Law Firm Partnership: What's in a Name?

I received a comment to my last post that was way off point, but which had two virtues: one, the commenter admitted it was off topic; and two, it was on an interesting subject that is important for law students to understand. So I have made this question the subject of today's post.

Here was the commenter's question:

While off topic, I heard something that is law career material--Is it true that once you make partner you have to pay your own benefits?

The short answer is "Yes." Once you are a full partner at a law firm, you pay your own benefits. But short answers are boring, and the reasons behind this answer are quite interesting. So let me explain.

When you are a law firm partner, you are a part-owner of the firm. That's true regardless of how the firm is structured--be it a regular partnership or something else (limited liability partnership, limited liability company, corporation, etc.). Law firms are structured in all different ways, and in fact calling law firms "partnerships" is increasingly inaccurate, as many (including my old firms) restructure for liability purposes. So the term "partner" is often used solely for the sake of convention. In fact, some firms even forgo the term and call their partners "shareholders."

When you work at a company, who pays your benefits? The owners, that's who. So as a law firm partner, you pay your own benefits. Bear in mind, however, that you also reap the rewards of high profits when times are good. Of course, you also share the risks/losses when times are bad--and this sharing of loss is one of the reasons that many larger firms have restructured as non-partnership entities that allow for limitation of liabilities. Remember that general partnerships are pass-through entities, so that all risks pass, jointly and severally, to the partners. That means that if a true partnership law firm goes belly up, the associates get fired--but the partners can lose everything. I know people who have experienced that.

Another very interesting thing to bear in mind about law firm partnership is that a lot of people who carry the title "partner" are not really partners or owners of the firm. This is the phenomenon of the two-tier partnership. These people are held out to the public as "partners," and they do partner-level work, but they do not (yet) own a stake in the firm. Instead, they have employment contracts with the firm (unlike associates, who are "at will" employees).

Cynical readers might think that the two-tier partnership structure is a way to lengthen the track to partnership. They might also view it as a way for a firm to get all of the benefits of calling non-equity (non-owner) attorneys "partners" so they can charge their clients more, but not have to pay those lawyers full partner rates. In my opinion, those cynics are exactly right. It is no accident or coincidence that as the practice of law became much more profitable in the 1980s and 1990s, partnership became harder to get at many firms. During my years in practice I saw things change dramatically. Partnership tracks became longer, and the requirements to make full partner became more and more onerous. So onerous, in fact, that more and more non-equity partners (read: partners who are not really partners) are opting to stay that way. They are, in other words, lawyers with long-term contracts with their firms, and they do excellent work and get paid very well. But they are not partners. (Which means, of course, that they do not have to pay their own benefits.) Personally, I think that if law firms could do it, we'd be seeing "three-tier" partnership tracks.

So my advice to any law student on the job market--in any job market, big or small--is to ask, during interviews, about the firm's partnership structure. Pick your moment carefully. Perhaps you shouldn't ask during a screening interview, when you are gunning for the call-back interview at the firm's office. But if the moment seems right during the call-back, ask. Be polite and genuinely curious--after all, you want to work there, so you want to know how the place works, right? And if the answer contains descriptions like "two-tier partnership" or "non-equity partners" or the like, you'll know you are dealing with a firm with a protracted partnership track that has two steps. In many markets, that is the industry standard. Whether that is a good thing or a bad thing, however, is probably the subject of a separate post.