Top 10 Things to Consider before Deciding to Marry a Corporation

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	August 3, 2012
Re:	“Corporations are people, too, my friend.”

Last month, a Seattle woman, Angela Vogel, was issued a marriage certificate to wed "Corporate Person" -- a corporation. 

Top 10 Things to Consider before Deciding to Marry a Corporation

10. – Can a rabbi with just a single member LLC perform the ceremony?
 9. – Am I ready to become stepmother to his subsidiaries? 
 8. – Does the reception have to be held in Delaware?
 7. – Under Citizens United, can he use corporate funds to help pay for my dress?
 6. – Am I prepared to take the heat from Rick Santorum?
 5. – Can I trust him to behave at the bachelor’s party?
 4. – Band or DJ?
 3. – Does his religion require our kids to attend Business Schools?
 2. – Will he really look like Mitt Romney in his rented tux?
 1. – Should I sober-up first?

Why is my Capital Account Negative?

Parsley Sage Rosemary & Ginsburg llp

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Rosemary R. Rosemary
From:	Mike Marget
Date:	August 2, 2012
Re:	Your Negative Capital Account Balance @ 12/31/2011

I hope you have recovered from the migraine I inadvertently induced while trying to respond to your question last week.  I thought it best to try again, this time in writing.  Your question to me was:  “Why does the firm’s 12/31/2011 balance sheet show a negative number for [your] Capital Account?”

[Keeping it simple.]  In a partnership, a partners’ Capital Account works as follows:

1.       Last year’s year-end Capital Account balance; plus

2.       Cash or fair value of property contributed by the partner to the firm during the year; plus

3.       The partner’s share of the firm’s net income for the year; minus

4.       Total distributions the partner received during the year in the form of: (i) draws; (ii) draw equivalents (e.g., insurance premiums and profit-sharing/401k contributions funded by the firm on the partner’s behalf); and (iii) fair value of property or capital, if any, returned by the firm to the partner; equals

5.       Capital Account balance at of the end of the current year.

If a partner’s Capital Account balance is negative, it means the partner’s aggregate distributions over time exceed (a) the amount of the partner’s initial and subsequent capital contribution plus (b) the partner’s share of net income accumulated during the partner’s tenure.

How is this possible?  Debt makes it possible.

At the end of 2011, instead of paying-off the firm’s bank line of credit and reserving cash for the 2011 profit sharing liability, the Management Committee paid bonuses to partners on December 31^st.  In other words, a sizable amount of the firm’s 12/31/2011 cash in the bank went into the partners’ pockets, rather than paying down liabilities.

This raises the question as to how the firm will deal with those 12/31 liabilities when they come due. 

·        Our loan agreement with Big Bucks Bank & Trust requires us to have a zero borrowing balance for any 30 consecutive days each year. 

·        We can postpone funding the 2011 profit sharing plan liability until September 15, 2012, should we want to wait that long.  As in prior years, we will extend the due date of the firm’s 2011 tax return until September 15^th.  The profit sharing liability must be funded in full before the firm’s tax return is filed, if the firm wishes to take the profit-sharing expense as a tax deduction for 2011. 

Last December I explained to the Management Committee, the 2012 Budget anticipates generating sufficient cash to payoff both liabilities no later than end of July 2012.  We paid the bank line of credit down to zero on May 1^st and did not borrow again until July 16^th.  On July 16^th, the firm tapped the line of credit again to help fund 2011 profit sharing contribution. 

Negative Capital Account balances are considered, by some, an indication the law firm is aggressively managing its cash resources.  Negative balances are seldom found in large law firms.  They are uncommon in smaller law firms, but I am aware of several firms who, like PSRG, report negative Capital Account balances at year-end.[i] 

Whether a law firm should maximize partner distributions – which is likely to produce negative Capital Account balances – must be tempered by firm liquidity considerations.  High partner draws are contraindicated if the firm runs the risk of cash shortfalls to meet its routine monthly cash requirements for payroll, operating expenses and client cost advances.

I hope this explanation is more transparent and less physically painful than my earlier attempt.  Esoteric financial precepts, like this, are not easily explained to non-accountants.  They are closely guarded concepts accountants employ to ensure job security.

