Written by
Ilyas Omari
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When it comes to running a business with someone, a partnership business structure can be very helpful. One can enter into various partnerships, and one such partnership is an equity partnership.
Partnership structures are very common in professional services, such as law and consulting. Partnerships consist of partners who have made investments in the business and are parties to the partnership agreement. In some instances, particularly in law firms, a distinction is made between “equity partners” who have made an investment in the business and are entitled to a direct share of its profits, and “salary partners”, who get paid an annual salary and are not otherwise entitled to the profits of the company.
In this article, we’ll take you through the difference in practice between these two types of partners.
Read along!
Table of Contents
What is an Equity Partner?
An equity partner is a business partner who owns a share of a company’s equity and participates in its profits and losses. In law or professional firms, equity partners invest capital into the firm and earn a share of its income, unlike salaried partners who receive fixed compensation.
Equity partners don’t hold “equity” insofar as equity generally refers to a holding of shares or options. The term is an analogy; rather, they are part-owners of the partnership.
A salary partner may not necessarily be a partner, in that they are not part-owners of the partnership. Often this title is given to signify a certain status within a company, or as a precursor to becoming an equity partner.
7 things you need to know about being an equity partner
1. An equity partner buys into the company
An equity partner buys into the company. This means that the partner’s income will come directly from the company’s profit. They are also generally entitled to a salary and bonuses.
2. The ‘buy-in’ amount injects capital into the business
Partnerships are based on the premise of investment and return. If you are invited or intend to become an equity partner, the capital you invest to ‘buy in’ is beneficial to the company.
This ‘buy-in’ is based on predictions that profits will continue to grow for the company. If this is the case, you will see a good return on your investment. Before you buy in, you must get some advice from an investment lawyer. This will allow you to weigh up the risks and benefits of buying into the business. It is accurate to say that the buy-in benefits the company immediately. By contrast, a newly minted partner will have to wait to receive monetary benefits.
3. The equity partner has a vested interest in the success of the business
Because an equity partner buys into the business, they not only have a financial stake in the business but a personal interest in driving the business forward.
This system generally motivates partners to work harder for the success of the business; likewise, if the company stagnates or starts to decline, this can put significant pressure on the partners to return the business to surplus for their own financial security.
4. …but you’ll also be responsible for debts
Equity partners do not have the same legal protections as company directors. One key feature of a partnership structure is that partners are responsible for any debts incurred. This can be risky if the partnership you’re buying into isn’t in a good financial position.
Conclusion
In summation, being an equity partner means high upfront capital is expected to be used to purchase an ownership stake in a company. Moreover, your income is less derived from a salary but more heavily linked to the performance of the company you have purchased ownership in.
If you’re considering structuring your business this way or entering into a partnership, it is wise to first ensure that your business’s growth projections will reflect the capital injected by the equity partners. If you’re considering buying into a partnership, make sure that you’re in a financial position where you can afford the buy-in amount – and that you’re both financially and mentally prepared to wait to see the benefits.
And if you need an experienced lawyer to help you, look no further than Lawpath. Our experienced lawyers can help you with everything that’s needed for your business.
