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Non-Equity Partners Are ‘Partners’ For Covering Firm Costs But Not Partners For Pay – 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’




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