All the best, mike

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[i] Negative Capital Account balances usually come at a cost.  Postponing payoff of bank debt in favor of additional partner distributions means the firm will incur interest expenses otherwise avoidable if the distributions were delayed.  Similarly, once the actuary completes its testing of the profit sharing calculations, any funding delay will f result in loss of tax-deferred investment earnings inside the plan in an “up market.” 

Top 10 Signs Opposing Counsel is from Another Planet

Parsley Sage Rosemary & Ginsburg llp

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	July 10, 2012
Re:	Top 10 Signs Opposing Counsel is from Another Planet

10. – Facebook profile says he likes “walks on the beach, classical music, and abducting humans for weird medical experiments.”
 9. – Metadata downloaded from his latest court filing reveals the word “Klingon” was deleted 87 times.
 8. – He has a few jillion frequent flyer miles.
 7. – Wants your firm to join him in petitioning the Federation Council to overturn Pluto’s demotion to dwarf planet status.
 6. – After a few drinks, he starts telling jokes starting with the phrase: “You might be from Alpha Centauri if ….”
 5. – He boldly goes where no man has gone before – to see a midnight revival of Sex and the City 2.
 4. – His garage is saucer-shaped.  (Always a dead giveaway.)
 3. – Authorities in Arizona are trying to deport him to Europa.  
 2. – He has Charlie Sheen on speed dial.
 1. – Tells you in confidence that a future Supreme Court decision will unanimously overturn 531 US 98 (2000). 

Top 10 Steps the Firm is Taking to Sustain the Planet

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	July 6, 2012
Re:	Top 10 Steps the Firm is Taking to Sustain the Planet

10. – Managing Partner is converting his SUV to run on Oil of Olay.

 9. – Amended the health insurance plan so endangered species can be claimed as dependents. 

 8. – Conserving water by serving clients cold drinks with dry ice.

 7. – Swapping out all existing PCs with new hybrid PC capable of running on either electricity or gasoline.

 6. – Relocating the accounting department to Antarctica.

 5. – New mandatory CLE class on “Global Warming and the Law of the Jungle.”

 4. – Converting all the office thermostats to Celsius. 

 3. – Recycling monthly financial reports from prior years.  It will save paper and no one will notice.

 2. – From now on Top 10 Lists will consist of only 9 items.

Celebrate FREEDOM FROM OVERHEAD DAY

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	All Partners
From:	Mike Marget
Date:	June 22, 2012
Re:	FREEDOM FROM OVERHEAD DAY – Celebration Time C’mon

Saturday, June 23, 2012 marks FREEDOM FROM OVERHEAD DAY for most small and midsize law firms.

Although Hallmark is unlikely to produce any greeting cards, and the occasion will receive less recognition than National Pi Day,[i] FREEDOM FROM OVERHEAD DAY commemorates a significant annual event in the financial life of any law firm.  It is the calendar date when a law firm has earned enough money to cover its annual overhead costs.  From that date forward, all the cash goes to the lawyers!

In its most rudimentary form, a law firm’s revenue can be divided into two pools:

·        Overhead – occupancy, marketing, equipment, legal research and staff expenses
·        Lawyer Compensation

Assume your firm begins working on January 1^st and earns the same amount of money each day while spending nothing.  When the law firm has accumulated enough money to pay all overhead expenses that will come due during the year, FREEDOM FROM OVERHEAD DAY has arrived.

According to a survey published last year, 47.4% of the average small firm’s revenue goes to paying overhead costs and the balance constitutes partner and associate compensation.[ii]  FREEDOM FROM OVERHEAD DAY is calculated by comparing the relative law firm revenue and overhead costs as reported by the survey and applying those figures to the 366 days in calendar year 2012.  The breakdown works as follows:

Overhead Element	% of Revenue	# Days	Dates Covered
Occupancy Costs	6.8%	25	January 1 - 25
Marketing Costs	2.4%	9	Jan 26 – Feb 3
Equipment Expenses	2.1%	8	February 4 – 11
Library & Reference	1.5%	5	February 12 – 16
Other Overhead	16.7%	62	Feb 17 – April 17
Staff Salaries/Benefits	17.9%	66	April 18 – June 22
Total Overhead	47.4%	175

June 23 is the 176^th day of calendar year 2012.  In theory, June 23^rd is FREEDOM FROM OVERHEAD DAY and it’s all profit for the lawyers from here on out.  Be sure to celebrate (and spend) responsibly.

