What are the benefits and drawbacks of two tier partnerships in law firms?

A large number of other firms have moved to a two-tier structure but continue to apply an "up or out" policy, forcing all non-equity partners to ultimately meet the criteria required of equity partnership or to find a new law firm. Like single-tier firms, these firms limit long-term opportunities for strong lawyers who lack business development skills or equity partnership interests.

In light of today's heavy competition for talent and sky-high profit expectations, a growing number of our clients are asking: How and why should we deal with lawyers who do not have the ability or desire to become owners of the firm? What are the benefits and drawbacks of creating a non-equity career path? What are successful firms doing to effectively manage non-equity partnership opportunities?

Defining Two-Tier Partnership Structures

A two-tier structure consists of two differing types of partner positions and related roles and responsibilities: equity partners and income partners. The primary difference between the positions is that equity partners:
  • Make a capital contribution;
  • Participate directly in the profits of the firm;
  • Are liable for the debts of the firm; and
  • Exercise ultimate control over the policies and direction of the firm.