In “traditional” old line law firms, it was typical for a lawyer to join a firm upon graduation from law school, work hard as an associate for five to seven years and then, in most cases, be admitted to equity partnership, staying until death or retirement. Today, even for smaller law firms, it is common to have at least two tiers of partners: equity partners who share directly in the profits of the firm; and non-equity, income, or contract partners who, in most cases, receive a base salary plus bonuses, usually based upon their personal production.
Equity partnership involves shared liability for the debts of the firm, voting rights regarding the affairs and strategy of the firm, and compensation based on a share of the profits. It usually also involves a financial investment in the capital of the firm. Non-equity partnership does not, but it usually means they get to attend meetings of partners, giving them access to more information than non-partners (and, in our view, more than they probably need or want). Nevertheless, the designation as a partner can be important to the individuals involved in terms of prestige, marketing, etc.
Many smaller firms today have made the business decision to limit the number of equity partners. Instead, they offer non-equity partnerships to associates that they would like to keep. Regardless what the firm’s policy is, it should be communicated to associates so that they know what is expected of them. To differentiate a non-equity partner from an associate, rather than a bonus that is simply based on overall firm profitability without reflecting the contributions of the individual non-equity partner to that profitability, we recommend and have designed profit sharing arrangements that are based upon the individual’s profitability to the firm,