Is profits per partner the same as take home pay? Forum

[Anonymous User]

All,

Is profits per partner the same as take home pay? E.g., a Wachtell equity partner makes $7M per year, Sull Crom $5.1, etc.

I know this is only EQUITY partner, right?

And how informative is this? If it's the average, there are surely a number of large rainmakers that bring the average up, true? (excluding the lockstep firms). What would be more informative would be the MEDIAN profits per partner, right?

[Anonymous User]

PPP is informative in that equity (and income) partners tend to earn more at higher PPP firms. But it doesn't tell you what junior equity partners make and how much variation there is within the equity ranks. PPP can also be manipulated by some firms; if partners receive a mix of equity and salary, firms have some discretion over whether they're counted as equity partners, as I understand.

If you are really interested in what partners at a particular firm can make, look up financial disclosures from political appointees and judicial nominees from those firms.

[The Lsat Airbender]

What would be more informative would be the MEDIAN profits per partner, right?

Depends on your purpose. If you're trying to gauge the overall financial health of a firm (which is the main reason a prospective associate would care about PPP), mean is probably more useful than median.

[nealric]

The vast majority of partners at most firms make less than the PPP number. There can be huge differences in comp between major rainmakers and rank and file members. So at a firm with $2MM PPP, you may have 5 partners making $1MM and 1 rainmaker making $5MM.

On top of that, there are various accounting tricks that firms might use to inflate the PPP number (often with income/expense timing), as well as gaming who gets counted as an equity partner.

[Sackboy]

The vast majority of partners at most firms make less than the PPP number. There can be huge differences in comp between major rainmakers and rank and file members. So at a firm with $2MM PPP, you may have 5 partners making $1MM and 1 rainmaker making $5MM.

On top of that, there are various accounting tricks that firms might use to inflate the PPP number (often with income/expense timing), as well as gaming who gets counted as an equity partner.

I think the bolded is underappreciated. I also think it's worth noting that once you're in the partnership your comp may plateau. At most firms these days, their partnership models have very small, if any, seniority components, so if you yourself do not have a growing book or can't finesse a greater % shares of origination credit, your comp may just make minor adjustments up every year assuming your firm is growing.

[Anonymous User]

The vast majority of partners at most firms make less than the PPP number. There can be huge differences in comp between major rainmakers and rank and file members. So at a firm with $2MM PPP, you may have 5 partners making $1MM and 1 rainmaker making $5MM.

On top of that, there are various accounting tricks that firms might use to inflate the PPP number (often with income/expense timing), as well as gaming who gets counted as an equity partner.

I think the bolded is underappreciated. I also think it's worth noting that once you're in the partnership your comp may plateau. At most firms these days, their partnership models have very small, if any, seniority components, so if you yourself do not have a growing book or can't finesse a greater % shares of origination credit, your comp may just make minor adjustments up every year assuming your firm is growing.

At my firm, I think about 20-25% of partners would be above the publicly stated PPP number, and the vast majority of them are M&A or related practices. Litigators and some of the speciality/support groups are by nature lower earning practices, at least on an average individual partner basis, and thus tend to be lower earning. But I am sure most of those on the lower end of the scale are appreciative of the revenue that comes from the high earning M&A folks because it raises their own comp higher than it would be if they were at a firm solely dedicated to their practice, and thus do not begrudge the high earners' their compensation.

[Anonymous User]

The vast majority of partners at most firms make less than the PPP number. There can be huge differences in comp between major rainmakers and rank and file members. So at a firm with $2MM PPP, you may have 5 partners making $1MM and 1 rainmaker making $5MM.

On top of that, there are various accounting tricks that firms might use to inflate the PPP number (often with income/expense timing), as well as gaming who gets counted as an equity partner.

Good point but your math is off. Rainmaker is making $7mm

[nealric]

Lol, yea. Brain fart on the math.

[Lacepiece23]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

[randomthrowaway]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

Correct, they get a K-1 so they're paying self-employment tax (i.e., the employer and employee portion of FICA) on top of federal income tax, plus state income tax in the jurisdictions in which the firm operates. Also paying the full cost of employee benefits.

[Anonymous User]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

The multiple states can be good or bad or neutral depending on facts in terms of the multiple jurisdictions. Gets into very complicated issues around state apportionment and state tax credits--it's not like you pay full tax in all of the states.

In terms of federal tax in general, the amount of tax a partner owes is associated with the amount of the firm's income that is allocated to that partner--it's not necessarily 1:1, but it corresponds. They do get hit with both employer and employee sides of employment taxes and so on, but, this is seriously a rich person's problem and it's not a HUGE increase from a % basis compared to being an associate (setting aside the fact that more of a partner's income is in a higher tax bracket because they just make a lot more money). Partners can also deduct more stuff as business expenses.

Plus, while I don't know all of the details... not a tax person... all of these SALT workaround statutes that got passed in the last year or two in blue states probably are very helpful to partners and don't help associates.

