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Accounting Firm Agreement

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This presentation by Russell Shapiro provides an overview of an accounting firm agreement, including the process, provisions, governance, retirement, payment period/payment limitations, life insurance, payment protections, compensation, withdrawal/dismissal, restrictive covenants/purchasing clients, firm capital, income partners and amendments.

Publié dans : Droit, Business, Économie & finance
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Accounting Firm Agreement

  1. 1. Accounting Firm Agreement Overview Levenfeld Pearlstein, LLC 2 North LaSalle Street, Suite 1300 Chicago, Illinois 60602 1 1
  2. 2. Introduction: • Importance of Agreement - Will the firm be able to make quick, efficient decisions? - Will partners be able to leave and take business? - Will the next generation have a chance to grow? - Will it be easy to bring on lateral partner? - Will the firm be able to Merge? Levenfeld Pearlstein, LLC 2
  3. 3. Agreement: • Impetus for Revising Your Agreement - Proactive Example: • 10-year old firm; 7-partners; 35-professionals • Added partners laterally • Founding Partners wanted to: - Make firm cohesive - Smoothly transition to next generation - Secure retirement income 3Levenfeld Pearlstein, LLC
  4. 4. Process Used: • Consulted with advisors to determine objectives • 9-Monthly partner meetings before or after work - Started after tax season • Lawyer in attendance for Most Meetings • Agenda for each meeting that confronted issue 4Levenfeld Pearlstein, LLC
  5. 5. Outside Event: • Long established firm – second generation near retirement • 15-partners; 75 professionals • Leadership wanted to merge with regional firm - Perceived lack of leadership in younger generation - Desire to secure retirement benefits • 80% voting requirement to merge • Younger generation said “no, we want to run it” 5 “Each generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it." [George Orwell] Levenfeld Pearlstein, LLC
  6. 6. Process: • Committee formed consisting of: - 2 from older generation - 2 from younger generation - Neutral partner • Development of extensive outline - Security for older generation - Control for younger generation 6Levenfeld Pearlstein, LLC
  7. 7. Major Agreement Provisions: • Governance • Retirement • Compensation • Restrictive Covenants • Capital • Income Partners • Nuts & Bolts 7Levenfeld Pearlstein, LLC
  8. 8. Governance: • Governing Body (Executive Committee) • Managing Partner • Powers Retained by the Partners • Advantages/Disadvantages of Centralized Management - Efficiency and accountability - Autonomy 8Levenfeld Pearlstein, LLC
  9. 9. Executive Committee: • Evolutionary Process • Governing Body (all decisions except those specifically reserved) • Selection of Members - Nominating Committee - Ratification vs. Election • Managing Partner is on EC • Firm First Mentality 9Levenfeld Pearlstein, LLC
  10. 10. Executive Committee (continued): • Term (e.g., 3-years) • Term Limits (e.g., 2-terms) - Subject to override by super majority vote • Removal - Majority of Executive Committee 10Levenfeld Pearlstein, LLC
  11. 11. Managing Partner: • Day to day decision making • Selected by: - Executive Committee - Nominating Committee • Term (e.g., 4-years) • Term Limit (e.g., 2-terms) • Member of Executive Committee • Removal - Majority of Executive Committee 11Levenfeld Pearlstein, LLC
  12. 12. Partnership Voting Rights (Retained Powers): • Fundamental Decisions - Mergers (over a certain size) - Dissolution - Partner hires - Making a partner - Partner Expulsion 12Levenfeld Pearlstein, LLC
  13. 13. Partnership Voting Rights (Retained Powers) (continued): • Major Economic Decisions - Banking Relationship - Draw-down over a certain amount - New lease • Governance - Ratification of Executive Committee Members - Ratification of Managing Partner - Amending the Partnership Agreement 13 Question: What else would you add to the list? Levenfeld Pearlstein, LLC
  14. 14. Super Majority Voting: • When to Use - Merger (80% story) - Dissolution - Amendment of Partnership Agreement • Will of Majority vs. Protection of Minority - Should the will of the majority ever be thwarted? • Type of Majority - Percentage Interest - Per Capita - Capital Accounts 14Levenfeld Pearlstein, LLC
  15. 15. Other Governance Structures: • Other Structures as Firm Grows - Compensation Committee - Nominating Committee - Promotions Committee 15Levenfeld Pearlstein, LLC
  16. 16. Retirement: Favorite Subject of Anyone Over 50 • Overview - Mandatory Retirement - Early Retirement - Vesting - Basis of Payments - Changes in Payments - Life Insurance - Withdrawal and Competition - Work after Retirement 16Levenfeld Pearlstein, LLC
  17. 17. Mandatory Retirement: • Mandatory Retirement Age - 65 – 70 • Age Discrimination - Owners as Employees - Voting Rights - Risk of Loss • Allows transition planning 17Levenfeld Pearlstein, LLC
  18. 18. Early Retirement: • Retirement Age: 55 on • Executive Committee Approval • Compliance with Restrictive Covenants • Long Notice Period (6 to 24 months) • Consequences of Failure to Give Requisite Notice 18Levenfeld Pearlstein, LLC
