Equity partner

Equity partner

An equity partner is a partner in a partnership who is a part owner of the business, and is entitled to a proportion of the distributable profits of the partnership. The term is used in contra-distinction to a salaried partner (or contract partner) who is paid a salary but does not have any underlying ownership interest in the business and will not share in the distributions of the partnership (although it is quite common for salaried partners to receive a bonus based on the firm's profitability).

Although they are both regarded as partners, in legal and economic terms, equity partners and salaried partners have little in common other than joint and several liability.[1] The degree of control which each type of partner exerts over the partnership depends on the relevant partnership agreement.

The division between equity and salaried partners could, in theory, occur in any partnership, but in practice, the distinction is most frequently referred to in law firms and accountancy firms.

Type of equity partnership

In their most basic form, equity partners enjoy a fixed share of the partnership (usually, but not always an equal share with the other partners).

However, in more sophisticated partnerships, different models exist for determining either ownership or profit distribution (or both).

Probably the most common two forms are "lockstep" and "eat-what-you-kill" (sometimes referred to, less graphically, as "source of origination").

Lockstep involves new partners joining the partnership with a certain number of "points". As time passes, they accrue additional points, until they reach a set maximum. The length of time it takes to reach the maximum is often used to describe the firm (so, for example, one could say that one firm has a "seven year lockstep" and another has a "ten year lockstep" depending on the length of time it takes to reach maximum equity).

Eat-what-you-kill is rarely, if ever, seen outside of law firms. The principle is simply that each partner receives a share of the partnership profits up to a certain amount, with any additional profits being distributed to the partner who was responsible for the "origination" of the work that generated the profits.

British law firms tend to use the lockstep principle, whereas American firms are more accustomed to eat-what-you-kill. When British firm Clifford Chance merged with American firm Rogers & Wells, many of the difficulties associated with that merger were blamed on the difficulties of merging a lockstep culture with an eat-what-you-kill culture.

See also

Footnotes

  1. ^ In many legal systems, salaried partners are not technically "partners" at all in the eyes of the law. However, they are nonetheless jointly liable as their firms "hold them out" as partners.

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