the firm is acquired, and the “buyer” provides retirement benefits that are more lucrative that the “seller” currently pays to the retired partners, then those retirees are entitled to share in the improved benefits. General partner agreement 1. Name of the firm. 2. Capital accounts. 3. How a partner’s share of capital is determined. 4. Are capital withdrawals allowed? This includes over-withdrawals on distributions. 5. How a new partner buys in, determining ownership percentage, etc. 6. Voting. 7. What ownership percentage means. What it determines. 8. Managing Partner duties, term of office. 9. Executive and/or management committees: how appointed/elected, duties, term. 10. Partner compensation system. 11. Partner duties. 12. Partner prohibitions. 13. Partner expulsion – what are the grounds, what does an expelled partner forfeit? 14. Liabilities of partners to the firm after termination. 15. Non-compete and non-solicitation. 16. Require periodic physical exams of all partners? 17. Require all partners to provide the MP with a copy of their income tax returns? 18. Death and disability. 19. Non-equity partners. 20. Principals (partner rank for a non-CPA). 21. Mandatory retirement. 22. Part-time partners. 23. What happens if the firm is sold or merged out of existence? 24. Issues that many consider “boiler plate” legal language, addressing issues such as confidentiality, mediation/arbitration and indemnification. cpaclick/14rAw2W
Posted on: Sat, 20 Jul 2013 20:35:03 +0000
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