At the end of the day, even ignoring the fact that more of a partner's income is in higher tax brackets, partners probably (though not definitely) pay a higher % of their overall income in taxes than associates do. But it's not enough to make partnership not worth it or anything of that nature and it's not some giganticly-larger amount.

(Non-share partners, on the other hand, can really get hosed on this.)

And yes, partners pay full freight on employee benefits etc. That's absolutely a real cost. But let's not shed tears for the poor partners. They're ok.

[Anonymous User]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

[Lacepiece23]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

I won’t pretend to know more about this than others because the last few posters really got into the weeds and seem to know tax.

All I know is that I have a good friend who is an equity partner. He told me point blank that he gets killed on taxes. And that some equity partners make less than junior partners after the tax man comes in.

I agree with everyone else that I’m not shedding any tears for them because he and all the rest of them are rich.

I’m just saying that from what I’ve been told, taxes do have a decent impact on take home in a way that doesn’t necessarily affect income partners and associates.

[Anonymous User]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

I won’t pretend to know more about this than others because the last few posters really got into the weeds and seem to know tax.

All I know is that I have a good friend who is an equity partner. He told me point blank that he gets killed on taxes. And that some equity partners make less than junior partners after the tax man comes in.

I agree with everyone else that I’m not shedding any tears for them because he and all the rest of them are rich.

I’m just saying that from what I’ve been told, taxes do have a decent impact on take home in a way that doesn’t necessarily affect income partners and associates.

As far as I know there's nothing different between an income vs. equity partner for purposes of tax treatment, assuming they're both paid on a K-1. Others w/ direct experience / tax expertise can jump in. Obviously they're both different from associates who are salaried employees of the firm.

[Lacepiece23]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

I won’t pretend to know more about this than others because the last few posters really got into the weeds and seem to know tax.

All I know is that I have a good friend who is an equity partner. He told me point blank that he gets killed on taxes. And that some equity partners make less than junior partners after the tax man comes in.

I agree with everyone else that I’m not shedding any tears for them because he and all the rest of them are rich.

I’m just saying that from what I’ve been told, taxes do have a decent impact on take home in a way that doesn’t necessarily affect income partners and associates.

As far as I know there's nothing different between an income vs. equity partner for purposes of tax treatment, assuming they're both paid on a K-1. Others w/ direct experience / tax expertise can jump in. Obviously they're both different from associates who are salaried employees of the firm.

Not sure income partners got paid as K1 at my old firm. It was my understanding that they were employees with a salary and a title.

[Anonymous User]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

I won’t pretend to know more about this than others because the last few posters really got into the weeds and seem to know tax.

All I know is that I have a good friend who is an equity partner. He told me point blank that he gets killed on taxes. And that some equity partners make less than junior partners after the tax man comes in.

I agree with everyone else that I’m not shedding any tears for them because he and all the rest of them are rich.

I’m just saying that from what I’ve been told, taxes do have a decent impact on take home in a way that doesn’t necessarily affect income partners and associates.

As far as I know there's nothing different between an income vs. equity partner for purposes of tax treatment, assuming they're both paid on a K-1. Others w/ direct experience / tax expertise can jump in. Obviously they're both different from associates who are salaried employees of the firm.

Not sure income partners got paid as K1 at my old firm. It was my understanding that they were employees with a salary and a title.

Depends on the firm. My firm definitely has income partners as K-1 “partners” for tax purposes, although I think this is a fairly conservative approach (which naturally benefits equity partners and screws income partners, particularly if income partners’ salaries are treated as guaranteed payments and thus deductible by the firm).

[Anonymous User]

Also remember that equity partners get taxed to death. They own the business. As business owners they have to pay taxes.

From my understanding, they get taxed in every jurisdiction in which they do business.

This can eat up a decent chunk of take home pay.

This is true for non-equity partners as well. Also, it isn't as bad as you're making it out to be--out-of-state taxes are typically a very small portion of the overall tax burden and only certain states tax out-of-state partners.

I won’t pretend to know more about this than others because the last few posters really got into the weeds and seem to know tax.

All I know is that I have a good friend who is an equity partner. He told me point blank that he gets killed on taxes. And that some equity partners make less than junior partners after the tax man comes in.

I agree with everyone else that I’m not shedding any tears for them because he and all the rest of them are rich.

I’m just saying that from what I’ve been told, taxes do have a decent impact on take home in a way that doesn’t necessarily affect income partners and associates.

As far as I know there's nothing different between an income vs. equity partner for purposes of tax treatment, assuming they're both paid on a K-1. Others w/ direct experience / tax expertise can jump in. Obviously they're both different from associates who are salaried employees of the firm.

Not sure income partners got paid as K1 at my old firm. It was my understanding that they were employees with a salary and a title.

Depends on the firm. My firm definitely has income partners as K-1 “partners” for tax purposes, although I think this is a fairly conservative approach (which naturally benefits equity partners and screws income partners, particularly if income partners’ salaries are treated as guaranteed payments and thus deductible by the firm).

Kirkland NSPs are on K-1s. And yes, it's another (subtle) example of how the NSP position is taken advantage of here.