  19. 19. Retirement Benefits: • Vesting of Retirement Benefits (examples) - 20-years for full vesting - 10-years for any vesting - Credit for merged-in partners 19Levenfeld Pearlstein, LLC
  20. 20. Retirement Payment Amount: • Retained Business Approach - e.g., 20% of partner’s originated business for 5-years - Younger firm - Less institutionalized - If business leaves, no payment – strong incentive to transition clients • Issue of Credit Sharing and Compensation 20Levenfeld Pearlstein, LLC
  21. 21. Retirement Payment Amount (continued): • Compensation Average Approach - e.g., average of highest 3 of last 5-years x number of years (e.g., 3-years) • More Institutionalized Firm • Percentage Interest - Value Firm (e.g., 1.0 x revenue) x partner percentage interest at retirement 21Levenfeld Pearlstein, LLC
  22. 22. Post Retirement Adjustments: • Originated Business – Self adjusting • Compensation Average/Equity Purchase - Loss of firm business - Loss of partner’s business • Inflation Adjustments 22Levenfeld Pearlstein, LLC
  23. 23. Payment Period/Payment Limitations: • Anywhere from 5 to 15 years • Generally no more than 10% to 12% of net income - Recapture mechanism • Missed payments get carried into future years 23Levenfeld Pearlstein, LLC
  24. 24. Life Insurance: • No transitional period • Protects the partner and the firm • Entire amount or portion of insurance proceeds may be paid to deceased partner • Partner can take policy after retirement 24Levenfeld Pearlstein, LLC
  25. 25. Payment Protections: • Remaining partner personal liability • Ability of retired partners to vote on merger or other matters 25Levenfeld Pearlstein, LLC
  26. 26. Work After Retirement: • Generally no right • Decision on an individual basis 26Levenfeld Pearlstein, LLC
  27. 27. Compensation: • Generally not addressed directly in partnership agreement • Compensation Committee - Executive Committee appointment - Terms and term limits 27Levenfeld Pearlstein, LLC
  28. 28. Compensation (continued): • Generally not limited by percentage interest or capital accounts • Objective/subjective/mixed 28Levenfeld Pearlstein, LLC
  29. 29. Withdrawal/Dismissal: • Retirement Benefits - Generally lost - Some firms allow for benefits when they would otherwise have been received (e.g., at age 60) • Restrictive Covenants Will Apply 29Levenfeld Pearlstein, LLC
  30. 30. Restrictive Covenants/Purchasing Clients: • Non-compete • Client non-solicit • Employee non-solicit • Generally upheld by courts 30Levenfeld Pearlstein, LLC
  31. 31. Restrictive Covenants/Purchasing Clients (continued): • Consequences of Violation - Injunctive relief - Forfeiture of retirement benefits - Liquidated Damages • 100% to 200% of fees lost • 50% to 100% of employee compensation 31Levenfeld Pearlstein, LLC
  32. 32. Firm Capital: • Capital Contributions - Need for working capital - Upon admission • Fixed amount - Additional capital • Tied to compensation • Profit retention 32Levenfeld Pearlstein, LLC
  33. 33. Firm Capital (continued): • Capital Accounts - Disparate capital accounts - True-ups (to percentage interest or compensation) • Periodic • Generational shift • Return on Capital - Prime + - Fixed percentage 33Levenfeld Pearlstein, LLC
  34. 34. Firm Capital (continued): • Return of Capital - Withdrawal/retirement - Payout (1 to 5 years) - Interest - Set-off rights • Amounts owed • Violation of restrictive covenants • Contingent liabilities that relate to periods when a partner 34Levenfeld Pearlstein, LLC
  35. 35. Income Partners: • Recognition of professional achievement • No capital contributions • No voting rights • Considered as employees - Age discrimination - cannot require age based retirement 35Levenfeld Pearlstein, LLC
  36. 36. Income Partners (continued): • Restrictive covenants • Retirement benefits (sometimes) • Make part of partnership agreement or separate agreement - Psychological effect - Inadvertent granting of rights 36Levenfeld Pearlstein, LLC
  37. 37. Nuts & Bolts: • Full-Time Profession Devotion - Side businesses • Proceeds of All Work - Authorships - Programs - Speaking - Boards - Trustee/Executor 37Levenfeld Pearlstein, LLC
  38. 38. Nuts & Bolts (continued): • Rights of Contribution - Leases - Bank loans • Confidentiality - Firm - Clients 38Levenfeld Pearlstein, LLC
  39. 39. Nuts & Bolts (continued): • Professional Standards • Rights to Name • Mediation/Arbitration - But not for injunctive relief 39Levenfeld Pearlstein, LLC
  40. 40. Nuts & Bolts (continued): • Just and Faithful Dealings - Pay taxes - Pay debts • Relationships with Clients - Investing - Disclosure/permission 40Levenfeld Pearlstein, LLC
  41. 41. Nuts & Bolts (continued): • Indemnification by Partnership - Exceptions: • gross negligence • willful misconduct • Indemnification by Partner • gross negligence • willful misconduct 41Levenfeld Pearlstein, LLC
  42. 42. Amendments: • Supermajority - Not unanimous - Protection against amendment that singles out one partner • Retirement Benefits - No amendment unless majority of those near retirement agree - But can change for younger generation 42Levenfeld Pearlstein, LLC
  43. 43. Questions/Comments: 43Levenfeld Pearlstein, LLC

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