Equity vs. Non-Equity Partnerships

         

           In two recent posts by members of Building a Better Legal Profession, we have explained non-equity current events, but it occurred to us that one key element that is often left out of writing on the topic is a simple explanation of what the equity/non-equity distinction even means. (You can read our posts about NALP's decision not to ask about equity/non-equity by clicking this post and reading this article..)

            As it turns out, there's not really a simple answer, at least when it comes to formal definitions used by the publications that ask about equity and non-equity in their firm surveys. American Lawyer's AmLaw 100 and 200 and the National Law Journal's NLJ 250 surveys use the same clear, objective definition. Vault's Diversity Database (done in conjunction with the Minority Corporate Counsel Association) and Working Mother magazine's Best Law Firms both use vague and open-ended definitions.

In Their Own Words

            Here's how each publication describes the distinction:

  •  American Lawyer, "Our Methodology," April 29, 2009, available at by clicking here. "Equity partners are those who file a Schedule K-1 tax form and receive no more than half their compensation on a fixed-income basis. Nonequity partners are those who receive more than half their compensation on a fixed basis."
  • National Law Journal, in an e-mail from Associate Editor Leigh Jones to Stanford Law Professor Michele Dauber, October 8, 2008: "We count equity partners as those partners who receive a Schedule K-1 and receive no more than half their compensation on a fixed-income basis. Non-equity partners are not full participants in the firm's profits, though they may have voting rights in firm matters."
  • Vault/Minority Corporate Counsel Association Diversity Database, in "How to Use the Law Firm Diversity Database," available by clicking here.: "Equity partner: An attorney, generally referred to as a partner, member or shareholder, who has the right to share in the profits of the firm. Non-equity partner: A law firm employee who has been promoted from associate to a tier of partnership in which the lawyer does not share in the profits or capital of the firm; this position is often an intermediate step toward full equity partner."
  • Working Mother, "Best Law Firms Methodology," available here.: "Nonequity partners[:] Salaried partners who do not have an ownership stake in the firm and do not share profits. Equity partners[:] Lawyers who are part owners of their firm and share in its profits."

What It Means

  •  AmLaw and NLJ define equity partners as lawyers who get 50%+ of their compensation as equity, i.e., a share in firm profits. Anything less, and the partner is non-equity; that basically means that she is primarily a salaried employee of the firm. 
  • The Schedule K-1 (available for download from the IRS at available from the IRS.) requirement is also telling: it's the IRS's form for the reporting of a "Partner's Share of Income, Deductions, Credits, etc." A firm has to file a K-1 for each person who meets the IRS's definition of general partner or limited partner (available in the Schedule K-1 instructions, downloadable from the IRS at from the IRS. ). In other words, the firm files K-1s for the people who are actually, legally partners. Employees without K-1s are just that-employees, not partners, even if their firm directory page (and their client billing statement) says "Partner."

Vault and Working Mother basically allow firms to define equity as they choose. The "partner's" "share of profits in the firm" or "ownership stake" could be 1% of the lawyer's annual take-home pay, and the lawyer could still be counted as an "equity partner" because she has some ownership stake in the firm (even if it's approximately equal to my "ownership stake" in Apple thanks to the couple of shares of common stock I own).

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