Yes, tiny violin - did anyone else struggle first years of law partnership?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, did your family have a personal accountant aware of DH's career trajectory? If not, that's a critical mistake.

While the bumps in the road for a new partner can't completely be removed, a good accountant can certainly smooth them over.

The numbers for new partners are not shared with non-partners. There is no way to prepare. Other than save money and do not buy a house at this point. In 4-5 years you will be swimming in money. Just need to wait.

In my firm the incoming partners get a series of classes on law firms economics, how their draws and finances will work, which accountants are familiar with the firm’s K-1, etc. It’s very common knowledge that new partners are often cash flow constrained.

It gets better but you're not "swimming in money". My DH made partner at a top firm very early. Estimated to be around $3M gross this year for him after 6 years in. Call it $1.4M after all deductions and taxes. It's a nice life, but we're not talking tech founders that sell their company and make $15M+ in an exit.

Lol. As a law firm partner who for a lot of complicated reasons has never made that much - you’re swimming in money.

5 million net worth is a curse. The poorest rich person in America.

[Anonymous]

OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Yes they give you back the buy in.

Unless the firm fails. Which does happen.

Yep. Law firms are an inherently unstable business. The “assets” are the people, and if the partners who are bringing in the business start to leave (even when the firm is still profitable) it can spiral and get ugly fast. Not only do you lose your equity buy in, but you’re doubly hosed if you borrowed money to pay it. The bank will still want its money back. Not to mention being on the hook for any debts of the firm.

https://adamsmithesq.com/wp-content/uploads/2022/08/Why-Law-Firms-Collapse-full-article.pdf

https://adamsmithesq.com/2022/09/law-firms-fail-in-the-oddest-way-all-of-them/

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, did your family have a personal accountant aware of DH's career trajectory? If not, that's a critical mistake.

While the bumps in the road for a new partner can't completely be removed, a good accountant can certainly smooth them over.

The numbers for new partners are not shared with non-partners. There is no way to prepare. Other than save money and do not buy a house at this point. In 4-5 years you will be swimming in money. Just need to wait.

In my firm the incoming partners get a series of classes on law firms economics, how their draws and finances will work, which accountants are familiar with the firm’s K-1, etc. It’s very common knowledge that new partners are often cash flow constrained.

It gets better but you're not "swimming in money". My DH made partner at a top firm very early. Estimated to be around $3M gross this year for him after 6 years in. Call it $1.4M after all deductions and taxes. It's a nice life, but we're not talking tech founders that sell their company and make $15M+ in an exit.

Lol. As a law firm partner who for a lot of complicated reasons has never made that much - you’re swimming in money.

5 million net worth is a curse. The poorest rich person in America.

Hmmmm. I’m ok with it.

[Anonymous]

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

[Anonymous]

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DH was in a very similar position except that while he was a mid-level associate, a young partner clued in DH. Basically, we saved a ton to try to stay ahead of the buyin, capital calls, deferred comp, quarterly taxes, etc. Sounds like OP started spending money and expanding lifestyle/expenses without calculating the future financial situation. Just how most others do it too. Still, a problem of your own making.

Oh, massive eye roll, lady. We bought a house. And sent a kid to school. Get over giving yourself gold stars for handling your husbands income so well.

Well besides having a partner telling DH about all the money he wouldn’t be making as a new equity partner, it helped that I also worked in big law but the partnership track was longer and didn’t have the big buy in DH’s firm had. You asked how people managed the struggle of the early partnership years, and I answered that we stayed ahead of it. No need to get emotional.

+1

Law partners are often married to other law partners, at least at the big firms I have worked for.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Yes they give you back the buy in.

Unless the firm fails. Which does happen.

Yep. Law firms are an inherently unstable business. The “assets” are the people, and if the partners who are bringing in the business start to leave (even when the firm is still profitable) it can spiral and get ugly fast. Not only do you lose your equity buy in, but you’re doubly hosed if you borrowed money to pay it. The bank will still want its money back. Not to mention being on the hook for any debts of the firm.

https://adamsmithesq.com/wp-content/uploads/2022/08/Why-Law-Firms-Collapse-full-article.pdf

https://adamsmithesq.com/2022/09/law-firms-fail-in-the-oddest-way-all-of-them/

+1

Also, you can never rely on bonus amount/s, even if you are a rainmaker. And if you are a recent partner, definitely not - but likely you already knew that OP.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, did your family have a personal accountant aware of DH's career trajectory? If not, that's a critical mistake.

While the bumps in the road for a new partner can't completely be removed, a good accountant can certainly smooth them over.

The numbers for new partners are not shared with non-partners. There is no way to prepare. Other than save money and do not buy a house at this point. In 4-5 years you will be swimming in money. Just need to wait.

In my firm the incoming partners get a series of classes on law firms economics, how their draws and finances will work, which accountants are familiar with the firm’s K-1, etc. It’s very common knowledge that new partners are often cash flow constrained.

It gets better but you're not "swimming in money". My DH made partner at a top firm very early. Estimated to be around $3M gross this year for him after 6 years in. Call it $1.4M after all deductions and taxes. It's a nice life, but we're not talking tech founders that sell their company and make $15M+ in an exit.

Apparently it’s a requirement for law firm partner families to lose all perspective.

+1

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, did your family have a personal accountant aware of DH's career trajectory? If not, that's a critical mistake.

While the bumps in the road for a new partner can't completely be removed, a good accountant can certainly smooth them over.

