We are a two attorney firm in our second year of business. Thinking about whether we should change the structure for the new year. Right now everything is a 50/50 split and we take monthly draws. Thoughts/ideas on a better structure? Should we go on payroll? Start doing origination credit?

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I was exactly where you were 20 years ago. My advice:

1. Take salary, open payroll accounts with government, take taxes out, file 941’s regularly
2. Pay estimated taxes regularly. Do it from your firm operating account. It will be treated as taxable income by IRS but it guarantees that one partner doesn’t end up in tax trouble.
3. Do not go to origination credit. Partnership is like a marriage. And keeping score is bad for a marriage. If one partner not pulling weight for a while, it will be very noticeable, and it’s ok. If it sustains for too long then make a change. But while together, be in it for the partnership.

I didn’t do 1 or 2 in my first 2 years and it caught up with me hard with the IRS. I brought in a partner who encouraged discipline, and now we have no debt, no tax liability, 11 lawyers, and a total of 40 employees with sustained revenue with very little stress in a career that is usually riddled with stress.

Bonus advice: Don’t put expendable money in cars or casinos. Put it in investments. Set up 401k. Do max withholding and matching.
I’m set now, but if I had gotten and taken this same advice when I was in your shoes, I would have been set a lot sooner and with a lot more liquidity.

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Thank you so much for your insight! I truly appreciate it. I think that’s great advice.

I tried building a corp practice with a contingency partner. We had a lot of fun and got along great, but we didn’t make much money. We didn’t have enough reserves to fully pursue real contingency projects.

Today my partners and I take the same salary and then split profits in different buckets - one shared, one for billables, and one for originations. We’ve tweaked the %s assigned to the buckets over the years but it works well.

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Are you both pulling your own weight?

Not in particular. I’m managing the business and bringing in and working on majority of the day to day business. However my partner is spearheading the contingency matters, which will most likely hit bigger when they settle.

I like the Draw and Revenue based system. You get a monthly draw (salary) and reconcile actual revenue realized by each partner on a quarterly basis (bonus the amount realized above the draw, after paying other expenses). Your danger is that one of you does not realize enough revenue to cover the draw on a quarterly basis.

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