As small and midsize law firms rush to claim a share of $350 billion in government-backed loans to keep their payrolls afloat, some are finding that their business models pose a special obstacle.

Starting April 3, small U.S. businesses have been able to start applying for the Paycheck Protection Program, a key part of the $2 trillion COVID-19 pandemic relief bill. Under the program, banks will loan up to $10 million to businesses with less than 500 employees on very favorable terms—two-year maturity and 1% interest rate.

The U.S. Small Business Administration will forgive the entirety of the loan's principal if, eight weeks after receiving the money, the businesses keep all of their employees on the payroll and the money they borrowed is used for compensation, rent, mortgage interest or utilities. If businesses do take the money and lay off employees anyway—or cut their pay by more than 25%—then they have to pay back a portion of the principal.

"Every firm I have spoken to that meets the size criteria says they're applying," said Lisa Smith, a principal at the law firm consultancy Fairfax Associates. "You can probably throw a dart to any firm with 200 lawyers and probably find one."

Another legal consultant said "many, if not, almost all" law firms with less than 500 employees are applying for the program.

The program's roll-out has been a frustrating headache for everyone involved. Technical problems have plagued the program since its April 3 launch. On Monday, a key SBA system that's used in processing small business applications crashed, according to Politico. Financial institutions have seen a crush of applications, according to Vox.

But law firms and solo practitioners are likely to represent a special test of the program's eligibility requirements because of the compensation models and business structures that characterize the legal industry.

"It's really challenging trying to fit a square peg through a round hole, because law firms have so many different ways to pay their employees," said Tyler Maulsby, an ethics counsel at Frankfurt Kurnit Klein & Selz.

A key example of this confusion is whether lawyers who might own equity in their firm, whether designated as partners, members or shareholders, count toward the program's head count limit. One legal consultant said he heard that law firms that are organized as professional corporations and send W-2 forms to equity partners must include them in their employee totals, but firms that are organized as limited liability partnerships can't because equity partners are not employees.

But David Hernand, a partner in Paul Hastings' corporate department who has been informally giving advice to his lawyer friends who run smaller firms, said he expected equity partners would be considered employees.

Noting the variety of law firm and compensation structures out there, Maulsby said it's important for law firms to be consistent in how they treat their equity partners apart from their employees who receive a traditional paycheck. Law firms should consult their bankers and tax professionals on these issues if they have questions, Maulsby added.

"It's reasonable to make that distinction, especially when the application is asking who is getting paid on a salary … and who is at risk not getting paid," Maulsby said.

Solo practitioners have their own set of challenges. The law is supposed to allow solo practitioners like June Castellano, a Rochester, New York-based lawyer who practices family law, to count her monthly draws on her Paycheck Protection Program application. But Castellano said her bank won't count those draws on her application, meaning the only money she can borrow would pay the salaries of her one full-time employee and her part-time employee.

"You don't just keep the people you employed paid. You keep yourself paid. It's such a new and different concept. That's the disconnect," Castellano said.

Although the program is run by the SBA, it's administrated by banks. But not every bank is participating in the program, to the frustration of solo commercial litigators like Domenick Napoletano. Based out of Brooklyn, Napoletano has accounts with a number of banks, but he does his primary banking through Citibank, which isn't accepting PPP applications yet.

"For them not to be able to come forward, for a person like myself, it's disheartening," Napoletano said. Both Napoletano and Castellano are leading the New York State Bar Association's emergency task force that aims to link small law firms with economic aid.

And then there are general concerns about the program. No one knows when the money will actually begin flowing to small businesses. Although the program is active until June 30, Napoletano said he's worried the money has already run out. News reports Tuesday said the Trump administration is hoping to add another $250 billion to the program.

"It might already be gone, because there are too many people applying for this and there's just not enough money," Napoletano said. "There is simply not enough money."

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