Best Practice: Law firm non-equity partnership tiers

Asked and Answered

By John W. Olmstead, MBA, Ph.D, CMC

Q. We are a 12-attorney firm in Houston with three equity partners and nine associates. Several of our associates have been with the firm for over 10 years. My partners and I are all in our early 60s and are beginning to think about succession and retirement. If possible, we would like to keep the firm within the family and not go the merger route. What are your thoughts concerning two-tier partnership structures (equity and non-equity partnership)? Should we consider bringing associates in first into a non-equity tier?

A. I believe that a non-equity tier gives a firm a way to give associates the professional recognition and status of being a partner without conveying actual ownership and diluting ownership and control. Often a key differentiating factor between equity and non-equity partnership is client origination. Partners that don't originate a sizeable book of business often don't make it to the equity tier. For very small firms a non-equity often does not make sense - for others it often does. If you believe, as I do, that equity partners should be client originators and if you currently have a mix of client originator and non-client originator associates with 10 years or more time with the firm you may want to consider a two-tier structure. You should carefully define, and put in writing, admission criteria for each tier.

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John W. Olmstead, MBA, Ph.D, CMC,(www.olmsteadassoc.com) is a past chair and member of the ISBA Standing Committee on Law Office Management and Economics. For more information on law office management please direct questions to the ISBA listserver, which John and other committee members review, or view archived copies of The Bottom Line Newsletters. Contact John at jolmstead@olmsteadassoc.com.