What is an Equity Partner at a Law Firm and How Much Does an Equity Partner Make?

An equity partner at a law firm shares ownership, profits, risks, voting rights, and management responsibilities. Find out how much equity partners make, how compensation works, and how equity partnerships differ from salaried partnerships.

By Brad Nakase, Attorney

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Table of Contents

1. Introduction

2. An Equity Partner: What Is It?

3. A Salaried or Non-equity Partner: What Is It?

4. Hybrid Partnerships

5. Making the Switch from Salaried Employee to Equity Partner in a Law Firm

6. Equity Partnership vs Non-equity/salaried Partnership: Benefits

7. What model is best for you?

8. Partners’ Preferred Compensation Plan

9. Providing Breather to New Equity Partners

Introduction

You have more opportunities than ever to advance as a leader in a legal practice. The industry is changing due to the growth of platform law firms and consulting attorneys. Your business structure will be directly impacted by your growth strategy, regardless of whether you decide to expand into a larger firm or establish a specialized practice. In the end, you will need to decide whether to function as a partnership, LLC (limited liability company), or LLP (limited liability partnership) based on your practice fields and how they influence that structure.

For a number of years, law firms have traditionally been organized as partnerships. Understanding the duties of partnerships, particularly the distinctions between equity and salaried partners, is crucial because it is the system choice for numerous law firms. The strategic expansion of a law firm depends on the appointment of a partner, whether they are salaried or not. Because of their size and variety of practice areas, large firms usually have more complicated partnership structures, such as equity partnerships and salaried partnerships.

An Equity Partner: What Is It?

The law firm & its assets are owned by equity partners. They are accountable for the company’s losses and have a right to a portion of its revenues. Instead of being paid, equity partners receive withdrawals from the company’s profits. They are subject to self-assessment taxation.

The income that equity partners receive is unlimited. The magnitude of the company’s profits and their portion of those profits will decide that. A partnership agreement may regulate participation in the business’s profits, and it is essential to remember that equity partners may not always own equal shares in the company.

To maintain their status as equity partners, equity partners usually need to provide capital to the partnership. The capital accounts of the current partners are then credited with this in accordance with their ownership stake in the company.

Decisions about the company’s future are made by its equity partners. This includes everything from its office location to its strategic orientation, as well as the quantity and kind of employees it has. Once more, the equity partner’s percent stake in the company may restrict the scope of decision-making.

Any litigation is the personal responsibility of the equity partners. This implies that their business and personal assets are vulnerable if they fail to win a case.

A Salaried or Non-equity Partner: What Is It?

A staff member of the legal firm is known as a salaried partner. No ownership or profit-sharing rights are granted upon appointment as a salaried partner. Law firms often utilize salaried partnerships, particularly as a means of acknowledging senior attorneys without giving them ownership.

Salaried partners receive remuneration that is subject to the usual deductions, as the name implies. Salaried partners’ income arrangement is built on a fixed salary rather than profit sharing, and they usually don’t contribute money to the company. Salaried partners are also entitled to paternity or maternity leave, as well as sick and holiday pay.

If salaried partners meet predetermined goals, they may also receive bonuses; however, the deductions will apply to these bonus payments. Depending on the success of the company or personal goals, salaried partners might also be eligible for additional compensation.

A salaried partner has the same right as other company workers to file a claim for wrongful termination in an employment court if they are fired or made redundant.

They have no official voting privileges in the partnership, even though their thoughts and ideas may be sought out and be helpful to the firm’s overall strategy. Nonetheless, building client relationships and overseeing junior attorneys are often important tasks for salaried partners.

A salaried partner may anticipate becoming an equity partner in a law firm, but this is not a given. But it’s probably only a step in the right direction. Although they contribute significantly to the company, salaried partners are not compensated through profit sharing.

Hybrid Partnerships

The concept of “hybrid partners” is another noteworthy development in partnership arrangements. When income or non-equity partners are referred to as “hybrids,” a portion of their compensation—typically 10–30%—is determined by the overall profitability of the company. Therefore, with a system set at 10/90, 10% of pay is determined by the company’s yearly revenue, but 90% of payment is guaranteed. Depending on the company, some divisions are set at 20/80, while others are set at 30/70.

New partners may continue to gain advantages from this, even if it might not appear very partner-friendly. There could be a financial benefit for the partner if the company surpasses its growth or profit targets. However, the reality that the partner will need to invest some money in the company reduces this benefit.

The phrase “one-tier” collaboration may be familiar to you, and some businesses actively promote themselves in this manner. However, as these companies would not be included in the annual reported number of PPP (profits per equity partner), the term is deceptive. According to research, partners who earn 50% or more of their remuneration as equity are referred to as equity partners; those who receive less are referred to as non-equity and are just paid employees.

Prospective partners should always make sure they have carefully read and comprehended the operating agreement. This is the fine print. It is a good idea to seek assistance from a certified business attorney when considering becoming an equity partner in a law firm.

Making the Switch from Salaried Employee to Equity Partner in a Law Firm

When switching from a salaried position to an equity partner, there is no standard method. The scale of the law firm can sometimes have a major impact. Different companies will encourage lawyers to join the ranks of equity partners at different times in their careers; the steps are not set in stone.

