Attorney and partner in a law firm here. Here are my two cents:
1) Don't assume that you need to come up with the cash. There are financial institutions that will provide you with a partnership loan, or you can mortgage your house or condo if you have one. I put a HELOC on my condo for the full amount of the partnership loan. The interest is fully tax-deductible, and I am paying it down over a number of years. Who in their right mind would finance a partnership buy-in purely from cash, or even 50% from cash?
Please elaborate. I understand that debt used to acquire an ownership interest in a business is fundamentally different than consumer debt but I'm still hesitant to use debt financing. The firm is a limited liability partnership, so if things go south I lose my capital contribution but otherwise walk away without personal liability unless I personally guaranteed a debt or I am liable for malpractice. If I cash financed the capital contribution, I'm out that amount of cash. If I debt financed, I lose the bank's money to the firm's creditors but I am personally liable for the full debt, plus interest and the bank can pursue any collateral I pledged. So the difference is simply the additional interest cost of debt financing versus the opportunity cost of having the cash tied up in partnership rather than other investments. Who knows what interest rates will be like at the time I buy in, but I'm assuming the debt interest rate would only be a bit lower than the average stock market return, so it is not a huge difference.
Are you just commenting on the need to diversify? I suppose if I debt finance, I can invest the cash I might otherwise have used to pay the capital contribution in a retirement account. Then then I am better diversified AND the investments are out of reach of creditors. Is this the point of your comment?
A partnership buy-in is a capital investment that will yield a certain ROI. What type of ROI you will have to determine through your own due diligence. Interest on an investment loan is tax-deductible, at least here in Canada. The rules may be different than in the states.
Let's say your buy-in is $100,000, and you finance the entire amount through a secured loan. In my situation, the interest on that was approximately $3,500 per year. Since the principal of the loan is used to purchase a capital asset, your carrying cost is only the $3,500 per year. If that buys you an additional income stream of $50,000 per year, there is no significant downside to taking out a partnership loan. You could use a portion or all of the additional income to pay down the principal. When I bought in, I tried to pay down the loan by 1/4 every year.
Whether you finance from cash or through a loan will not change your liability, nor your net worth. If the firm goes belly-up, you will be out $100,000 regardless of how you finance the buy-in. I looked at the downside risk of financing to be the risk that I would be stuck paying a $100,000 mortgage with a job somewhere else. I thought (and still think) that I could handle that without getting into dire financial straights. And the ROI was high enough to make the risk worthwhile.
I know that in the U.S. mortgage interest is deductible (it isn't here in Canada) so I would suggest that you take the tax consequences of your decision into account. Do the math on whether you are better off taking out $100,000 from your investments or leaving that amount in your investments and taking out a loan.
Your biggest consideration should not be how you buy in, but whether you should do so at all. By far your biggest risk will be the overhead attributable to you. This will be a constant in good years as well as bad years, with bad years posing the risk. If your firm has $100,000 of overhead per partner per year, you will have to bill (and collect!) at least $200,000 annually to make $100,000 in income. And I have seen some large firms where overhead is close to $500,000 per partner per year. I left that environment as an associate, and there is no way I would have taken on the risk of being a partner there.
And congratulations on finding the ways of Mustachianism early. Collectively, we are not known as a very frugal profession and it is good to see a canoe full of lawyers floating in this sea of engineers!