Four Essentials Every Law Firm Partnership Needs with Jonathan Hawkins
Most law firm partnerships begin from a good place. The partners trust each other, share a vision, and believe they can work through whatever comes their way.
But as Jonathan Hawkins explains in this episode, that is exactly why the beginning is the right time to have the difficult conversations.
A handshake agreement may work for years. The problem comes when circumstances change and there is nothing in writing explaining what happens next. Even having a written agreement is not necessarily enough. It needs to address the realities that are unique to law firms.
Jonathan walks through four of the biggest issues every law firm partnership agreement should address: voting and decision-making, exit ramps, partner compensation, and dissolution.
Voting and Decision-Making
Who actually gets to make decisions inside the firm?
It sounds like a simple question, but it quickly leads to several others. Does every partner vote? Is there a managing partner or executive committee? Are certain decisions reserved for the entire partnership? Do decisions require a majority, supermajority, or unanimous vote?
For a two-partner firm, there is another important question: what happens when there is a deadlock?
These decisions can feel unnecessary when everyone is aligned. But Jonathan’s point is that partners should establish the rules while relationships are strong, rather than trying to create them after something has gone wrong.
As he explains, “Now is the time in the beginning to make these decisions so later on if anything goes sideways, you have something to go back to about how decisions are made.”
Creating Clear Exit Ramps
Partners leave firms for many different reasons. Jonathan calls these scenarios “exit ramps.”
A partner could die, become disabled, retire, voluntarily withdraw, or be expelled. And the agreement should consider what happens in each situation because not every departure should necessarily be treated the same way.
For example, a partner expelled for cause may not receive the same treatment as someone who retires.
The agreement should also address potential buyout obligations. Will there be a lump sum or payment terms? Could departing partners remain responsible for certain firm obligations, such as a long-term lease or an outstanding line of credit?
These may be uncomfortable scenarios to discuss when forming a partnership, but leaving them unanswered only postpones the conversation until a potentially much more difficult moment.
Getting Partner Compensation Right
Compensation gets plenty of attention when partners negotiate agreements, and for good reason. Everyone wants to understand how they will be paid.
But Jonathan has seen partnership agreements that focus almost entirely on compensation while overlooking many of the other issues that can determine whether a partnership functions effectively.
A strong agreement should make compensation clear enough that partners are not left guessing or fighting about how the system works later.
Jonathan also points listeners to an earlier episode of the podcast where he discusses his current thinking and philosophy around equity partner compensation.
Compensation matters, but it should be one part of a broader agreement built to handle the full life cycle of the partnership.
Planning for Dissolution
Dissolution is often used casually to describe partners separating, but Jonathan makes an important distinction.
“Dissolution is really a technical term.”
It means the firm itself is shutting down, not simply that one or more partners are leaving while others continue operating the practice.
A partnership agreement should explain how that decision gets made. Does dissolution require a unanimous vote or a majority?
Then comes the practical work.
The firm may still have active client matters, old client files, accounts receivable, cash, debts, leases, furniture, computers, and other obligations or assets that need to be handled.
Partners need a process for winding down those responsibilities, paying what the firm owes, and determining how anything remaining will be distributed.
Planning for the end of a firm may seem strange while building one, but it can prevent enormous uncertainty if that day ever comes.
Build an Agreement for a Law Firm
These four issues are not everything a partnership agreement needs, but Jonathan considers them four of the biggest areas to address.
There is another important consideration. A law firm partnership agreement should actually be designed for a law firm.
Jonathan has reviewed agreements borrowed from other types of businesses where someone simply changed the names and inserted the law firm’s information. That approach can miss circumstances unique to legal practices.
Law firms also operate under ethics rules, ethics opinions, and applicable case law. Jonathan notes that he has seen agreements containing provisions that violate requirements governing lawyers.
The goal is not simply to get an agreement signed. It is to create one that reflects how the firm actually operates and the situations its partners could realistically face.
Bonus Tip: Separate Partner Compensation
Jonathan closes with a structural recommendation based on his experience drafting partnership agreements.
