‘Partner’ isn’t the deal it used to be.
The post Nonequity Partners Are ‘Partners’ For Covering Firm Costs But Not Partners For Pay appeared first on Above the Law.
When I wrote “Repeat After Me, ‘Partnership Without Equity Is Not A Partnership’” back in 2019, my complaint with the growing and shady effort to recast what were once senior associates and counsel as non-equity “partners” was that it was a dubious title trading short-term vanity for cheap. Little did I realize there was an even cheaper way to sell out.
Worse, the nonequity partner route gets used as a dumping ground for diverse candidates that the firm can sell to clients and the public as “partners” without diluting the existing partnership’s equity.
But I never realized the absolute worst of it: some firms treat these employees as partners for all the partnership expenses without any of the corresponding revenue.
Justin Henry’s piece in Bloomberg Law News is horrifying:
The meteoric growth in law firm nonequity partners often comes with a side effect attorneys dislike: thousands of dollars in health and tax costs without the large profit payouts full partners get.
Several Big Law firms treat nonequity lawyers as full partners for tax purposes. That means they saddle them with Medicare, Social Security and health levies the lawyers didn’t face as associates.
Wait, what? That’s so, so much worse than anything I’d imagined. It was bad enough slapping a misleading title on lawyers to cover for the firm’s unwillingness to share the wealth. But then to tax them as partners to increase the pot of gold for the equity team is downright dirty.
In 2024, [Balanced Capital founder Corey] Noyes said firms could save 7.65% of Social Security and Medicare taxes for K-1 partners on their first $168,600 of salary, and 1.45% on income over that. These savings would collectively top $2 million for a firm with about 140 nonequity partners.
Aside from the increased tax burden, a greater cost for rising nonequity partners comes from having to fully subsidize their own health care. For a high-deductible family plan, this could mean an additional $14,400 a year out of pocket, Scruggs said. However, self-employment insurance deductions for a partner with a marginal tax rate of 35% could subtract about $10,000 a year, he said.
By listing income partners as partners with “0% equity,” the firm can save millions of dollars a year.
Some firms have at least figured out that they’re the baddies in this exchange. McDermott Will & Emery has transitioned nonequity partners to W-2 employees. Meanwhile, Bloomberg reports that Kirkland & Ellis offers a comp boost to offset the increased charges.
Still, this leaves a bunch of firms on the wrong side of this. The article identifies Shearman & Sterling, Duane Morris, and Thompson Hine using the K-1 angle.
There very well could be more.
Big Law Seizes on Promotions That Bring Big Tax Bill, No Profits [Bloomberg Law News]
Earlier: Repeat After Me, ‘Partnership Without Equity Is Not A Partnership’
Joe Patrice is a senior editor at Above the Law and co-host of Thinking Like A Lawyer. Feel free to email any tips, questions, or comments. Follow him on Twitter or Bluesky if you’re interested in law, politics, and a healthy dose of college sports news. Joe also serves as a Managing Director at RPN Executive Search.