Specific requirements that equity partners search for in salaried partners

The law firm’s equity partners may set particular requirements for salaried partners to obtain equity partnership status. Among them could be:

Contribution to business development: The salaried partner might have been given a goal in terms of revenue targets, new cases, or clients (or a mix of all three). Equity partners anticipate substantial contributions to the creation of commercial possibilities and the expansion of the company’s clientele. The salaried partner can anticipate an invitation to sign up as an equity partner in a law firm after reaching the goal.
Consistent billing success: A salaried partner could be invited to upgrade to an equity partner if they regularly achieve strong billing performance. Such success is often linked with profit sharing & profit share, with higher earnings & greater involvement in profits for individuals who reach or surpass goals.
Leadership and management skills: The equity partners may choose to extend an invitation to a salaried partner to grow into an equity partner in a law firm if they exhibit these qualities when managing a team or interacting with clients.

The opportunity to participate in processes for making decisions, which is an essential component of equity partnership, is one of the other aspects that the equity partners would, of course, consider.

The role will probably be reviewed and evaluated by the equity partners on a regular basis.

The salaried partner will typically receive an offer from equity partners, after which a discussion will take place. The salaried partner’s required capital commitment and the equity stake they should earn will be negotiated. The salaried partner’s voting privileges and possibly succession planning will also be covered. Financial goals, business development, and strategic direction may also be included.

Rarely, the salaried partner can be granted voting rights and a restricted portion of the earnings without converting into a full equity partner in a law firm. It’s possible that a fixed-share partner won’t have to contribute capital or bear any losses.

Equity Partnership vs Non-equity/salaried Partnership: Benefits

Benefits of Equity Partnerships

More possibility for income. Your income can increase as the business succeeds if you directly participate in its earnings.
More authority. Equity partners have the ability to vote and have a voice in the company’s key strategic choices.
Long-term financial commitment. At retirement, an ownership stake generates asset worth that can be transferred or sold.

Benefits of Non-Equity Partnerships

Concentrate on practicing law. Without the weight of firm management duties, partners can focus on client jobs and relationships.
Less danger to finances. Without the monetary risk of company debts or commercial commitments, they receive a steady wage.
Retention. Without requiring complete ownership, companies can reward and retain excellent staff with greater pay and partner status.

Must Read: How To Become An Equity Partner In A Business

What model is best for you?

For some, being an equity partner is the ultimate goal in the legal profession. Others, however, think the equity partner approach is overly risky. The advantages and disadvantages of each partnership arrangement must be carefully considered when making decisions concerning career advancement.

The potential equity partner’s ability, motivation, financial preparedness, risk tolerance, and personal priorities all play a significant role. Some claim that prospective equity partners need to be driven. This choice can also be strongly influenced by the firm’s culture and the partner-firm relationship.

For the duration of their careers, some lawyers continue to be salaried or non-equity partners. They take advantage of all the safeguards and advantages provided by employment legislation and prefer the stability that comes with a regular paycheck. Their income potential is probably capped, and they might have little say in the company’s strategic direction.

The income of equity partners is derived from a portion of the company’s profits. This implies that their income is unlimited, at least in theory. Choosing to become an equity partner, however, carries the danger of giving creditors access to both personal and company assets.

When weighing the merits and cons of the salaried partner versus equity partner arrangements, individual lawyers must make a decision.

Partners’ Preferred Compensation Plan

You simply haven’t been watching hard enough if you haven’t seen the changes that have occurred in the corporate sector over the past ten or so years. The concept of compensation is more flexible, giving firms more latitude to modify wages, make use of measurements and indicators, and alter things like how people’s careers develop.

In actuality, as drawings have decreased and partner remuneration has been reversed, bonuses have also increased in frequency and scope. As a result, management has more power and discretion. The majority of payments to income partners and non-equity partners are typically made by a monthly set draw. On the other hand, high-quality performances are recognized with bonuses, a few of which can be very substantial.

Therefore, in addition to their draws, a partner who waits to turn into an equity partner might still receive incentives, some of which might be extremely lucrative.

Providing Breather to New Equity Partners

Most businesses have high expectations for their equity partners. This is still the case now, as it has been for many generations. These new partners are under more pressure as a result, but they also usually have to go through a transitional phase as they get used to the new company’s culture and methods.

This ramping-up phase might make it difficult for them to accomplish objectives, close sales, and advance overall, particularly with less seasoned business partners. Although many partners bring previous commercial opportunities with them and believe they will get off to a quick “on a roll,” this is typically not the case.

Some businesses are opting to offer an alternative route to becoming equity partners since the pressure to deliver can be unsettling. They are employing an interim or transitional period to do this. This concept can help a new partner succeed, boosting the firm’s total value as well as the partner’s and their business dealings’ worth. These days, some companies have policies that require new partners to transition over a period of one to two years.

During this period, the partner can easily integrate their own clients into the company, get to know their coworkers, and comprehend how the firm’s processes, procedures, and policies operate in real time. If everything is satisfactory to both the company and the new partner at the end of this transitional phase, the equity conversation will start.

Even while this new strategy might appear slow-moving, it can lessen the overall strain that new partners experience, strengthen bonds throughout the company, and increase productivity. Imagine “strategically patient” rather than “slow-paced.”

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