CPA Partner Agreement Issues – Part 2

At a recent meeting of my monthly roundtable of 20 of the 30 largest local CPA firms in Chicago, we invited attorney Russell Shapiro, partner with the law firm of Levenfeld Pearlstein, to speak to us about the issues below, which are rarely addressed in CPA firm agreements. In our blog post of August 29, 2012, we listed four items. Here are four more.

Two important caveats: (1) Several of these issues are governed by state laws, which vary considerably from state to state and (2) the term “partnership agreement” is applicable to all legal entities.

1. Is mandatory retirement of equity partners enforceable? Yes, for the vast majority of firms, but the key is whether the partners are “owners” or “employees” under the law. In 2007, two highly publicized court cases that involved two mega law firms: Kelley Drye & Warren and Sidley & Austin, were settled out of court with significant payments to the plaintiffs. The ex-partners claimed that, despite being equity partners, in substance, they were employees because they had absolutely no involvement in firm management and decision-making.

On the face of it, these cases would seem to have scary implications to the thousands of CPA firms who have mandatory retirement provisions for their partners. But not to worry, says Shapiro. The two law firm cases above likely aren’t applicable to most local CPA firms because they are substantially smaller than these huge national law firms and the equity partners have the indicia of ownership.

2. Does a terminated partner’s liability to the firm end on the day he/she leaves the firm? Not necessarily. Examples: a partner’s share of the office lease and acts committed by the departing partner that result in claims against the firm and related expenses for malpractice, fraud, etc. It will depend on what the partnership agreement says.

3. Should “partners” in an LLC refer to themselves as “members” on their correspondence and business cards? I always grimace when I hear a partner refer to him/herself as a “member.” It conjures images of non-CPA-like things such as a body part or inclusion in a club. In Shapiro’s opinion, while the use of the term “member” might be a best practice, he opines that use of the term “ partner” informally is fine.

4. Can a partnership agreement provide for a reduction of deferred compensation benefits if a retired or withdrawn partner fails to (a) provide the stipulated notice and/or (b) properly transition clients to other firm personnel? Yes, for the most part. We have seen hundreds of partnership agreements that have provisions requiring notice and client transition by retiring or withdrawing partners, but fail to specify penalties for non-compliance. Therefore, there is virtually no “teeth” in the notice and transition requirements.

When I have pointed this out to firms, they quickly respond that it is almost impossible to put in writing the definition of “proper client transition.” It may be difficult, but it can be done.