law firms & partners
TRANSCRIPT
welchllp.com
Law Firms and Their Partners What you need to know to manage your
practice going forward
GROUND RULESQuestions
• Attendees are in listen-only mode• This webinar is being recorded for future on-demand playback• Your participation represents acknowledgement that we are recording• Tweet questions & comments to: #WelchExpert
Windows Mac Tablet
Micheal Burch, CPA, CA, CFPManaging [email protected]
Don Scott, FCPA, FCATax Partner & Director of Tax [email protected]
PRESENTERS
Peter Cleveland, BBA, CFE, CIRP, [email protected]. clevelandleadershipgroup.com
WHAT WE’LL COVER TODAY• Tax changes affecting professional corporations
and partnerships
• Opportunities that still exist
• Managing the Professional service firm
• Income allocation
• Other issues
• Q & A
TAX CHANGES AFFECTING PROFESSIONAL CORPORATIONS & PARTNERSHIPS
0
• Private companies can earn income that is eligible for the
Small Business Deduction (“SBD”)₋ SBD income is taxed at 15.0%₋ Regular business income is taxed at 26.5%₋ Tax deferral on SBD income is worth $57,500/year
[$500,000 x 11.5%]₋ Higher personal tax is paid when SBD income is
eventually paid as dividends
PARTNERSHIP INCOME
• Income earned by a partnership is subject to an
annual $500,000 SBD shared by the partners
• Each PC that receives partnership income gets its
prorata share of the $500,000 SBD
• SBD sharing can be avoided by having fees earned
by PCs charged to the partnership, i.e. this is not
an allocation of partnership income
P1 P2 P3 P4 P5
PC PC PC PC
20%20%20%20% 20%
Income - $1,000,000
Each PC - $200,000 Income
- $100,000 SBD
LAW LLP
P1 P2 P3 P4 P5
PC PC PC PC20%20%20% 20%
LAW LLP
Each PC - Invoices for services- Full $500,000 SBD on Income
20%
BUDGET 2016
• For taxation years beginning after March 21st, 2016 rules
are extended to services provided to a partnership
• Services PC deemed to be a partner
• Each partner assigns prorata share of SBD to PC
• Rule does not apply if the PC earns substantially all its
income from services to arm’s length persons other than
Law LLP
OPPORTUNITIES THAT STILL EXIST• Still provides a tax deferral
15% vs 26.5% vs 53.5%
• Partner retires De-register PC
Estate freeze
Income splitting
• Partner leaves partnership Professional services
Non professional services
Transient Workforce• No longer long-term commitments• Current generations want multiple work
experiences• Need policies and incentives to minimize churn
For the best people spend time learning what is important to them Bonus pools Include them in decisions Embracing churn
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HR ISSUES
Technology & Artificial Intelligence• Greater use of electronic research
• IBM’s “Watson”
• “Ross” for law firms
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HR ISSUES
Remote Workforce• Management implications
• Necessary adjustments
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HR ISSUES
Small Firms (10-15 lawyers)• Designated partner to manage
• Some part time
• Manages by consensus
• Everyone feels they have a say
• Mostly administration as opposed to governance
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METHODS OF MANAGEMENT
Medium size Firms (15-30 lawyers)• Maybe just managing partner (MP)or both MP and
Management committee (MC)
• Beginning to shift away from consensus management
• Begin to create policies and procedures for uniformity
• ‘Governance Light’
• Resentment at loss of consensus
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METHODS OF MANAGEMENT
Larger Firms(30+ lawyers)• Formalized management structure
• Management committee with a rep from each practice area Approves strategic plans
Reviews performance of MP
Acts like board of directors
Mergers and acquisitions
Major policies developed and approved
Income allocation to partners
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METHODS OF MANAGEMENT
Managing Partner• Reports to management committee
• Implements strategic plan
• Drives operations Business development
Ensures timely billing and collections
Adherence to policies
Staff capacity
Seeks advice from partners
Partners may be equal, but some more equal than others
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METHODS OF MANAGEMENT
• Management is a continuum from consensus to true
governance as the firm grows
• Uniformity and discipline around operations becomes
more difficult with size
• Aligning all practice areas to one strategic direction
becomes a challenge with size
• Need to tie rewards to alignment and performance
not years from the bar
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METHODS OF MANAGEMENT
• Income Allocation Committee
• Open system VS. closed system
• Using income to motivate
INCOME ALLOCATION
OTHER ISSUES
Micheal Burch, CPA, CA, CFPManaging [email protected]
Don Scott, FCPA, FCATax Partner & Director of Tax [email protected]
Q&A
Peter Cleveland, BBA, CFE, CIRP, [email protected]. clevelandleadershipgroup.com