Starting your own practice? Picking the right legal structure (Part 2)
Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you believe you require assistance in deciding which business structure is best for you, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).
In this blog, I’m going to write about lawyer associations as an alternative to forming a partnership or having a professional corporation.
Defined
An association is simply an arrangement whereby a sole practitioner or partnership shares space with other lawyers. In other words, an association is an unincorporated company which allows its members (i.e. individual lawyers running their own practices) to share costs and resources.
Advantages
There are tremendous benefits to space-sharing. The most obvious is the sharing of expenses: receptionist, bookkeeper, photocopier, boardroom, library, phone system and fax. When first starting out, lawyers’ overhead costs can be daunting, and sharing these expenses can mean a significant saving. Other benefits include: each lawyer maintains much of the autonomy of a sole proprietorship, liability is prima facie not shared, there is the possibility of cross-referral work, an on-site lawyer can watch over another lawyer’s practice when the latter lawyer is on holidays or ill, expenses can be shared, and there is someone who can give a sympathetic ear to when a lawyer is in need.
Disadvantages
The main disadvantage to an association is the potential for joint liability: notwithstanding best efforts to limit liability of the individual association members, they may still be held jointly and severally liable because of the actions of other members. To help mitigate against this, the members can draft a mutual indemnification agreement; however, the bottom line is that if one or all of the associates become insolvent or are personally judgment proof, the “last man standing” may still be stuck paying for the jointly acquired debts.
There are other, less obvious advantages to sharing space. Lawyers may have to share the burdens of administration with others — dealing with equipment suppliers, for example.
Ease of Creating
Apart from the individual associates establishing a sole proprietorship or professional corporation form the association, the association is typically created through a cost-sharing agreement with other associates.
Continuity
As per Wendy E. Oughtred in Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 49, the cost sharing agreement should deal with the following issues:
Specify a finite term of the arrangement. At the end of the term you can agree to extend it if it is working, or terminate it with no hard feelings. Provide for the means by which someone can leave the association early and how they are to be compensated if at all for their contribution to any joint assets. Specify the period of notice which must be provided by the departing member. It is also important that a mechanism for the removal of a member be detailed and under what circumstances this action may occur. An individual should be nominated to find a replacement associate under circumstances and it should specified who bears the interim expenses if there is a delay between the departure of a member and the introduction of a replacement.
