Who Is Reviewing Your Firm's Partnership Agreements?

There are many factors that need to be addressed when developing these complex legal documents. Some significant factors that should be considered are as follows:

• Type of legal entity (C corporation, S corporation, General Partnerships (“GP”), Limited Liability Partnerships (“LLP”) or Limited Liability Company (“LLC”));
• The laws of the state(s) in which the firm is organized, domiciled and conducts business activities;
• Consistency between the partnership agreement and the partner's employment agreement;
• Number of partners;
• Disparity/concentration in the ages of the partners (Consider questions such as: Are several partners expected to retire around the same time?);
• Importance of significant rainmakers (originators) and the impact of their departure from the firm;
• Valuation issues related to allocations between the redemption price for ownership interests and deferred compensation;
• Types of benefits to be provided to departing owners and the funding of these benefits;
• Single or multiple levels of ownership/income allocation arrangements;
• Existence of multiple practice areas or reliance on one practice area;
• Governance issues related to the admission of new partners and related capital contribution requirements;
• Governance issues related to the determination of owner compensation;
• Financial position of the firm and its ability to pay the benefits outlined in the agreement;
• Capital structure and anticipated capital requirements of the firm;
• Method(s) of accounting used for income tax and financial reporting purposes; and
• Existence of life and disability insurance coverage on the owners and the structure of these policies.

While all the issues above must be addressed when developing an agreement, this article will focus on the specific areas where the accountant should be involved in this process and the specific areas of the agreement that require an accountant's expertise.

Role of the CPA