Becoming a partner may be a dream step up the career ladder for ambitious lawyers, but it comes at a hefty price – financially and non-financially. Louis Baker explains the implications of taking on the role




The aspiration of becoming a partner is an important motivation in the career of an ambitious lawyer. The additional responsibility, status and wealth which are all associated with this position offer ample incentive for those hardworking individuals who have spent years dreaming of their own office.



Yet too often, the excitement of becoming a partner clouds the serious practical and financial obligations which go with the role. Due diligence should be an essential part of every admission to partnership. Blind ambition can lead to heartache, both for the individual being admitted to partnership and the firm admitting them.



It is imperative for a new partner to consider the following financial and non-financial implications when taking on this role to avoid any disappointment and, more seriously, the prospect of financial calamity.



Firstly, does the incoming partner understand the level of capital injection which is required of them and over what time-scale?



The majority of mid- to large-sized law firms have two tiers of partnership: junior and senior. Junior partners may be expected to contribute a nominal amount of capital from their own savings – usually between £5,000 and £20,000. For senior partners, such firms tend to have arrangements with a bank so that the new partner can obtain a loan with tax relief and subscribe to capital without risking their homes. In this instance, the sums of capital tend to be much higher, from around £100,000 upwards.



Smaller firms can have more informal processes and new partners may be expected to contribute capital over a number of years through undrawn profits; however, this is not as tax efficient as borrowing it from a bank.



Once the incoming partner has discovered how they will raise the necessary capital, it is important to then consider their changing employment status. Becoming a partner means that they will now be classified as self-employed.



While there are benefits from falling under the self-employed regime, such as reduced National Insurance contributions, it is essential to be aware of other implications, such as forfeiting employment rights related to social security benefits and redundancy. In addition, partners are not entitled to participate in the firm’s staff pension scheme, and so must ensure they make individual arrangements for saving for retirement.



Partners are also separately liable for their own tax. They must each submit a personal tax return under self-assessment to HM Revenue & Customs by 31 January following the end of the tax year, which should include all sources of income received during the fiscal year, including their share of taxable partnership income. Any expenses incurred personally for the purpose of the business must be claimed via the partnership.



Exit arrangements, while this may feel a long way off, are equally important and may be a key influencer when deciding whether to join a particular firm. The incoming partner should not just be concerned with their individual exit arrangements, but those of existing partners too, as these will influence both ongoing profit shares and the security of the firm’s income stream.



It is important to consider what the firm is already committed to with regard to its current partners in terms of any future annuity obligations. This will highlight the risk of having lots of partners imminently due to retire. Do not assume that because a firm has been profitable for the last 10 years that it will continue to be so. If key fee-earners are retiring, their clients may well leave when they do.



The new partners should also consider any longer-term retirement income rights (annuities) that may be payable to themselves on retirement (as many firms have abandoned annuity arrangements for younger partners). They should also check their entitlement to a share of any of the capital proceeds should the business be subsequently sold.



A careful analysis of the firm’s accounts, as well as conversations with the managing partner, finance director and existing partners, can help uncover any potential liability issues. For example, is the lease on the property due to expire soon, or is there surplus unoccupied office space? If so, has the firm made ample provision for property dilapidations and onerous lease obligations or will the incoming partner be faced with a painful surprise as they settle into their new role?



In order for the incoming partner to protect their mobility and employability, they need to consider restrictive covenants. While leaving a partnership used to be rare, this is no longer the case. It is worth finding out what the firm’s policy is relating to restrictive covenants in respect of any client brought in by a lateral hire. If things do not work out, are you able to move on with this introduced client?



Last, but certainly not least, do the aspirations of the new partner match the firm? This should obviously include all of the practical financial implications mentioned, but also include considerations such as work-life balance. This can become an issue, particularly when partners begin to have other additional priorities in their lives, such as families. To ascertain the firm’s actual position on this, as opposed to any corporate rhetoric, the views of existing partners can be the best of guidance.



A clear understanding of the firm’s expectations and ironing out any potential issues – or even walking away – can help prevent the dream of partnership from becoming a nightmare.



Louis Baker is a partner in the professional practices group at Horwath Clark Whitehill