---

[i] National Pi Day (or π Day) is celebrated by math enthusiasts around the world each year on March 14^th (which can be abbreviated as 3.14 and Pi = 3.1415926535…).  Coincidentally, March 14^th also marks the birthdate of Albert Einstein.  I’m told Pi Day is a big deal at Princeton.

[ii] “Small Law Firm Economic Survey,” 2011 Edition, published by The National Law Journal and ALM Legal Intelligence (2011).  This survey focuses on the economics of firms with 20 or fewer lawyers.

Top 10 Things I've Learned about Cloud Computing

Parsley Sage Rosemary & Ginsburg llp

“Always a reasonable result for a reasonable fee, always”

MEMORANDUM

To:	Top 10 File
From:	Mike Marget
Date:	May 15, 2012
Re:	Top 10 Things I’ve Learned about Cloud Computing

10. – The “Time Travel” app does not automatically adjust for the Julian calendar.

 9. – Surprisingly unavailable in any shade of blue.

 8. – It is not less filling and does not taste better.

 7. – Optional cup-holder holds virtually no cups.

 6. – Incompatible with all known ESP-based bandwidth protocols.

 5. – Users’ manual contains no information regarding cute little kitten playing the piano.

 4. – Avian data carriers are prone to delays, low throughput, and work only at low altitudes; but on the upside, the cost is essentially chicken feed.

 3. – Won’t work with any 8-track tapes.

 2. – Chips running the Cloud-based servers are made mostly from Doritos.

 1. – According to Donald Trump, security access protocols should include a user-ID, a password, and a long-form user-ID issued by the State of Hawaii.

Final Meeting with the Auditors

Parsley Sage Rosemary & Ginsburg llp

“always a reasonable result for a reasonable fee, always”

MEMORANDUM

To: CC:	Management Committee Accounting Department
From:	Mike Marget
Date:	April 30, 2012
Re:	The Auditors are Coming!  -- Final Meeting with the Auditors

We have scheduled the Final Meeting with the Auditors and Management Committee to occur in conjunction with the May Management Committee Meeting on May 21^st. 

As you know, Beane & Beane, CPAs completed their examination of the 2011 financial statement at the end of March.  Copies of the final financial statements, together with the auditor’s report, have been circulated to Big Bucks Bank, Monopoly Holdings (our landlord) and to Easy Credit Leasing – all in accordance with our agreements with those outside parties.  Copies also have been posted on the “partners only” section of the firm’s Intranet for partners who enjoy reading financial footnotes.

On May 21^st, the first agenda item will be the meeting with one of the partners from Beane & Beane.  He will discuss the following:

·        How his firm went about examining our financial statements for 2011, the type of tests and analysis performed and comment upon the cooperation received from me and other members of the Accounting Department.    

·        The report issued by his firm and its scope and limitations.

·        Suggestions for improvement in our operations in their Auditor’s Recommendations Letter.

As in prior years, I will ask senior members of the Accounting Department, especially those who worked to prepare the Audit Binder and responded to requests from the auditors during the course of the examination, to be present from the Beane & Beane presentation. 

When the presentation is concluded, the Accounting Department personnel and I will leave the conference room so the Management Committee can meet in executive session with the Beane & Beane partner without any of us present.  This is an opportunity for the Management Committee to ask candid and probing questions concerning our financial stewardship of the firm’s books and records. 

Even after 25 years of doing this job, this executive session is always the most anxious 30 minutes of my year.  Even though nearly five months will have passed since the end of 2011, it is not until the auditor emerges from the executive session with the Management Committee that we can finally declare fiscal year 2011 officially closed.  A week later, we start preparing, slowly at first, to repeat the whole process for 2012.

[I keep hoping one day, you will call me back to the conference room, after Beane & Beane departs, and greet me with a standing ovation for a job well done.  It could happen.]