Commonly Omitted Provisions in CPA Firm Partner Agreements

Partner agreements are a key organizational document for any business, including CPA firms. Firms normally don’t find themselves needing to refer to them, but in the event that they do it’s important to have the right provisions included to be able to effectively handle situations as they arise. Many partnership or operating agreements from CPA firms either miss out or lack clarity and detail in important provisions. Here are the top five I see commonly omitted:

1. Vesting:
   • It is important to clearly articulate the commitments required of partners to earn full retirement benefits. Regardless of which system a firm uses to determine a partner’s buyout, firms should have minimums for years of service and/or age before a partner can “earn” their share of retirement benefits. A typical year requirement ranges from 15–20 years and encourages partners to continue growing the firm and developing staff prior to retiring.   
2. Death and disability:
   • While no firm wants to think about either of these situations, both death and disability provisions are important in a partner agreement so the remaining partners know how to proceed operationally and financially during a stressful time. Specifics to address how permanent disability is defined, how you want to compensate a partner who becomes disabled both prior to being declared permanently disabled or disability insurance payments commencing, whether you want to accelerate vesting for retirement, and whether the firm wants to provide life and/or disability insurance for its partners (which I recommend).
3. Voting: While many partner agreements have a clause that discusses how voting will work, firms often fail to mention which decisions will require a vote or their list misses situations such as:  
   • Selling/merging with another firm 
   • Removing the managing partner or executive committee members 
   • Filing for bankruptcy 
   • Dissolving the firm 
   • Another item to note is how smaller firms, especially sole proprietors or firms with founding partners that entered the partnership at the same or similar times, want to account for newer partners entering the partnership and what level of voting power they will have. It is common for founders to maintain overriding power on most, if not all, voting matters to ensure they aren’t outvoted by the more junior partners, especially on impactful issues such as selling the firm.
4. Partner Duties 
   • Astonishingly, a section spelling out the duties of a partner is left out of many CPA firm agreements. Listing the specific expectations or responsibilities of partners serves as a “job description” for that role.  
5. Partner Restrictions
   • No firm expects that their partners will commit a felony, be suspended or expelled from a professional organization, or engage in illegal behavior that jeopardizes the firm’s reputation, but it is best to clearly define these instances in the unlikely event that you need to take remedial action. I always ask firms if they want these restrictions to be grounds for expulsion from the partnership and grounds for reducing that partner’s share of retirement benefits being either in part or in total. Defining restrictions doesn’t compel the firm to reduce or revoke goodwill benefits, but that it at least gives the remaining partners the discretion to do so.  

Did you recently add any of these provisions to your partner agreement? Let us know in the comments below.

The legal issues related to partnership or operating agreements vary by state law.  Be sure to check with your attorney and applicable state laws to apply the principles addressed in this blog at your firm.