Yuliya_LaRoe

Law Firm Partnership Models: What You Need to Know

When you’re a law firm associate, what happens at the partnership level can seem both mysterious and detached from your own reality, like black holes or the fame of the Kardashians. Focused as you are on proving yourself as an attorney, making your hours, and honing your legal skills, your firm’s partnership structure may be the last thing on your mind.

But you really should know what’s behind the partnership curtain and what to expect when you get there - if you want to get there at all.

Lawyers and law firms are unsurprisingly steeped in tradition and precedent, and the way firms have operated for the past few decades reflects that. However, changes in the economics of law and in the way firms obtain and keep legal talent have caused some disruption and rethinking of existing partnership structures.

There are two primary law firm partnership models: single-tier partnerships and two-tier partnerships.

Single-Tier Partnerships – You’re In or You’re Out

The old-school model. Up until the 1990s, almost all law firms had single-tier partnerships. Law firms would primarily hire young associates straight-out of law school. They would invest in the attorney’s professional growth with the hope that he or she would live up to the promise the firm initially saw in them. After many years of hard work and contributions to the firm’s success, the associate would be invited to join the partnership.

While associates are paid salaries and performance bonuses, partners in this model are given an equity interest in the partnership, hence the term “equity partner.” As an “owner” of the firm, a partner’s compensation would be tied to the firm’s revenues or their own contributions to that revenue.

Equity partners don’t necessarily take salaries (though they sometimes do); rather, they receive a “draw,” usually paid monthly or quarterly. Most often, the partner’s draw is a percentage of the firm’s profits for a given period of time. The amount of a given partner’s percentage, which may be determined by all of the partners (in smaller firms) or a compensation committee (in larger firms) may be based on the partner’s performance and contributions over the last year or two, including such elements as billable and non-billable time, billings, collections, accounts receivable, write-offs and write-downs of bills, and disbursements.

Draws for equity partner can be calculated in other ways as well. “Eat what you kill” is shorthand for basing compensation on the amount of the partner’s production (i.e. how much work this partner brought in to the firm). Firms may also adopt a “lockstep” compensation system in which the amount of a draw correlates with the partner’s seniority.

Of course, as with any business, law firms need capital to operate. Sometimes, that capital comes from the owners of the business. Equity partners may be called upon to make capital contributions to the firm when necessary.

Two-Tier Partnerships – Some Partners Are More Equal Than Others

Two-tier partnerships took off in the late 20th Century to become the dominant law firm partnership model. There were many reasons firms adopted this structure, but one of the primary ones was due to changes in the way firms hired attorneys. As lateral hires became more common, especially for mid-level associates or junior level partners who had a modest book of business, the equity-partner/associate dichotomy no longer made as much sense.

Thus, the two-tier partnership was born. An outstanding senior associate is elevated to partner or a lateral hire is brought on as a partner, but they are “non-equity” or “income” partners (or as some lawyers say, “glorified associates”). Non-equity partners may have some say in firm governance and administration, but they do not get an ownership interest in the firm like equity partners have. Compensation for non-equity partners usually remains a salary largely based on the same factors that determine the amount of compensation for associates.

What to Ask If Partnership May Be on The Horizon

If you’re in the “red zone” of your quest to become a partner, you’ll want to know a bit more what that means at your particular firm (beyond being able to tell your clients, friends, and Mom & Dad that you “made partner”).

Much of what defines the terms of partnership in your firm will be found in the written partnership agreement you will no doubt be asked to sign if and when you get the call. Since you may not get a look at the agreement until after an offer has been made, here are some questions you should ask to get a better picture of partnership at your firm:

  • Is the firm’s partnership structure single-tier or two-tier?
  • Will I be receiving a draw only or is there also fixed compensation?
  • How is the amount of each partner’s draw determined and how often do partners receive their draws?
  • How much in capital contributions will I be required to make and when will I be required to make them?
  • How will partnership affect my benefits and how much I pay for those benefits?
  • If the firm’s structure is a two-tiered one, what are the criteria for becoming an equity partner after I am made an income partner?

The decision to join a law firm partnership is one of the bigger ones you will make in your legal career. Just like you wouldn’t buy a house without knowing what it looks like, where it was located and how much it costs, you shouldn’t accept a partnership invitation without learning the basics about what that means for your career and your wallet.

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ABOUT THE AUTHOR:

Yuliya (pronounced “You-Lee-Yah”) LaRoe is an experienced attorney, professional speaker, and certified leadership and executive coach, who helps senior associates accelerate promotion to partnership, new or junior partners get more clients, law firm leaders become more effective, and lawyers achieve a more fulfilling synergy between their professional and personal lives. She is the co-founder of 20/20 Leadership Group, a national coaching firm focused on “seeing” lawyers, law firms and legal industry leaders to new levels of success.

Prior to helping lawyers optimize their performance, Yuliya practiced law at a major international firm for nearly 10 years as counsel for numerous Fortune 500 Companies, including Cisco Systems, Halliburton, United Health Group, Herbalife, and others. She left her corporate practice to pursue her passion of helping lawyers realize their highest leadership potential and translate it into business and career success. Her proven strategies, frameworks and coaching tools allow attorneys to successfully advance their careers and grow their legal practice, while creating the lives they want. 

A seasoned speaker, Yuliya is frequently invited to present to numerous organizations and companies, such as the Miami Dolphins, Airbus, the Florida Bar, Florida Association for Women Lawyers, and many others. Yuliya writes about business, career, leadership, and effective communication, and has been featured in publications as diverse as the Miami Herald, Work Awesome, Bloomberg Radio and numerous others.

For more information, visit www.2020lead.com or email Yuliya at ylaroe@2020lead.com.

4 Comments

sinequanon

What do you mean by ‘a modest book of business’?
“As lateral hires became more common, especially for mid-level associates or junior level partners who had a modest book of business, the equity-partner/associate dichotomy no longer made as much sense.”

sinequanon

Also what do you mean by income partner? I thought it said in the lower level of a two-tier arrangement the only thing that changed was deciding power, not financials?
“If the firm’s structure is a two-tiered one, what are the criteria for becoming an equity partner after I am made an income partner?”

sinequanon

Sorry put the wrong quote in my last comment, meant to do this one—“outstanding senior associate is elevated to partner or a lateral hire is brought on as a partner, but they are “non-equity” or “income” partners”

sinequanon

Also nevermind the first question, figured out “book of business” means “list of accounts/clients” so basically that they’re less experienced and/or connected

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