Structuring a Law Firm Under Georgia Law

Transcription

1 Chapter 5 Structuring a Law Firm Under Georgia Law 5-1 INTRODUCTION There are various options under Georgia law for structuring a law firm partnership, including as a professional association, traditional general partnership, or a limited liability partnership. Few law firms, however, take full advantage of the protections available to them and many fail to organize their partnerships to best protect the partnership s and their individual partners assets and management. Unfortunately, by the time a problem arises, it may be too late to take corrective action. Accordingly, it is important that each law firm not only understands which arrangement is most suitable for its specific needs, but also the various pitfalls common to the maintenance of law firm partnerships, as discussed herein. 1 Furthermore, it also is important that when a partnership is dissolved, the dissolving partners uphold their fiduciary duties to act in good faith This chapter does not address any tax advantages or disadvantages associated with the structuring of a law firm. This chapter merely addresses other potential liability created by law firm structure. In many instances, there are tax implications related to firm organization that should also be considered when deciding upon an appropriate structure for a law firm. 2. Jordan v. Moses, 727 S.E.2d 460, 464 (Ga. 2012), rev g 714 S.E.2d 262 (Ga. App. 2011). In accordance with the Supreme Court of Georgia s ruling, the Court of Appeals of Georgia recently vacated in part and affirmed in part its 2011 ruling in this matter in Moses v. Jordon, No. A11A0218, 2013 WL , --- S.E.2d ---- (Ga. App., Feb. 7, 2013). Georgia Legal Malpractice Law GA_Legal Malpractice_Fullbook.indb 163 5/11/13 11:27:04 AM

2 Chapter 5 Structuring a Law Firm Under Georgia Law 5-2 GENERAL PARTNERSHIPS Traditionally, many Georgia law firms organized themselves as general partnerships. Georgia law is not kind to general partnerships. Indeed, general partners can be jointly and severally liable for not only any partnership obligations, but also any obligation of an individual partner for actions taken while acting as a partner. 3 At Georgia law, pursuant to the Georgia Uniform Partnership Act ( GUPA ), all partners are jointly and severally liable for all debts, obligations, and liabilities of the partnership. 4 The only exception to this general liability is if the partners have instead elected a limited liability partnership, as discussed below. In a general partnership, a partner may bind the partnership through her or his own actions taken on behalf of the partnership, even where the partner had no authority to act for the partnership in the particular matter, if the person with whom the partner was dealing had no knowledge of the fact that the partner lacked authority to act or bind. 5 Accordingly, partners in a general partnership may be individually liable for debts or liabilities that they had no intention of undertaking. A partnership itself may also be liable for the wrongful acts or omissions of a partner acting in the ordinary course of business or with the authority of her or his copartners. 6 The power to dissolve a partnership must always be exercised in good faith. 7 Where a partner does not act in good faith in dissolving a partnership, that act may give rise to a tort of wrongful dissolution. 8 However, as the Supreme Court of Georgia recently reiterated, the tort of wrongful dissolution of a partnership does not require an attempt to appropriate the new prosperity of the partnership For more on vicarious liability issues related to law firm structure, see Chapter 3: Liability for or in Conjunction with the Conduct of Others. 4. O.C.G.A (a). 5. O.C.G.A O.C.G.A Jordan v. Moses, 727 S.E.2d 460, 464 (Ga. 2012), vacated by in part, clarified by No. A11A0218, 2013 Ga. App. LEXIS 52 (Ga. Ct. App. Feb. 7, 2013). 8. O.C.G.A Jordan v. Moses, 727 S.E.2d 460, 464 (Ga. 2012), rev g 714 S.E.2d 262 (Ga. App. 2011). In accordance with the Supreme Court of Georgia s ruling, the Court of Appeals of Georgia recently vacated in part and affirmed in part its 2011 ruling in this matter in Moses v. Jordon, 164 Georgia Legal Malpractice Law 2014 GA_Legal Malpractice_Fullbook.indb 164 5/11/13 11:27:04 AM

