When Is It Time to Consider a Law Firm Dissolution?

Law firm dissolutions happen for a variety of reasons. They are not always linked to the firm’s poor economic health or failed management. But the end of a law firm (or of certain partnerships or affiliations) marks a critical time for law firm owners and their clients and must be handled with the utmost care. 

In small to medium-sized firms, law firm partners and managers often consider dissolution when a significant partner or group leaves, when a practice group or client base changes and can no longer support the firm, or when fundamental disagreements change the direction or future of the firm. Differences in the way the firm uses technology or human resources are increasingly becoming a wedge issue that may contribute to differing strategies and approaches to law firm management, practice groups, and overall law firm stability.

However, making the right decisions about whether or when to dissolve and how to manage a dissolution is essential to protecting the personal and professional interests of partners and their clients. It also helps to ensure lawyers and their practice groups can successfully transition their teams and clients to a new law firm structure with minimal disruptions.

Dissolution Options, Analysis, and Planning 

Sometimes, a law firm has no choice but to dissolve; however, in many situations, there are other options to consider. Depending on the size of the firm and the terms of the firm’s governing documents, a dissolution can also be triggered by the act of a partner or group of partners. Understanding the significance of a dissolution, what it means for the firm, its clients, and partners, and what is required to effectuate and complete it properly, are keys to determining the best path forward. 

There are many issues to consider when deciding whether to dissolve a law firm. Other options should be analyzed or explored before heading down this path. If the law firm decides it must close down, the goal should be to effectuate dissolution in a way that protects clients and individual partners, maximizes liability protections, and allows lawyers to move to a new law firm with their practices and professional reputations intact.  

Winding Up Your Law Firm Partnership

Once the difficult decision to dissolve a law firm has been made, execution of the dissolution and windup requires thoughtful planning, precision, and care. A law firm should design and implement a dissolution windup plan that complies with its ethical and legal obligations to clients and third parties and protects client interests and the interests of law firm partners. 

The right advice at the right time is critical here. A well-developed windup plan coupled with key analysis and guidance helps law firms make critical decisions properly, including: how and when to notify clients, employees, and other third parties; how to handle leases, contractual and other third-party obligations; how to manage accounts receivable, accounts payable, work in process, invoicing and getting paid; what insurance and tail policies are required, which should be maintained and for how long; meeting record-keeping obligations for clients, IOLTA and trust account reporting, firm financial and employment records, and how best to maintain records in compliance with ethical and legal obligations; asset inventory, liquidation and disposal; and other administrative, financial and regulatory considerations.   

Questions also arise during a law firm windup about which partners, if any, need to assist with or manage the windup process, whether those partners will be compensated, who will be considered partners in dissolution, and if capital partners can be paid anything from the firm, when is the proper time to do so. There are also complex issues to be resolved around the return of capital and distributions to partners (if there is money to be paid out), when a partner is considered a creditor of the firm, and how to handle personal guarantees, among other issues.

When Should a Law Firm Entity be Terminated?

Entity termination is the last step in a law firm’s dissolution. But it is an extremely critical one. Knowing how and when to terminate a law firm entity properly can mean the difference between maintaining the liability protections of the law firm entity structure during windup and needlessly exposing law firm partners to unnecessary risk and potential personal liability.

While it is often hard to consider the end of one thing, it inevitably means the beginning of something else. Not all law firm transitions and transformations will lead to dissolution, and some will weather the storm better than others.  But, for some law firms and partners, it will be the right decision. And if handled properly, it may be the beginning of something even better. 

Dena M. Roche
Managing Partner
O’Rielly & Roche LLP
dena@oriellyroche.com