A: In rare cases, the capital loan comes out of your annual draw (this can be up to half of the amount), but in all of the cases I’ve seen, the firm arranges a loan through a bank. Typically the bank provides the loan at the prime rate of interest, which is currently three percent. So if you buy in at $100,000, you’d have to pay back $3,000 a year in interest, but the firm covers that interest, so it’s a wash.
Q: How much does it cost to buy in?
A: Anywhere between $50,000 and $500,000. I typically see $100,000 to $200,000 for mid-size firms.
Q: Since the firm pays the interest, should partners be in any rush to pay off their loans?
A: There’s not a lot of incentive for new partners to pay down the debt. Still, there’s nothing to stop you. If you’re conservative you might want to pay it off, while others might focus on their mortgage or put money in their RRSPs.
Q: What are the risks of this type of loan?
A: In the rare case that the law firm goes bankrupt, you’ll never see that money again.
Q: Recently, the laws changed to allow partners to register as corporations. Good idea?
A: There are costs involved to incorporate and some firms allow you to, while others don’t. Incorporating can be a way for a lawyer to pay less tax. It’s best to seek advice from an accountant or a tax lawyer at your firm to see if it’s a good fit.