Equity Partners Vs. Nonequity Partners

In some law firms, partners must serve as nonequity partners before they will be invited to be equity partners.

In some law firms, partners must serve as nonequity partners before they will be invited to be equity partners.

If you're a new lawyer or accountant and are looking for a job, you may be considering jobs that offer either equity partnership or non-equity partnership. These two compensation and ownership systems have different benefits and drawbacks and it is important to know how each type of partnership could affect your work and pay. The basic difference between nonequity and equity partnerships is that equity partners earn more than half of their salary from equity. Equity is the profit that the firm brings in. This means that equity partners get more than 50 percent of their salary from firm profits and nonequity partners either receive no payments from ownership in the firm or receive equity payments that make up less than half of their total salary.

Equity Partner Advantages

Equity partners have many advantages when it comes to the daily operation of the partnership because they are considered partial owners of the firm. This means that equity partners have full voting rights on important decisions about the future of the business. Additionally, an equity partner's pay will increase as the firm increases profits, which means that equity partners have the potential to grow their salary relatively quickly. Additionally, being an equity partner is considered a prestigious position, especially within a law firm.

Equity Partner Disadvantages

Of course, there are downsides that you will want to consider before becoming an equity partner. First, equity partners usually must buy into the partnership, meaning that you would need to put money into the business before you are recognized as a partner. Additionally, if your entire pay is from equity and you don't make any salary as an employee of your firm, you may have to pay self-employment taxes. Perhaps the biggest disadvantage of being an equity partner is being liable for the debts of the partnership. If the partnership is unable to pay its debts, the individual partners are liable for the shortfall. This could put you at risk if the business is not financially sound.

Nonequity Partner Advantages

Nonequity partners have the advantage of being considered a partner in name but without some of the responsibility. Most nonequity partners still have the "partner" title and are considered leaders in their organizations, but they do not have the obligation to vote on business decisions. In fact, many nonequity partners continue the same work they were doing before being named partner, but with a new title and a potential raise. Further, nonequity partners do not have to make a capital contribution to the partnership, which can be a significant expense.

Nonequity Partner Disadvantages

The primary disadvantage of being a non-equity partner is that you won't have full voting rights in management decisions, which means that you may not always agree with the decisions the firm makes. Additionally, within the legal world, being a non-equity partner may not be as prestigious as being an equity partner. And because you won't receive all of your income from firm profits, you make a lower salary than an equity partner.

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Bea is a personal finance and legal writer based in Texas.

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