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Understanding Partners' Capital Accounts

By Luda Mirne

The challenges law firms have experienced since the onset of the recession have been widely documented, but as the recovery continues at a sluggish pace, law firms are shifting their focus to the challenges that lie ahead. After years of layoffs and diminished or negative growth, law firms are seeing increasing partner turnover. Too often these departing partners are surprised at the status of the capital accounts, leading to real and potential disputes with management. To proactively address this issue, law firm management should ensure that partners and senior associates (potential partners) understand the basic concepts pertaining to partners' capital accounts.

A partner's ownership interest in a partnership is tracked through the maintenance of a capital account. Failure to pay attention to the tax basis schedules and capital account balances can trigger unintended tax consequences.

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