Law Firm Partnership: A Rose by Any Other Name?
Sure, introducing yourself as a partner sounds good. It’s an impressive title. It denotes that you put in the proverbial blood, actual sweat, and actual tears to your profession. Your mom will most certainly be proud, as will most of your friends and acquaintances. You’re a law firm partner, after all. It’s just that for many lawyers who are on the partnership track and are named partner, they learn that a lot of the time, it really is just an honorary title.
How Does a Partnership Work in a Law Firm?
There are several law firm partnership models. The most common terms you should know for the purposes of this conversation are single-tier partnerships, two-tier partnerships, non-equity partnerships, and equity partnerships. You’ll note throughout the article that there are some similarities between the terms and how they work in a law firm setting. A single-tier partnership is a partnership model involving equity. Associates devote most of their career, fresh out of law school, to the firm. They bring in business. If they work hard enough and contribute enough business to get noticed, they may be invited to join the partnership. In this model, they receive an interest in the equity of the law firm. Thus, they enter into an equity partnership. We’ll explain more about that soon.
A two-tier partnership is now the most common model of law firm partnership. It became such as law firms began to change how they hire lawyers. Lateral hires are the new normal, even for junior partners, who have their own book of business. With the two-tier partnership, an associate lawyer or a lateral hire could make partner, but they are non-equity partners. They may have some management power, but they don’t have an actual ownership interest.
With an equity partnership, the partner may or may not receive a salary. They do receive what is known as an equity draw. How often the equity draw occurs depends on the firm. It might be monthly or it might be quarterly. The draw is usually based on a percentage of the law firm’s profit during that period. The percentage each partner receives may be determined by all of the partners if the firm is relatively small or it may be determined by a compensation committee in larger law firms. The percentage may be based on factors such as the performance of each partner, their contributions for a certain amount of time (both billable and non-billable time), accounts receivable, write-offs, and other accounting information. It may also be based partially (or fully) on the individual partner’s production. It may also depend on seniority.
With a non-equity partnership, you get the fancy title of partner, but there’s no equity draw. Non-equity partners in a law firm generally keep receiving a salary. That salary is based on the same factors as those applied to associates.
We recognize that there are some instances where an equity partnership may be on the horizon as well as the existence of those who are fine with simply the title of being a partner. Hey, to each their own. If you’re happy, we’re happy for you. How long it takes to become a partner at a law firm depends on the law firm, your contributions, and the type of partnership offered. If you’re a lateral hire bringing your own book of business, the size of your book and the money coming in with it could mean that you make non-equity partner within a few years. For equity partners or what is thought of as the more traditional model of partnership, it could take an associate ten years or longer to become a partner. However, there is no guarantee.
Does Equity Partnership Always Equate to the Big Bucks?
Now you understand the primary difference between an equity and a non-equity partner, you may be under the impression that equity partnership is more preferable than non-equity because equity means making the big bucks. While it is possible in law firms with equity partnerships to make better money, it’s important to understand that in addition to the contribution and seniority level of each partner, there’s another factor that must be considered. That factor is liability. As an equity partner, you may be liable for the debts of the law firm. This may include, but is not limited to, you being required to contribute to or fully pay creditors for law firm debts. Equity partners may also be required to invest into the law firm. Oh, and if the firm goes out of business, you most likely will not get your investment back.
In addition to varying pay, the possibility of being liable for law firm debts, and the probability of making capital contributions, equity partners have other concerns as well. We’re not just talking about board meetings, committees, and management concerns. We’re talking about paying for your own insurance and other benefits. There’s also the matter of ensuring that you take care of your taxes. This could involve you needing to pay estimated quarterly taxes.
Law Firm Partnership Isn’t All Fun and Games
Law firm partnership certainly provides you with a nice title but doesn’t guarantee a life flush with money and power. In fact, it could be nothing more than a title and a ton of additional financial and management responsibilities. Yet, it’s something that you should approach with your eyes wide open. Understanding the differences between equity and non-equity partnerships (or single-tier or two-tier partnerships) helps you better know whether partnership is the right decision for you.
