Introduction to the topic of Equity Partner
The term “Equity Partner” refers to a career level within the partnership structure of law firms focused on business law. Equity Partners are attorney members who participate in the economic success of a law firm and exercise voting rights in key business decisions. This position differs fundamentally from that of a so-called Salary Partner, who usually holds an employed position with a fixed salary and no share in profits. The Equity Partnership model is especially common in international, mainly Anglo-American, law firms, but has also been adopted in various forms in German-speaking countries.
Fundamentals of Equity Partnership
The status of an Equity Partner is associated with extensive rights and obligations. Equity Partners typically hold a certain legal share (equity) in the partnership. Their income consists of a distribution based on the firm’s profit, the amount of which depends on the firm’s economic success, their own contribution, and the respective participation model of the law firm.
Legal Corporate Structure
In many law firms, participation as an Equity Partner takes place on the basis of a partnership company, a civil law partnership (GbR), a partnership with limited professional liability (PartG mbB), or a comparable legal form. Equity Partners are considered co-entrepreneurs. This brings additional responsibilities, such as liability risks (depending on the structure of the firm and any possible insurance solutions) as well as rights to co-determination regarding the strategic direction of the law firm.
Difference from Salary Partner
Salary Partners are usually not involved in the firm’s capital and receive a fixed salary or bonus arrangement, whereas Equity Partners are directly affected by both the entrepreneurial risks and the economic potential of their law firm. The Salary Partner position is often used as an intermediate step on the way to full partnership.
Historical Development
The distinction between Equity and Non-Equity partnership originated in the Anglo-American world and became widespread, particularly since the 1990s, with the internationalization of legal advisory services. While in small and medium-sized law firms all partners were often equally involved, international law firms today routinely differentiate between Equity and Non-Equity Partners to ensure flexibility in compensation and management.
Requirements and Prerequisites
The path to Equity Partnership typically requires several years of professional experience, outstanding performance as an Associate, and usually also as a Salary Partner.
Typical Requirements
- Proven contribution to client acquisition: Independent acquisition and management of clients is considered a central criterion.
- Professional excellence and market reputation: Successful and independent acquisition and handling of complex mandates.
- Social skills and leadership experience: Ability to train, lead, and motivate team members.
- Entrepreneurial mindset: Understanding of business management contexts, contribution to the strategic growth and profitability of the firm.
- Cultural fit: Identification with the law firm’s philosophy and values, willingness to actively participate in shaping the firm.
Selection Process
The admission process usually follows a multi-stage selection procedure, often comprising performance analyses, proof of mandate success, “business cases”, internal recommendation letters as well as votes by the other Equity Partners.
Rights and Obligations of Equity Partners
Rights
- Profit participation: Share of the generated profits depending on the participation formula.
- Co-determination: Voting rights in firm decisions, including strategic directions, admission of new partners, selection of key mandates or alteration of organizational processes.
- Access to internal resources: Use of partner-level infrastructure, participation in exclusive partner meetings, and access to strategic information.
Obligations
- Liability: Depending on the legal form of the law firm, there is also co-responsibility for the firm’s liabilities up to personal liability; in the case of PartG mbB, this is usually limited due to the profession.
- Client acquisition and mandate development: Continuous maintenance and development of an independent client portfolio.
- Personnel management: Responsibility for training, development, and promotion of future generations.
- Contribution to firm management: Participation in internal committees, management duties, or assumption of specific organizational functions.
Compensation Models
Compensation structures for Equity Partners vary greatly between law firms and regions. Profit distribution may be based on “lockstep models,” performance-based models (“eat-what-you-kill”), or hybrid variants.
Lockstep Model
Allocation of participation rights occurs by length of service or stage, and is adjusted regularly.
Performance-based models
The participation rate depends on an individual’s contribution to turnover and profitability, e.g., through independently acquired mandates.
Hybrid models
Different models are combined to appropriately recognize both individual and collective contributions.
Perspectives and Further Development
The position of Equity Partner marks a turning point in one’s career. Within the partnership, further leadership roles—such as Managing Partner, firm management, or in international committees—may be assumed.
Transition to Leadership Positions
Many Equity Partners, after several years, take on even greater organizational or strategic responsibilities. These may include moving up to management (“Managing Partner”) or executive board positions in international partnerships. Alternatively, a withdrawal from active client work into a position such as Of Counsel is possible.
Leaving the Partnership
Exiting the Equity Partnership can occur by reaching retirement age, switching to other legal forms, or selling the stake to the law firm or other partners.
Legal Framework
The legal foundation arises mainly from company law and professional regulations. In Germany, Austria, and Switzerland, the respective laws governing partnerships, civil law, and liability influence the structure and rights of Equity Partners. Insurance obligations, confidentiality, and conflicts of interest are other key regulatory points. Professional practice remains bound by certain admission requirements, continuing education obligations, and professional rules.
Frequently Asked Questions (FAQ) about Equity Partnership
How does one become an Equity Partner?
Admission usually takes place after several years of working at the firm, often initially as an Associate or Salary Partner. After successfully demonstrating client acquisition, team leadership, and economic contribution, admission is decided through a structured process.
What are the differences between Equity and Non-Equity Partners?
Equity Partners have an economic interest in the firm and hold full voting rights. Non-Equity Partners (e.g., Salary Partners) generally have no legal share in the firm and receive a fixed salary.
How much does an Equity Partner earn?
Earnings vary greatly and depend on the size of the firm, business model, profits, and individual participation. There is no standardized reference value.
What risks do Equity Partners face?