He prefers putting the equity partner compensation arrangement into a separate agreement that is referenced by the primary partnership agreement.
Why?
Compensation plans often need to change as circumstances inside the firm change. When compensation provisions are buried inside the partnership agreement, changing them can mean reopening the entire document and potentially inviting negotiations over unrelated provisions.
Keeping compensation separate can make those periodic adjustments easier while allowing the primary partnership agreement to remain intact.
For firms that expect their compensation model to evolve, that separation can create valuable flexibility.
Closing Reflection
A partnership agreement is not just paperwork for the day a firm is formed. It is a framework for navigating the decisions, transitions, disagreements, and unexpected circumstances that may come years later.
Trust still matters. Shared vision still matters. But strong relationships are not a substitute for clarity.
As Jonathan puts it when discussing handshake arrangements, “It works until it doesn’t.”
Thinking through voting, exits, compensation, and dissolution while everyone is aligned can give partners something concrete to rely on when circumstances inevitably change.
If you are forming a law firm partnership, or already have one and have questions about your agreement, Jonathan invites listeners to reach out and discuss it.
Thank you for joining us for this episode of The Founding Partner Podcast. Stay tuned for more conversations that inspire connection and growth.
AND MORE TOPICS COVERED IN THE FULL INTERVIEW!!! You can check that out and subscribe to YouTube.
Connect with Jonathan Hawkins:
- Website: https://www.lawfirmgc.com/
- LinkedIn: https://www.linkedin.com/in/jonathan-hawkins-135147/
- Podcast: https://www.lawfirmgc.com/podcast
Jonathan Hawkins: [00:00:00] What are the four essential issues to address in any law firm partnership agreement?
Hi, I’m Jonathan Hawkins, and you’re listening to Founding Partner Podcast. Today, I’m gonna talk about the four things you need to make sure are covered in your law firm partnership agreement. If you don’t cover these, you’re setting yourself and your partnership up for heartache.
At the end of this, I’ll give you a bonus tip, so make sure you stick around. But before I dive in, first thing that you have to have is a written partnership agreement. I know some firms that operate on a handshake. Yes, it can work, but remember, it works until it doesn’t. And when it doesn’t work, it can be pretty bad.
So again, written agreement, but not just any written agreement, a well-written agreement. I can’t tell you how many written agreements I’ve reviewed that, let’s just say, weren’t very good. So here are the four essential elements to address in a law firm [00:01:00] partnership agreement.
Number one, voting/decision-making. Number two, exit ramps. Number three, partner compensation. And number four, dissolution. All right. Let’s start at number one, voting and decision-making. So these are some of the questions that you need to answer as you are drafting your agreement. How will decisions be made? Who gets to vote? Is there an executive committee, managing partner?
Do all the members vote? These are questions you need to think through. If there is an executive committee, who’s on it? How does the executive committee vote? Do you reserve certain decisions for everybody to vote on, and what are those? Is it majority vote, super majority vote, unanimous vote?
If there’s just two of you, what if there’s a deadlock? As you can see, there’s lots of different questions and lots of things you need to think through that I guarantee you most people going in are not thinking about. They’re thinking, “Hey, we’re all [00:02:00] great friends here. We all have the same mission, the same vision.
It’s gonna be easy.” Well, now is the time in the beginning to make these decisions so later on if anything goes sideways, you have something to go back to about how decisions are made All right, number two, exit ramps. This is what I call them. So what do I mean by exit ramps? These are all the ways a partner might leave the firm.
So death, disability, retirement, voluntary withdrawal, maybe you have to expel somebody for cause, maybe without cause. Lots of different ways somebody might leave. So what happens in each of those scenarios? It may not be the same thing. Probably not. If somebody is expelled for cause, that means they did something bad.
They should not be treated the same way if somebody retires. So you gotta think through that. Is there any sort of buyout obligation when somebody leaves? Does that change again, depending on why they leave? Is it a lump sum payment? Terms? [00:03:00] Might there be any offsets for certain firm obligations?
