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In no particular order:
1. Capital contributions. Most firms require partners to contribute capital (cash) to capitalize the firm. In many biglaw firms partner capital correlates to the partner’s earnings. A decent target is a funded capital account equal to 20-30% of annual comp. how that gets funded depends on the firm. Some let new partners pay over time via deductions from distributions. Others arrange low interest loans. Some let you find it yourself from cash or a HELOC. Knowing your firm’s approach helps your planning. And in my view of your firm isn’t capitalized by partners that would be a red flag for me.
2. Quarterly taxes. Partners don’t have taxes withheld like employees. Instead they make quarterly tax payments to the government based on their estimated income, and a true up payment (or refund) in the spring. This is sort of like filing four tax returns a year and requires careful planning so you have enough cash available to pay your sometimes substantial quarterly tax payments.
3. Cash flow. Firms do this many ways but a typical approach is to provide partners a modest monthly draw, quarterly distributions based on the firm’s profit during the quarter, and a year end true up payment plus a possible bonus if you outperform your shares. In such firms partner might make as much as 80% of their income at the end of the year. Dealing with that requires careful planning. Many partners open a revolving line of credit, draw on it early in the year to meet expenses, and pay it off at the end of the year. Also, partners get money only after all liabilities are paid off. That means if the firm doesn’t make money, you get nothing.
4. Personal liability. Partners generally are personally liable for firm liabilities. Firms absolutely have to have malpractice insurance and should have general liability insurance. Employment practices insurance is also a good idea. Assuming strong policy structure and coverage limits, those policies together should cover most foreseeable liabilities. But one thing to look out for is leases. I represented former partners in the Brobeck firm against millions of dollars in lease claims asserted against them when that firm failed in the early 2000s. Very bad situation, because law firm leases are often long term and pricey. You can’t insure against that problem. That means your only protection is conservative financial management to prevent failure or at least leave sufficient resources to pay off liabilities without contributions from partners. If you don’t implicitly trust the people who run things, stay far, far away.
5. Personal responsibility for expenses. Again this varies from firm to firm but at many firms equity partners pay for their own health, life, and disability insurance without any firm subsidy. Sometimes partners also have to pay their own bar dues and some other expenses. This is what it is but when the time comes you need to understand what this involves. Health insurance, in particular, is very expensive. For very good family coverage (albeit with a $5,000 annual deductible) I pay $2,100 per month and also make a $600 per month HSA contribution. That’s a lot of coin and usually dramatically more than associates pay.
6. Responsibilities. At most firms the responsibilities of an equity partner are geometrically more demanding than those of a senior associate - more nonbill time, more cases, more management demands, more more more.
I know that’s a lot but don’t let it deter you. I’ve been an EP in three firms, including two V25s. I’m also married to the same person I started dating 30 years ago as a first year, and have a great relationship with my young adult children. With discipline and planning being an EP is amazing - freeing, independent, and powerful. Good for you for asking the question and best of luck getting there. Happy to answer other questions if you’re curious about something I didn’t cover.
Not if you do it right.
OP, what kind and size of firm do you work for and do you have non equity partners and/or counsel?
I work for a medium sized firm. There is one non equity partner (used to be equity partner) and two equity partners. I am on partner track and would like to become an equity partner.
Ask yourself how equity draws are determined (equal shares or eat what you catch); then ask yourself how the company is organized so you can determine your potential liability to the firm (general partner, shareholder).
In a partnership, general partners are typically liable for all losses beyond what their investment in the firm is. Shareholders of a corporation, members of an LLC, and limited liability partners typically are only liable for the firm’s losses up to the amount that they have invested in the firm.
Trial lawyer 1. Excellent advice and one of the most useful post I have seen in Fishbowl.