The Business of the Practice of Law

CHAPTER 6

FIRM OWNERSHIP

The lawyer members of a law firm can be divided into two groups: those who are owners and those who are not.  Firm ownership is here differentiated from both associate status and any of the various membership classifications employed by a firm to designate a status that is neither associate nor owner. Every firm, regardless of its business structure, will have some criteria for admission to the ranks of its owners and, unless practice in a law firm setting is viewed only as an element of some other personal goal, that admission will be the aim of every associate who joins a firm.

Gaining a full participatory share of firm ownership is sometimes a gradual process with several stages between non-ownership and that share.  Thus, many firms have instituted ownership classifications such as “non-equity partner” or “A,” “B,” “C,” or “non-voting” shareholder, or other similar designations that indicate an ownership or firm membership status other than “associate” but less than the highest level of firm ownership.  Such classifications are seldom noteworthy outside the firm and allow firm members with those classifications to refer to themselves simply as “partners” or “shareholders”... and not as “associates.”  But, within the firm, they are significant because any status other than one of full participatory ownership can be perceived, both by the holder and other firm members, as an inferior ownership status and, in the case of the holder, not a full realization of his or her ownership goal.

In any event, the creation of a hierarchy of ownership is an unavoidable consequence of the use of ownership classifications.  Whether the existence of such a hierarchy is a positive or negative influence on the attitudes and conduct of firm members is a challenge for management and will largely depend upon how the classifications are used.  If the classifications are part of the normal progression of admission to full participatory ownership, it is likely that their attainment will be viewed as a positive achievement.  However, if they are used as a more or less permanent alternative to full participatory ownership the probability of negative implications is very high.  Even though a differentiation in ownership status may be inconsequential outside the firm, the failure to achieve admission to full ownership status can often have the same effect on an individual member as does the failure to advance beyond the classification of “associate.”

Clearly, it should be the goal of management to use ownership status, regardless of possible classifications, as a positive reward for desired conduct.  While some firms may be able to successfully utilize a more or less permanent differentiated ownership system, without offering the reasonable prospect of eventual full participatory firm ownership, few if any firms will be able to induce high achievement oriented attorneys to pursue careers with them.  Conversely, few if any high achievement oriented attorneys will be inclined to pursue their careers at firms that do not offer that opportunity.  Firm ownership is usually viewed as the ultimate achievement.  It is usually perceived as providing a high degree of security, but whether it actually does depends, in the final analysis, upon the ongoing successfulness of the firm.

Regardless of any classification, some type of personal financial commitment is a requisite of firm ownership.  This is a fact often overlooked by the goal-oriented associate.  While that commitment may take the form of personal assumption of all or a portion of firm liabilities, in addition, it normally consists of a fixed monetary investment. In the event that the financial commitment falls into the former category, the extent of the commitment will be clearly set forth in some type of firm ownership documentation.  If a monetary investment is involved, some firms allow for installment payments, while others require a lump sum payment.  The amount of any monetary investment and manner of payment will likewise be clearly defined in ownership documentation. Also, in addition to a fixed monetary investment requirement, it is not unusual for some organizational structures to require that owners personally guaranty certain of a firm’s financial obligations, such as loans and premises leases.

Even though the type of financial commitment may vary from firm to firm, the requirement of such a commitment does not.  At the root, it is this personal financial commitment that differentiates owner from non-owner, employer from employee.  It carries with it both financial responsibility and risk: responsibility for the protection of personal assets or the amount invested, and the simple risk of personal financial loss.  If a law firm fails to succeed as a viable business (the breakup of law firms is not uncommon), in addition to the basic loss of employment issues involved, the owners are exposed to the greatest risk of personal financial loss.

In addition to whatever financial commitments may be involved, upon becoming an owner, the nature of an individual’s compensation changes significantly and his or her attention to firm operations and costs becomes, or should become, heightened. As discussed in Chapter 3, owner compensation is increased with firm profitability and decreased if the firm is not profitable. Regardless of firm practices regarding the determination of regular payments to owners, and regardless of what the payments are called (salary, draw or whatever), any payments to owners are at risk unless justified by receipts less expenses, exclusive of those payments. Obviously, an owner cannot expect any distribution of profits unless they exist.  Most importantly, in addition to the financial commitment required, owners assume responsibility for the generation of business and for the profitability of that business.

The criteria that a firm has established for ownership not only determine how owner responsibilities will be satisf