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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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.
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