Becoming a partner in a law firm, accounting firm or other type of business requires a commitment to work that some people are either unable or unwilling to make. Partners might work long hours, travel frequently and have other work-related commitments that can monopolize their personal time. However, the financial rewards are often great. For companies that don't want to lose valuable employees who can't or don't want to become full partners, the nonequity partner position carries the title of partner, but doesn't require as much commitment -- or deliver as much reward -- as a full partner.
Partners in a professional services firm, such as a law or accounting firm, own the business, vote on management issues, share in the profits and are responsible for the firm's debts in proportion to their ownership percentages. When someone is invited to become a partner, he is required to invest in the partnership by purchasing a percentage interest. Many firms have historically used an "up-or-out" staffing model. After a certain number of years, if an employee is not a partner, he probably won't ever become a partner. The firm might encourage him to seek employment elsewhere or help him find a role at a client.
A nonequity partner is someone who has been given the title of partner, but who has no financial interest in the firm. Nonequity partners typically vote on management issues except for those that pertain to the partnership's finances. Many firms compensate nonequity partners by designating a percentage of profits to be divided among all nonequity partners based on an individual assessment of each nonequity partner's performance and contribution to the firm. According to the CPA Leadership Institute, nonequity partner compensation is about 40 percent to 50 percent of equity partner compensation.
Retaining Valuable Employees
There are some cases where the "up-or-out" model doesn't work. For example, a firm might have an employee it wants to keep, but either the employee isn't ready to become an equity partner or won't ever become an equity partner. In some cases, an employee might not want to become an equity partner either because of the financial investment or because of the number of hours he'll be expected to work. In all of these cases, a nonequity partner is a good solution to retain talented employees without making them full partners in the firm.
Some accounting firms have a rule that only CPAs can become equity partners. However, if these firms branch out into other businesses, such as consulting, they might need to hire partner-level consultants who aren't CPAs. In these cases it is important to call a senior-level consultant a partner even though she might not be able to become an equity partner because many clients prefer to do business with partners rather than lower-level employees. It is also important to reward her at a level that's competitive with other consulting firms.
- Internal Revenue Service: Publication 541 - Partnerships
- American Bar Association: What Being a Nonequity Partner Means - From Lifestyle to Leadership Choices
- Feeley & Driscoll: The Pros and Cons of Having Nonequity Partners
- American Institute of Certified Public Accountants: The Pros and Cons of Nonequity Parnterships
- CPA Leadership Institute: Nonequity Partners - A Method for Retention
- Major, Lindsey & Africa: 2010 Partner Compensation Survey
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