Professional Practices: Five things to consider when you are promoted to equity partner

Congratulations. Being promoted to equity partner is a significant career milestone.

It brings the potential for considerable reward but also financial and legal responsibilities. Unlike salaried roles, equity partnership involves becoming a part-owner of the business and with it important implications for your income, tax status and regulatory obligations.

The inbox of an equity partner will quickly fill up with, amongst other things, responsibility for winning and delivering new work, the training and development of more junior staff members and the running of the business. It is vital that new equity partners consider and prepare for that transition.

Our dedicated professional services team has worked alongside many new equity partners as they start their journeys.

Here are our top five financial and regulatory considerations to address as you make the transition.

1. Capital contribution

One of the first issues to address is your capital contribution – the amount you are expected to invest in the firm. This can be a sizeable sum and is often required upfront or made over an agreed timeframe. It can be funded through personal savings, but more commonly via bank finance where available or through a partner loan scheme offered by the firm.

The purpose of the capital contribution is to provide working capital to the business and demonstrate your financial commitment. Before committing, make sure you understand how your contribution is valued, what happens to it if you leave the partnership and whether it earns interest.

Thoroughly assess the partnership’s financial statements and the overall health of the firm to gain a clear understanding of what you’re investing in—this will help you evaluate both the potential risks and the long-term rewards.

We can offer advice on valuing those contributions, assessing the financial statements and on funding arrangements.

2. Profit-sharing arrangements

Equity partners will share in the profits of the firm rather than receiving a fixed salary. Profit-sharing arrangements can vary widely, from a lockstep where share increases with seniority to merit-based or performance-linked models. It is not uncommon for firms to use a hybrid of various arrangements.

Understanding how profits are allocated is essential. Review the partnership agreement carefully, paying attention to whether you are entitled to a fixed share or one that varies year to year.

Consider too how losses might be handled. Clarity at this stage can help avoid surprises later.

3. Drawings and distributions

As an equity partner, you will receive regular ‘drawings’ against your expected profit share, often monthly or quarterly. These are not the same as a salary, but advances on profit. If the business underperforms, equity partners may be required to repay excess draws.

Final profit distributions are typically made after year-end accounts are finalised. It’s important to manage your personal finances to account for possible delays between work performed and cash received. Partners may also be required to retain earnings in the business as part of the firm’s liquidity planning.

The partnership agreement should set this out.

4. Tax implications 

Equity partners are generally treated as self-employed for tax purposes. You will no longer have income tax deducted at source and will be responsible for calculating and paying income tax, National Insurance contributions and potentially payments on account to HMRC.

Cash flow planning becomes vital. You may need to set aside funds for tax liabilities which can be substantial. Some firms pay partners’ tax liabilities directly out of their profit shares, but this will mean reduced regular drawings.

We can support new and existing equity partners in their tax returns, tax and pension planning, and other potentially tax-efficient strategies.

5. Regulatory and compliance obligations

Finally, equity partners often take on a greater burden of regulatory responsibility. Depending on your profession, this may include obligations under Solicitors Regulation Authority (SRA) rules, Institute of Chartered Accountants in England and Wales (ICAEW) codes, Royal Institution of Chartered Surveyors (RICS) regulations or other industry-specific regulations. You may also be required to sign off on accounts, compliance returns and client care standards.

New equity partners need also to understand their duties under the partnership agreement and any liabilities that may arise, particularly in traditional partnerships where partners can be jointly and severally liable.

Take advice

Those promoted to equity partner may find that their firm provides a package of advice and support in making that transition. Where it does not, independent advice and support is highly recommended. 

We are here to support you through your whole partnership journey from start to retirement. Beyond just the tax implications of the profit-sharing arrangements, we can help you assess and understand the partnership agreement and your obligations and rewards, alongside your financial commitment. 

Please get in touch if you would like further information.