For example, if the firm has a 20-year lease, hopefully you don’t have a 20-year lease, but a long-term lease and somebody leaves, should they be responsible for some or all of that? Or maybe there’s a line of credit that the firm has used over the years, and there’s a balance when somebody leaves.
Again, you gotta think through these things on the front end, because otherwise, when somebody leaves, you’ll be dealing with them then, and it may not be so easy. All right, let’s move on to number three, partner compensation. This is a biggie. This is where most people focus. I’ve seen many one or two-page partnership agreements that all it talks about is compensation.
I guess that’s better than nothing, but frankly, you know, it’s way more than that. Everybody wants to get paid, and you don’t want anybody to be guessing how they’re gonna get paid or have disagreements later. So you really need to address this. Now, a few weeks ago on this podcast, I dropped an [00:04:00] episode where I talked about my current thinking and maybe philosophy on equity partner compensation.
So if you haven’t heard that one, I’d say go check that out. You might learn something there that you can apply as you’re drafting your agreements. So go check that one out All right, number four, you gotta address dissolution. Now, a lot of people come to me and they say, “We’re dissolving the firm.” But dissolution is really a technical term.
It’s not some people are leaving, some people are staying. It is the firm is shutting down. Everybody’s leaving, and the firm is shutting down. And so you need to figure out what happens in that scenario. And how do you make that decision? Is it unanimous vote? Is it majority vote? And if you do dissolve it, what happens?
You’ve got active client matters. You’ve got old client files. You have potentially leases that have terms on them, unpaid debts. You have all sorts of things you gotta sort through, and maybe you have assets, although many firms, law firms don’t really [00:05:00] have that many assets. I mean, you got furniture and maybe some computers, and from my experience on the furniture, you pretty much have to pay somebody to come get it.
So, I’m not even sure that’s really an asset. But either way, these are things you need to address. I mean, certainly there’s gonna be AR, cash hopefully, and you gotta pay off debts and then split it up. So you gotta deal with that. So just to be clear, these are the four, I think, biggies. They’re not the only things.
There are lots of other things need to be covered, but those are the four big ones I’ve read a lot of law firm partnership agreements in my career. Some of them are pretty good. Some of them are, are really good but I would say on the whole, most of them are lacking. They may be borrowed from some other type of business, and they just change the names and put in the law firm names without really giving any thought to the scenarios of what might happen down the road.
And law firms [00:06:00] have peculiar scenarios that other businesses do not have. So you’ve got to make sure that whatever you’re building is built for that. And remember, we have all the ethics rules and all the ethics opinions that sort of run through all of this. There are certain things we cannot do as lawyers.
And I’ve seen plenty of agreements that put things in there that are violations, and sometimes they’re not in the rules or the opinions. You gotta go to case law to find this stuff. So anyway, if you’re out there about to form a partnership or maybe you have a partnership and you have questions about it, please reach out.
Happy to discuss it. All right, I promised a bonus tip, and this is it. And I can’t remember if I covered this in the partner compensation episode, but when I draft partnership agreements, I really like to have the equity partner compensation scheme or agreement in its own separate agreement, sort of a side agreement that’s referenced in the partnership agreement, but it’s got its own [00:07:00] agreement.
And I have a reason for this. The reason is I have found that partner compensation plans, schemes, whatever you wanna call it, need to be changed periodically as facts on the ground change. If it’s buried in the actual partnership agreement and you need to change it, then the whole thing gets cracked open, and then people start wanting to renegotiate, change this, change that, and you never know what’s in the back of their mind.
Why do they wanna change this provision? Maybe they have something that they’re planning to do. But if it’s just the compensation by itself, I have found that’s just a little bit easier to open up and change and then close it back down, and then you keep the partnership agreement as originally drafted in place.
So anyway, that is recommendation there. All right, that’s all I’ve got for today. One last thing before I let you go. If you get any value from this podcast today or any other episodes, please take five [00:08:00] seconds and leave a five-star review. It doesn’t take long. Just a couple buttons and we’re there.
I really appreciate your support and would appreciate a review. Thank you.
