When a Law Firm Splits Up

How to safely and appropriately move clients, financials and practice software to your new entity.

Why do firms split?According to a Martindale Hubbell® report, there were over 800 law firm splits over the past year, with the vast majority reforming as solo or micro firms. These firms split up for a variety of reasons, including partners reorganizing to focus on a different area of practice, a partner passing or other life-changing event, or even a partner dispute.

Pros and consThere are many benefits for partners who split to start new entities, such as being your own boss and in sole control of your business. On the downside, however, you could be losing a whole set of clients that had previously contributed to the value of your firm. You may also lose expertise in an area of practice. If, for example, one partner specialized in family law and the other in tax law, you will no longer have that diversity to offer your clients.

The challenges involvedEvery split—for whatever reason—requires redoing the partnership agreement. Basically, the orginal partnership is dissolved and then formed into two or more completely new entities. Each new entity should have a written agreement with clear provisions for how financial and other issues will be handled if the new firm or entity dissolves.

If you are involved in a split, there are a number of things you must do—and do right—from changing your firm name to disbursing trust accounts. As a best practice, consult authoritative sources for help. Don’t assume you can do all this by yourself because any mistake could have serious repercussions.

Contact your local bar association to learn the rules of professional conduct for partnership splits, including public and client notification and trust accounts management. It is also a good practice to talk to your accountant and/or a legal consulting firm. They may be able to supply specialized information for your jurisdiction.

Have a clear communications planBe prepared to notify your clients that your firm is splitting. Tell them where you are moving so they can still reach you, and offer them the option to leave with you if they want. Plan to change your letterhead, public announcements and the like in a timely manner. Continue to pay close attention to files, deadlines and court dates to make sure that nothing falls through the cracks during the transition period. You should also notify your malpractice insurance carrier immediately to ensure that there will be no break in coverage for you and/or all your attorneys.

Financial considerationsAsk your vendors to bill you immediately for anything that’s due from the old entity. You need to know what your liability is so you will know how much money to keep in the old bank account to cover all outstanding bills.

This can get complicated: Who will do last billing? What happens when you collect that money? Make arrangements for a wind-down period in which you are still collecting money from your old firm and determine who will be responsible for managing those funds. Many firms hire a third-party accountant to handle this for them. Sometimes it makes sense to use your previous firm’s bookkeeper since that person understands the existing set of books and can help smooth the transition without adding to the cost.

Taking care of your employeesWhether or not employees are moving with you, consider your obligations as a business owner regarding 401(k) or pension plans. A surprising number of firms get hurt because they forget about things like this. If you are closing your doors rather than transferring employees to the new entities, work with a local recruiting company to help outplace your staff. This can be an expensive effort, but you will feel good knowing you are helping to take care of the people who have helped take care of you. If finances are a issue, you could use your legal network instead and let others know that there will be some good talent coming available. After all, “referrals” are key to most successful legal businesses.

Rethink your practice management softwareIf your new firm will be about the same size as your old one, you may want to stay with the same matter and billing software you’ve been using. This will provide continuity from a client’s perspective and your staff won’t have to be retrained to learn something new. If staying with the same system is your choice, you need to ask, “Who owns the database? Who owns the software?”

One of the disadvantages of splitting up your practice management system is that you will have to keep old books that contain historical client data even as you are building a new database for your new firm. However, some applications will let you toggle back and forth between your old and new systems.

Know who to trustAt LexisNexis® we are committed to helping you spend more time practicing law and less time worrying about all the headaches of the business of law. Our solutions for small firms include award-winning software created with input from legal professionals and backed by a highly experienced and dedicated services and support team.

PCLaw® billing and accounting software is designed to make it easy for attorneys to establish new practices. It lets you keep your old law firm books and your new ones side by side and access them interchangeably. When a payment to the dissolved firm comes in, log in to the old book. Meanwhile, enter new account data into the new book. With PCLaw software you can easily run status reports on both. In addition, PCLaw offers a full suite of practice management tools such as calendaring, document creation, and PDA synchronization to get your new firm off to a solid start.

If you are a current PCLaw user and your firm divides, or you separate from your firm to create a new law practice, LexisNexis can split your database for a small fee or you can use a LexisNexis® Certified Independent Consultant to implement and get your practice up and running.

LexisNexis® Practice Management Transforming the Business of LawWe take the headache out of the business of law. Our innovative Practice Management products, content and services enable you to more effectively serve your clients and manage your business.

To learn more, visit www.lexisnexis.com/law-firms/ practice-management or call us at 800-328-2898.

All information provided in this document is general in nature and is provided for educational purposes only. It should not be construed as legal advice. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice in your state.

LexisNexis and the Knowledge Burst logo are registered trademarks of Reed Elsevier Properties Inc., used under license. PCLaw is a registered trademark of LexisNexis Practice Management Systems Inc. Other products or services may be trademarks or registered trademarks of their respective companies. © 2011 LexisNexis. All rights reserved. LPM00734-0 1211