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Should Your Firm Keep Two -- or More -- Sets of Books?

By Sheldon I. Banoff
December 01, 2003

Most law firms operate as general partnerships, limited liability partnerships or limited liability companies (together, “partnerships”, whose members having capital in the firm herein are “partners”).

Does your partnership keep two sets of books ' or more? Al Capone kept two sets of books, and the judge sent him to the Federal Pen for doing so. Yet many law firms (and other professional businesses) legally keep two or more sets of books, arising from different accounting systems prescribed by 1) their partnership Agreements; 2) generally accepted accounting principles (GAAP) audited statements (which are required by some lenders and landlords), and 3) the tax laws. As a result, the firm's net assets ' and the partners' ownership of the law firm, as reflected in the partners' capital accounts ' may be substantially different under each set of books. Moreover, the amount and timing of the firm's cash distributions to partners, the amount of the partners' annual income taxes, and the availability and amount of bank loans to the firm may all be affected by the firm's applicable accounting methods ' all items that may substantially affect the partners' pocketbooks.

Let's analyze each type of accounting system ' the 'books' ' that the law firm may maintain, and how each may differ.

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