“Kings and queens and guillotines…”

For BigLaw attorneys, the leap from associate to equity partner is a major milestone—and often, a major financial curveball. Many new partners are surprised to find that their benefits, retirement savings options, and cash flows change dramatically—and all at once. This case study highlights the experience of one attorney in her first year of equity partnership, and how we helped her transition successfully.

Background

As an associate, this attorney had access to subsidized employee benefits such as health insurance, life insurance, and disability insurance (among others). When it came to retirement savings, she had a 401k plan in which she could decide how much she wanted to contribute, and she could adjust those contributions as she saw fit. Finally, when it came to her income, she received a consistent salary and a potential bonus based on her hours. She had a solid sense of what to expect each pay period.

That predictability ended the day she was elected to equity partner.

The changes

Upon her election to equity Partner, she was invited to a meeting to learn how her firm’s partnership structure worked. This was the “lifting of the veil”, so-to-speak, as prior to this meeting the terms of equity partnership were opaque and only discussed in hushed rumors among the Associates. Once in the meeting, the information was copious and unintuitive; it was unlike her prior experience as an Associate in so many ways.

Here’s what she faced:

Capital Contributions:

Each Partner generally has a Capital Account from which to draw funds, pay for benefits, and establish equity ownership of the firm. Although each firm’s calculation is different for how much capital a new Partner must contribute, a good rule of thumb is 35% of target comp. For this equity Partner, the number was closer to 30%. With a target compensation of $550,000, she was on the hook to deposit $165,000 into her capital account.

In this case, we started working with this client not long before her elevation to Partnership. Although she had saved a respectable emergency fund, she could not cover the $165,000 capital contribution that she owed. This is a very common phenomenon.

Retirement Plans:

She now had mandatory 401(k) contributions layered on top of her voluntary ones. She also had a one-time option to enroll in the firm’s pension plan—an election that was irrevocable in both participation and dollar amount. The decision carried long-term implications for her wealth strategy.

Benefits:

No more subsidies. As an owner of the firm, she was now responsible for the full cost of benefits like health insurance, life, and disability coverage. She had no idea how expensive this stuff really was!

Compensation Structure:

Her predictable paycheck was replaced by a “draw” and “distribution” model. She received about 40% of her expected income through regular monthly draws, and the remaining 60% was paid in variable distributions, contingent on the firm’s performance.

These distributions were often aligned with quarterly tax payment deadlines and those estimated tax payments (see the next section) usually ate up most of those distributions. She did receive a separate, smaller, more predictable distribution each month that was based on the number of shares she owned as a new Partner, essentially to help her cash flows given the relatively small size of the monthly draw compared to her prior income as a Senior Associate.

In the end, her “sticker price” income target didn’t fully materialize until the firm closed its books the following year and was able to pay out the Partners based on actual earnings — just in time for April’s tax season and additional capital contributions.

Because of the above-mentioned compensation structure, the first 12 - 18 months of equity Partnership can be tight for cashflow purposes.

Taxes

As an Equity Partner receiving ownership distributions, there is no longer a paycheck to collect and from which federal income and other taxes are withheld. As a business owner, Equity Partners must make estimated tax payments each quarter, in line with their earnings over that time period.

In addition, given the firm’s business dealings in multiple states, her income was now subject to taxation in those states, all with their own tax structures, laws, procedures, etc. One of the first things her firm asked her to decide was how to file taxes in each individual state - Would she do so herself? Would she elect PTE status in states where eligible? Would she elect composite filing with the firm? Would she form a PC? Like any reasonable human being, she had no idea what most of that meant!

Working with a qualified tax advisor is an absolute must for Equity Partners, in our opinion and experience.

The Challenge, to say the least

Her expenses were increasing. Her income was becoming less predictable. And she had to make permanent decisions with long-term consequences.

Without a clear financial strategy, this period could easily lead to anxiety or even financial missteps.

How We Helped

We began by reviewing all the documentation provided by her firm. Every partnership model is different, so understanding the fine print was essential. From there, we mapped out a plan tailored to her new reality:

Increased her liquidity fund to buffer against unpredictable distributions.
Walked through financing options vs. cash payments for her initial capital contribution.
Built a detailed monthly cash flow plan that accounted for variable income, retirement contributions, and benefits costs.
Advised her on pension participation based on long-term goals and current liquidity restraints.
Coordinated with her spouse to leverage subsidized benefits through his employer, where available.
Introduced her to a tax professional that is well-versed in the complexities of Equity Partnership for a BigLaw firm doing business across the United States.

The Result

With a clearer picture of her partnership’s financial structure and a proactive plan in place, she felt confident navigating her new responsibilities. She was no longer reacting to surprises—she was anticipating them. She would no longer feel like she was just “scraping by” during the leaner cashflow months because she knew what to expect and why it was happening. She was now able to enjoy her elevation to Equity Partner and focus on growing her business prospects!

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