The numbers for new partners are not shared with non-partners. There is no way to prepare. Other than save money and do not buy a house at this point. In 4-5 years you will be swimming in money. Just need to wait.

In my firm the incoming partners get a series of classes on law firms economics, how their draws and finances will work, which accountants are familiar with the firm’s K-1, etc. It’s very common knowledge that new partners are often cash flow constrained.

It gets better but you're not "swimming in money". My DH made partner at a top firm very early. Estimated to be around $3M gross this year for him after 6 years in. Call it $1.4M after all deductions and taxes. It's a nice life, but we're not talking tech founders that sell their company and make $15M+ in an exit.

Apparently it’s a requirement for law firm partner families to lose all perspective.

+1

That post did show perspective. That poster compared their situation to someone else, but didn’t lost sight of anything. They stated a fact.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:OP, if you are still listening, I think your problem is that your quarterly taxes are too high for your draw. I understand that $320k ($80k x 4) is reasonable for tax on $800k salary. But they are just calculating that based on the $800k you made last year. However you aren’t getting the $800k evenly distributed throughout the year. It sounds like you are getting about half of it at the end of the year. So you can adjust your quarterly taxes to match the draws you are getting (sounds like $20k/month plus $55k/quarter, or about $115k per quarter, meaning your liability would only be about $46k, not $80k) as long as you understand you will have a higher tax burden at the end when you receive the rest of the payout. This should help your monthly cash flow issues. Hope that makes sense, let me know if you have questions.

While the above poster's analysis appears to be correct, the suggestion of adjusting and readjusting quarterly taxes should be reserved for dire financial situations rather than integrated as an ordinary business practice in the OP's situation as income is expected to rise in the very near future.

I’m the pp you quoted. Even if OP’s income increases a lot, in law firm world, the draws don’t increase that much. You just receive even more at the end of the year. It’s common for partners who make $2M a year regularly to still just receive a $400-500k draw (basically their base salary) and the rest in effectively a bonus. So my method above will keep working.

The issue is not whether or not your method will work, as I agree that it will; my position is that paying one-quarter of one's estimated annual income tax each quarter--absent dire financial circumstances--maintains awareness and is a sound conservative financial practice well suited for a profession with regulated ethics. I would categorize this as a "best practice" for anyone (and for any law firm) involved in such a highly regulated industry. Imagine a law firm partner getting into tax trouble leading to bad publicity and a lien on assets. And, yes, I understand that most state bars are sympathetic to legal issues regarding taxes, but the public, clients, and the IRS are not.

No. If OP's quarterly draw is $55k + $20k/month, that's a total of $115k (55 + 20*3) income per quarter. Its NOT reasonable to expect someone to pay $80k of estimated tax on $115k of cash flow. When he/she gets the fat check at the end of the year, the firm can withhold the remaining additional estimated taxes.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:DH was in a very similar position except that while he was a mid-level associate, a young partner clued in DH. Basically, we saved a ton to try to stay ahead of the buyin, capital calls, deferred comp, quarterly taxes, etc. Sounds like OP started spending money and expanding lifestyle/expenses without calculating the future financial situation. Just how most others do it too. Still, a problem of your own making.

Oh, massive eye roll, lady. We bought a house. And sent a kid to school. Get over giving yourself gold stars for handling your husbands income so well.

Well besides having a partner telling DH about all the money he wouldn’t be making as a new equity partner, it helped that I also worked in big law but the partnership track was longer and didn’t have the big buy in DH’s firm had. You asked how people managed the struggle of the early partnership years, and I answered that we stayed ahead of it. No need to get emotional.

+1

Law partners are often married to other law partners, at least at the big firms I have worked for.

Really? IME most law partners are married to SAHMs or their spouse is mommy/daddy-tracked so that at least one parent can be the primary parent. I honestly can't think of a single law partner whose spouse is in an equally or more demanding career.

[Anonymous]

Anonymous wrote:
Really? IME most law partners are married to SAHMs or their spouse is mommy/daddy-tracked so that at least one parent can be the primary parent. I honestly can't think of a single law partner whose spouse is in an equally or more demanding career.

Yes, I'm a law firm partner at a large firm, and my spouse is a doctor who works two (somewhat short) days a week. It works amazingly well for us. I can't imagine two spouses with my schedule.

And yes, starting as a new partner can have financial struggles. In part, it sounds like the capital contribution (assuming it is capital contribution and not overhead!) is fairly early lump sum. At my firm, the capital contribution is roughly about 20% of a partner's budgeted annual compensation. If you are a bit under that, you may have paid it all this year. Or perhaps you pay the rest next year, and then your capital contribution is done and better cash flow.

What is more standard at my firm, to even things out, is new partners generally get a loan with 3 or 5 years interest-only payments, and then 5-year repayment after that. The upshot is that the buy-in cost is spread over several years, so there isn't a big cash flow hit early. That may be no small part in what is causing a cash crunch for you.

Separately, this may not be your issue, but many firms have a ~6 month hold back, to capitalize the firm (on lieu of taking on debt). With our firm, for example, partners don't receive current year distributions until Q3 tax payments are due. Q1 & Q2 distributions are the payment for the remainder of the prior calendar year. A new partner, however, doesn't get a distribution until about 9 months in.

Moral of the story, new partners generally do need to plan ahead here, as it can pose challenges. These are good challenges, ones most folks would be thrilled to have. But challenges nonetheless.

[Anonymous]

If a newly minted equity partner is actually bringing home less than a senior associate the firm is poorly managed. Our firm saw to it that that was never the case.