The primary risks are entrepreneurial and, if applicable, personal liability, depending on the type of company and the firm’s insurance arrangements.
What are the career development opportunities after being an Equity Partner?
Further career steps often lead to management positions within the firm or committee activities. Alternatively, a return to client work or an advisory role may be pursued.
This article provides a comprehensive overview of the career model of the Equity Partner, illuminates the fundamental structures, requirements, and perspectives, and thus serves as orientation for all those interested in this career step at a law firm.
Frequently Asked Questions
How is admission as an Equity Partner legally regulated in a partnership company?
Admission as an Equity Partner into a partnership (for example, a partnership under the German Partnership Act – PartGG, or as a partner in a law firm GbR/PartG mbB) legally requires that an appropriate admission agreement is concluded between the partnership and the incoming partner. As a rule, an amendment to the partnership agreement, usually in the form of a shareholder resolution, is also required, since the existing partners must explicitly consent to the admission and the associated changes in capital and voting rights. Admission as an Equity Partner is often also associated with an obligation to make a capital contribution, the amount and terms of which can be regulated in the partnership agreement or a separate participation agreement. In certain cases, notarized certification of admission and a registration in the partnership register are also legally required. Legally, appointment as an Equity Partner also entails that the partner henceforth acquires the co-entrepreneurial rights and obligations as well as a share in the company’s assets and its risks.
What legal duties do Equity Partners owe to the company and the other partners?
Equity Partners are subject to extensive legal duties toward the partnership and their co-partners pursuant to the provisions of the German Civil Code (BGB) concerning partnership law and, where applicable, special statutes (e.g., PartGG for legal partnerships or the German Commercial Code – HGB for partnerships engaged in commercial business). Core duties include the duty of loyalty to the partnership, which encompasses protecting its interests, a prohibition on competitive activities, and a duty of confidentiality. Equity Partners are also obliged to contribute their share of capital and to actively participate in the business operations; furthermore, there is a duty to cooperate in shareholder resolutions and to remain loyal to decisions taken. They are also legally required to contribute to joint obligations and to bear the risks of losses and liabilities of the partnership, the precise extent of which can be contractually specified in the partnership agreement.
What are the legal consequences of termination or withdrawal of an Equity Partner?
Withdrawal of an Equity Partner—whether by resignation, death, exclusion, or through mutual settlement—has various legal consequences. Their membership in the partnership and the associated voting and management rights expire as of the withdrawal’s effective date. Legal consequences arise regarding compensation: Generally, Equity Partners are entitled to payment of their capital share and, where agreed in the partnership contract, a share of the company’s value. Withdrawal can also result in liability consequences: According to §§ 160, 736 II BGB and—in the case of legal partnerships—§§ 128 et seq. HGB, retired partners may still be liable for obligations existing at the time of their departure. Further legal steps such as removal from the partnership register and possibly adjustment of the partnership agreement must also be taken.
To what extent are Equity Partners liable for partnership obligations from a legal perspective?
The liability of Equity Partners largely depends on the legal form of the partnership. In a traditional partnership or civil law partnership (GbR), Equity Partners are generally liable without limitation, personally and jointly and severally for all of the company’s obligations, unless a limitation or separate agreement has been made effective in the partnership agreement. In partnerships with limited professional liability (PartG mbB), liability for certain professional risks can be limited to the company’s assets. Legal provisions, especially §§ 128 et seq. HGB as well as the PartGG, govern the scope and enforceability of such claims against individual partners. Internally, indemnification duties may be agreed upon in the partnership agreement, but these do not alter the statutory allocation of liability vis-à-vis creditors.
Who makes the legal decision regarding admission and exclusion of an Equity Partner?
The decision on the admission and exclusion of an Equity Partner is usually made by the shareholders’ meeting or by a body specified in the partnership agreement. The legal basis for this lies in the relevant partnership law provisions and the rules of the partnership agreement, which generally require qualified majorities for such fundamental matters. Admission generally requires a resolution of consent by the existing partners. Exclusion of a partner may be decided for important reasons (e.g., serious breach of duty, unacceptability of continued collaboration) based on an appropriate shareholder decision, often after a prior warning and/or conciliation procedure. The validity of the exclusion can often be reviewed by the courts if the excluded partner challenges the decision. The relevant statutory basis is particularly § 737 BGB, § 140 HGB, and, if applicable, the provisions of the PartGG.
What co-determination rights do Equity Partners have by law?
Equity Partners generally have comprehensive codetermined rights within the company, as stipulated by law and the partnership agreement. These include voting rights in shareholder meetings, participation rights in key decisions (e.g., admission of new partners, amendment of the partnership agreement, management measures of particular importance, appropriation of profits), the right to inspect the books and records, and general rights to information regarding partnership operations. By statute, these rights are primarily set out in §§ 709-716 BGB or in the relevant specific laws for each type of company. The scope of codetermination rights may be contractually adjusted but cannot be restricted so as to override mandatory legal rights.
How are profit and loss participation regulated by law?
The legal regulation of profit and loss participation for Equity Partners is primarily governed by the partnership agreement. In the absence of specific provisions, the statutory principles of § 722 BGB or, for certain partnership types, the special rules in the HGB or PartGG apply, which generally provide for profit and loss sharing on a per capita basis. The partnership agreement may, however, specify a proportional distribution, for example, based on capital contributions or individual agreements (e.g., performance evaluations). It is mandatory, from a legal perspective, that loss participation cannot be entirely excluded in order to maintain the legal form of partnership; thus, Equity Partners must participate in both profit and loss. A unilateral change in participation quotas generally requires a shareholder resolution and the approval of all affected partners.