3 PROFESSIONAL ASSOCIATIONS PROFESSIONAL ASSOCIATIONS The next wave of Georgia law firms organized themselves under professional association statutes. A professional association is comparable to a corporation and is not governed by the laws applicable to partnerships. 10 The Georgia Professional Association Act governs the formation and execution of professional associations. 11 A professional association is not a partnership but an unincorporated association of licensed professionals organized to render one type of professional service, such as legal service. 12 Unlike a partnership, which can elect a person of any background as a partner or member, membership in a professional association is limited to duly licensed legal professionals. 13 Licensed professionals can form a professional association by executing and filing articles of association with the clerk of the superior court in the county in which the association s principal office is located. 14 Once registered, a professional association is identified by the P.A. following its business name. 15 Members of a professional association are not individually liable for the debts of, or claims against, the professional association unless such member or shareholder has personally participated in the transaction for which the debt or claim is made or out of which it arises. 16 Also, [t]he assets of a professional association shall not be liable to attachment for the individual debts of its members or No. A11A0218, 2013 WL , --- S.E.2d ---- (Ga. App., Feb. 7, 2013). Furthermore, the issue of what happens to on-going work upon dissolution of a partnership currently is receiving a good deal of attention in the legal community. In addressing this issue, the California Court of Appeals has held that the fees from the unfinished business that began prior to dissolution belong to the dissolved partnership, not the new firm. Jewel v. Boxer, 156 Ca. App. 3d 171 (Cal. Ct. App. 1984). 10. O.C.G.A O.C.G.A , et seq. 12. O.C.G.A & O.C.G.A O.C.G.A O.C.G.A O.C.G.A (b); see also Henderson v. HSI Fin. Servs., Inc., 471 S.E.2d 885 (Ga. 1996) ( the legislature has provided that shareholders of professional corporations are not personally liable for corporate debts except by personal conduct. Based on the professional corporation statute, the two shareholders are not jointly and severally liable for the majority shareholder s failure to remit funds to the firm s client ). Georgia Legal Malpractice Law GA_Legal Malpractice_Fullbook.indb 165 5/11/13 11:27:04 AM

4 Chapter 5 Structuring a Law Firm Under Georgia Law shareholders. 17 These protections are greater than those afforded in a general partnership and comparable to the protections of a limited liability partnership, as discussed in the following pages. A professional association must be limited to rendering one specific kind of professional service and shall not engage in any business other than rendering the professional service for which it was organized. 18 Given the complexities of the practice of law, practitioners in a professional association must take care that they are not providing any services outside the strictly-defined professional service. 5-4 LIMITED LIABILITY PARTNERSHIPS 5-4:1 Introduction Georgia law offers broad protection to partnerships that have followed the statutory requirements for a limited liability partnership (an LLP ). Limited liability partnerships are a relatively recent development under Georgia law. Notably, limited liability partnerships offer much more protection to partners and are increasingly a more common partnership than the general partnership often seen in years past. Because limited liability partnerships are a relatively new phenomenon in Georgia, many law firms previously organized as general partnerships simply change their name without changing the actual partnership structure itself. Often, that approach is not entirely effective. By taking a few simple steps in drafting limited liability partnership agreements and implementing partnership guidelines in advance, however, law firms in Georgia can successfully make the change to a limited liability partnership. 5-4:2 Executing a Written Partnership Agreement That Complies With Georgia Statute In recent years, many law firm general partnerships have attempted to convert to limited liability partnerships but fail to ensure that their LLP election is clear and unambiguous. Indeed, 17. O.C.G.A O.C.G.A Georgia Legal Malpractice Law 2014 GA_Legal Malpractice_Fullbook.indb 166

5 LIMITED LIABILITY PARTNERSHIPS 5-4 those partnerships often do not draft and execute new partnership agreements or, alternatively, fail to record the proper paperwork with the superior court establishing this election. The result is the worst of both worlds. In that scenario, partners may be responsible for the liabilities intrinsic in general partnerships as well as the liabilities typically found in limited liability partnerships. Failing to execute a new agreement and filing the proper paperwork that unambiguously elects a limited liability partnership is thus risky. Such failure leaves the partners unprotected by the ineffective language from their original general partnership agreement and undermines the rights and protections afforded by the Georgia limited liability statutes. 19 Therefore, it is important that a limited liability partnership executes a new agreement specific to a limited liability partnership. This approach, as opposed to merely amending the existing partnership agreement, ensures that the agreement is more aligned with the protections afforded under the limited liability statutes. 5-4:3 Defining a Partnership as a Limited Liability Partnership Some partnerships intend to have a written limited liability partnership agreement, but then do not actually draft and execute one. Because Georgia statutes require the recording of documents establishing a limited liability partnership, Georgia law may presume a general partnership in the absence of recorded documents or a limited liability agreement. Georgia statutes give limited liability partnerships protection by specifically defining the obligations and debts of partners. Limited liability partnerships may also draft their partnership agreements such that the agreements inadvertently erode the protections provided by the statutes. To that end, it is important that a limited liability partnership identify the goals important to its own self-management and ensure that the partnership 19. See, e.g., O.C.G.A (e) (noting that a limited liability partnership is established upon recording: [t]he fact that a limited liability partnership election has been recorded as required by this Code section is notice that the partnership is a limited liability partnership. ). Georgia Legal Malpractice Law GA_Legal Malpractice_Fullbook.indb 167

