Equity partner
Encyclopedia
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
. 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 firm
s and accountancy
firms.
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.
Partnership
A partnership is an arrangement where parties agree to cooperate to advance their mutual interests.Since humans are social beings, partnerships between individuals, businesses, interest-based organizations, schools, governments, and varied combinations thereof, have always been and remain commonplace...
who is a part owner of the business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
, and is entitled to a proportion of the distributable profits
Profit (accounting)
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise in terms of the component costs of delivered goods and/or services and any operating or other expenses.-Definition:There are...
of the partnership. The term is used in contra-distinction to a salaried partner (or contract partner) who is paid a salary
Salary
A salary is a form of periodic payment from an employer to an employee, which may be specified in an employment contract. It is contrasted with piece wages, where each job, hour or other unit is paid separately, rather than on a periodic basis....
but does not have any underlying ownership interest in the business and will not share in the distributions
Dividend
Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
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
Joint and several liability
Where two or more persons are liable in respect of the same liability, in most common law legal systems they may either be:* jointly liable, or* severally liable, or* jointly and severally liable.-Joint liability:...
. 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 firm
Law firm
A law firm is a business entity formed by one or more lawyers to engage in the practice of law. The primary service rendered by a law firm is to advise clients about their legal rights and responsibilities, and to represent clients in civil or criminal cases, business transactions, and other...
s and accountancy
Accountancy
Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...
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
Lockstep compensation
Lockstep compensation is a system of remuneration in which the employees' salaries are based purely on their seniority within the organization. For example, in the legal profession, where this system is most commonly found, all law school graduates hired by a law firm who graduated in the same...
" 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
Clifford Chance
Clifford Chance LLP is a global law firm headquartered in London, United Kingdom and a member of the 'Magic Circle' of leading UK law firms. It is one of the ten largest law firms in the world measured by both number of lawyers and revenue...
merged with American firm Rogers & Wells
Rogers & Wells
Rogers & Wells was a New-York based international law firm founded in 1873. After several name changes, it was renamed for William P. Rogers and John A. Wells. The firm was well known for its litigation arm...
, 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.