Been watching suits lately and I’ve gotten to the point in season 6 where they use the buy in fund to finance a settlement, and overall I’m confused as to the idea of what a buy in is. They also mention concealing it from the partners who have left the firm, because if they found out the ex-partners would come gunning for their money. So, what is a buy in, and how does it work if you leave a firm after you’ve paid the buy in? Are you entitled to the money, or does it stay with the firm?
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If you are a partner you have an ownership stake, so if you need to fund an expansion or a settlement the money comes from the partners. Basically it means you have skin in the game. I am not sure if lawyers have a specific way of doing it but if it were a regular company the buy in would be rational to the amount of the company they own. The ‘buy in’ is the money you use to stake your ownership, and it is the money you use to make improvements and investments. Say you get bought out after you did an initial buy in and made subsequent buy ins, you would have to be paid out your original amount + all other buy when the company is sold. This is a great way to make $$$, but it is risky.
If you give up your ownership stake (so an ex-partner) then you have no claim anymore. I am not sure the episode of suits you are talking about but if the partners still own part of the firm, then this literally cannot be concealed from them, it would constitute fraud.
Being a partner generally means instead of employee you are now a part owner of the firm and so you can get a % of the overall profits of the firm instead of just an annual salary.
Its kind of the same idea as buying stock in a company. A company is worth 100M and if I want to own 1% of it I need to pay a million dollars and buy 1% of shares.
Same thing for a partner, you are becoming a part owner of the firm, so you need to ‘buy’ that amount of equity.
I will fully admit that I haven’t watched much of Suits, and while I am a lawyer, I am not a corporate lawyer (which is what the Suits people are). But I know enough to be dangerous.
As other people have mentioned, a buy-in is similar to buying stock in a normal company. However, most people who make partner do not have that kind of money to buy in immediately; instead, it is withheld from their paychecks over time, like a sort of no-interest loan. If you eventually leave, you do get that money back, though again it’s often over time, to avoid taking out a huge chunk of the firm’s money right away and to avoid a run on the firm’s finances.
Since I haven’t really seen Suits, I’m not sure if by “using the buy-in fund to finance a settlement,” they mean using it as liquid cash for a case they’re personally involved in as a company, or if they’re somehow spotting the money for a client dealing with a settlement. Either way, the problem is that you’re basically taking cash directly out of the firm’s long-term pool. People who are getting money slowly over time after leaving may demand all their money now, in case the company goes under and can’t pay *anyone*, exactly like a bank run with people pulling their money out now to avoid losing it.
A law firm operates as a partnership, which is a type of business set-up. When lawyers get to a certain level, they may be offered partnership. This allows them to buy a percentage of the business (lawfirm) and reap a percentage of its profits on top of their salary. The buy-in might be more than they can afford to just pay, so they finance it through the firm. And lawyers who leave the firm or retire typically want/need to get bought out of their parnership so the firm needs to have liquid funds with which to pay out.
Let’s say two lawyers get together and form a partnership. To get things off the ground they each pony up $500k so the firm can rent an office, hire staff, buy computers, etc.
Each year the firm makes them a bunch of money and every month, or quarter, or annually, they tally up the firm’s profits and divide it between the two of them. maybe they toss a bit to the staff as a incentive to keep them working hard. You see that throughout the show as their bonuses.
Now you have a really good employee, ad you don’t want them jumping ship to take all their experience (and clients that like them) to another firm. Best way to wield them on to your firm is make them a partner too. But you can’t just give them a part of your firm, not only would it devalue your stake but it would also be a huge tax burden to them (the IRS would tax the value as wages). So they buy in – you both put half a million up, so you want them to put half a million up too (I think in the show Harvy’s buy-in was $1m).
What happens to no-longer practicing partners? that depends on the partnership agreement. Some may be bought-out when they leave, some might continue to receive a reduced share of the profits, some might continue to pay in full. Alot if this is going to depend on if the firm can afford to return the capital.
Those buy-ins are not profits, so the firm doesn’t hand them out as profits, instead the firm keeps them invested and may use it for emergency expenses, like they did in the show. Partners do not like it when you start spending in the partnership capital since that reduces the value of their share – if your imaginary firm had to pay out a million dollar loss from that account it would now only have $500k in it and three partners, making their share worth 1/3 of what they originally bought in for.
Law firms are special that in many places unlike most other business they can only be owned by the professionals who do the work.
Only lawyers can be owners of a lawfirm.
You can’t really buy stock or shares in one or invest money in one.
What does happen is that the lawyers at the top of a law firm are co owners of the firm: partners. They share the profits that the firm makes, while all the other lawyers working there are paid like employees are everywhere else.
However lawyers sometimes leave a firm or eventually retire and stop being partners and new lawyers move up to become partners.
In this case they need to buy into the firm, put money in so they own a part of it. Basically buying part of a firm to become a partner in it and the money paid becomes part of the money the firm has as a whole. That money can be used to pay out those who want to stop being partners. It can sometimes be used for other stuff too, but there are things you can and can’t do with it and who you should tell
It can become quite complicated.
There’s lots of inconsistent answers because a buy in can mean several different things. There’s no single correct way of buying in. It depends on the law firm and each law firm is set up differently (based on how the partners choose to set it up their business).
Most common buy in is where each partner purchases a percentage of shares (or points) in an existing partnership.
The amount of money is generally arbitrary. It’s meant to reflect a commitment by the new partner. It doesn’t really reflect the value of the firm because most firms dont carry value like a company. Heres why:
-Most law forms don’t retain much money in the partnership. They distribute each year’s profits in the following year.
– The value in the firm is in how much business all the lawyers can generate in future years. But since clients tend to move with the lawyers, so the value is in the lawyers, not the firm.
It’s often just a way of showing commitment to the firm. Partners leave all the time and they are paid out their buy in amount when they leave, either as a lump sum or via partial payments over a short window.
The buy in tends not to change. It would be unfair for Partner A to pay 150K in 2020 and another to be forced to pay 300K in 2023. This would be unfair to the new partner
The $1M buy-in is TV magic mostly. That’s an incredibly high buy in. Perhaps a small handful of firms would require this but buy-ins range from 100k-300k.
Before interest rate skyrocketed you could borrow the buy in or the firm may borrow the money on your behalf. But that’s become much more expensive. I got stinged with the higher interest rates. My interest payments on the buy in loan basically tripled in a single year.
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