10 May 2023 Mini Series: Business of Law Firms - US Firm Withers Orders Junior Equity Partners to Make Capital Contribution

Business of Law Firms
US Firm Withers Orders Junior Equity Partners to Make Capital Contribution​

What do you need to know this week?

Welcome to this week’s Business of Law Firms series.

UK law firm Withers has reportedly called on its junior equity partners to make a capital contribution to the firm of between $25,000 to $52,000 (or approximately £20,000 to £40,000).

Withers, which is known for its specialist private client work worldwide, maintains that the capital call is not an emergency funding measure. Instead, as reported by The Lawyer, the firm states that the decision was taken two years ago so that the junior equity partners would be “more fully involved in the ownership of the business”.

Senior partners have not reportedly been asked to make a capital contribution.

According to RollOnFriday, Withers posted £267m in revenue in 2022, up nearly 10% year-on-year.

Why is this important for your interviews?

As a trainee applicant at the earliest stages of your career, the notion of partnership probably seems miles off. However, it is important to appreciate in overview the mechanics of partnership at a law firm because it will help you shore up your understanding of law firms as a business more generally.

The vast majority of law firms are structured as limited liability partnerships (LLPs). LLPs stand in contrast to limited companies because the law firm's owners are also the business's management, whereas shareholders in a company do not necessarily have any management powers, nor do directors necessarily have any ownership interest in the business.

Therefore, as an equity partner, you have an ownership interest in your firm's business as well as a direct role in business development and fee generation. Consequently, the vast majority of firms require their partners to have invested some of their own money into the business to join the ranks of equity partners.

As Withers’ decision demonstrates, this means that the partners have “skin in the game”. The future success of each partner is directly tied to the success of the firm’s business as a whole. In this sense, becoming an equity partner is a bit like purchasing shares in a company.
Nonetheless, many solicitors are surprised to hear that they must provide a down payment in order to join as an equity partner. Each law firm will have different rules and expectations for how partners fund their contributions. Rarely is such information made public. In fact, many senior associates on the partnership track may not have any indication as to the nature of equity partnership until the firm makes an offer to join due to the "blackbox" nature of most partnership arrangements.

In some cases, law firms will loan the new partner the capital contribution upfront and then structure a repayment arrangement (usually with interest) over the subsequent years. Alternatively, some new partners may opt to fund the contribution by accessing bank financing or re-mortgaging their house.

Finally, it is worth noting that firms can obligate partners to make further contributions if it is a term in their partnership agreement, which is the document that governs partner obligations. This is likely the basis for Wither's capital call. Such calls might be made to shore up a firm's balance sheet and increase liquidity. It might also be to fund new ventures.