6 Chapter 5 Structuring a Law Firm Under Georgia Law agreement does not contradict any aspect of Georgia s limited liability statutes. 20 If a limited liability partnership agreement contradicts any aspect of Georgia statute, the partnership will be bound by its agreement, even where the statutes offer greater protection or are more favorable to the partnership s position than its own agreement. 5-4:4 Ensuring That the Individual Assets Belonging to Each Partner are Protected Pursuant to O.C.G.A (GUPA): a partner in a limited liability partnership is not individually liable or accountable either directly or indirectly by way of indemnification, reimbursement, contribution, assessment, or otherwise for any debts, obligations, or liabilities of or chargeable to the partnership or another partner, whether arising in tort, contract, or otherwise, that are incurred, created, or assumed while such partnership is a limited liability partnership, solely by reason of being such a partner or acting or omitting to act in such capacity or otherwise participating in the conduct of the activities of the limited liability partnership. As such, Georgia law protects the assets of individual partners. 21 It is important, therefore, that there is no contrary language in the partnership s organizing documents and partnership agreement that would expose the assets of individual partners. The best approach for a law partnership to adopt is actually to include this statutory language in its limited liability partnership agreement. 20. See, e.g., O.C.G.A (g) ( Subject to any contrary agreement among the partners, an amendment to become a limited liability partnership by an existing limited partnership shall be approved by all of the partners. ); O.C.G.A (b) ( Subject to subsection (c) of this Code section and to any contrary agreement among the partners, a partner in a limited liability partnership is not individually liable or accountable [for debts] ). 21. See Smith v. Morris, Manning & Martin, LLP, 666 S.E.2d 683, (Ga. Ct. App. 2008) (attorneys of limited liability law firm were not individually liable to clients where alleged breach of contract stemmed out of firm s representation of clients such that alleged acts of wrongdoing by individual attorneys occurred within the scope of that representation). 168 Georgia Legal Malpractice Law 2014 GA_Legal Malpractice_Fullbook.indb 168

7 ADDITIONAL ISSUES COMMON TO ALL STRUCTURES ADDITIONAL ISSUES COMMON TO ALL STRUCTURES 5-5:1 Introduction Although there are obvious advantages associated with the formation of a limited liability partnership, as discussed above, every law firm whether large or small should consider a few additional issues common to all law firm management. Regardless of which structure is elected, the at-fault lawyer is still personally liable for her or his own misdeeds. Lawyers should be aware of the other risks inherent in each specific structure. 5-5:2 Identify What Happens When a Partner or Equity Holder Leaves the Firm Partnerships often overlook the issue of what happens when a partner or equity holder leaves and terminates her or his interest in the partnership. Every partnership should identify what relationship a former partner or equity holder will have with the remainder of the partnership or organization, specifically relating to debts and obligations. Limited liability partnership agreements specifically should address whether a partner who terminates her or his involvement will continue to be liable to the remaining partners (or retired partners or the estates of deceased partners) for partnership liabilities. Partnership agreements, limited liability partnership agreements, by-laws and similar contractual mutual undertakings also should address the process for dismissal from the partnership. These contracts must be strictly followed. Furthermore, law firms should fully document a decision to ask a partner to leave. Too often, law firm decision-makers are unfamiliar with the actual partnership agreement language and move forward without considering or fully appreciating the specific provisions implicated by such decisions. In those cases, unnecessary legal disputes often emerge, creating unexpected problems and additional expenses. Regardless of what the agreement is, prudent practitioners should always reduce the agreement to a written provision in a partnership agreement or shareholder s agreement. If not addressed, courts may turn to evidence outside the agreement, Georgia Legal Malpractice Law GA_Legal Malpractice_Fullbook.indb 169

8 Chapter 5 Structuring a Law Firm Under Georgia Law including testimony from partners and equity holders, which may result in an unfavorable and unintended outcome. Depending on the goals of each individual law firm, the law firm additionally may choose to indicate whether a departing partner or member agrees to indemnify and hold harmless all other partners and members in connection with their intentional conduct. The best agreements ensure consistency between the firm agreement and the firm s insurance policy, so that no partner or equity holder is ever liable for the uninsured conduct of another partner or equity holder. As discussed above, however, these protections may be unavailable to members of a general partnership. 5-5:3 Periodically Re-Review the Partnership Agreement or Articles of Incorporation Far too often, law firms draft and execute a partnership agreement or articles of incorporation and allow it to gather dust over the years. It is important for any meaningful review of the partnership agreement or articles of incorporation to include a periodic review of the agreement in its entirety to make sure that the law firm s goals and desired protections are covered by the agreement. In addition to the various partnership statutes, the courts recognize the partners right to be bound by their contract with each other. Periodic reviews of the partnership agreement should contemplate a holistic approach with an eye toward complete partner protection. In combination with an insurance program, use of a strong partnership agreement will help protect attorneys against future liability issues, where the use of a partnership agreement is permitted by law For more on legal malpractice insurance and coverage issues, see Chapter 11: Purchasing Legal Malpractice Insurance. 170 Georgia Legal Malpractice Law 2014 GA_Legal Malpractice_Fullbook.indb 170