[fatjokes]

Can you elaborate on the "new partners must invest capital" part? I've heard of this, notably in the TV show Suits where when the lead character got promoted to partner, he was asked to contribute a lump sum of cash. Sounded nuts to me that a promotion meant you basically got a chance to pay (I know it's actually invest) money.

[tidepod12]

Every firm has its own specific way of doing it, but the short version is that non-partner workers at a firm are normal employees with a normal salary, benefits, etc. But they do not own any equity/stake/shares in the firm.

Once you are promoted to partner, you are no longer an employee of the firm and in some cases you no longer earn a salary. Instead when you are promoted to partner, you are allowed to "buy in" by purchasing a certain number of shares of the company. Once you own those shares you are then part-owner of the firm (rather than an employee) and enjoy profit-sharing.

[mox1]

Relative is in HR at a big4, this is basically correct. Some ballpark numbers.

A "first year" partner may have to pay ~$150,000 into the partnership, on perhaps a $300,000ish a year in profit sharing. Usually this is just a reduction in the profit sharing (or perhaps a multi year loan, i forget). Its not uncommon to earn less as a first year partner than your last year as Managing Director. You are not longer an employee, but part owner. You move onto a totally separate HR system (Benefits, etc.).

Relative works with mostly senior partners, multiple of them are making $1 million+ a year. That's not common, but as you move up the ranks of partnership, that's not a crazy salary. They work a lot, are all divorced, don't seem to even have time to enjoy the $$ etc. Listening to the details, I'm not super jealous.

[FuckButtons]

It may be different in other firms but at least for the big 4 firm in familiar with sr managers can be promoted to either partner or managing director, and mds usually take home more that first year because of the buy in, usually in the form of an interest free loan.

[mox1]

That sounds correct from what I have heard as well.

[johnrgrace]

you have to buy a partnership. The firm usually makes you an interest free loan to buy the partnership. Some people bought into arther anderson right before enron blew them up.

The partnership is often the most valuable single asset a partner owns. It prevents them from jumping ship and taking clients. And it acts to hopefully prevent a partner from taking risks that could destroy the firm. Even senior people who might become partners in the near future will not want to put that partnership at risk.

When you retire, they'll buy your partnership out - often paid out over a few years.

[SilasX]

That doesn't feel much different from the (common, highly tax-favored) early exercise of stock options in a startup.

If you're becoming a part-owner, of course it makes sense you have to buy shares, my only confusion is how they determine the relationship between the value of those shares and what you have to pay for them.

[FuckButtons]

They know how many shares in the partnership they have, and the profits they earned and have no other shareholders, the remaining profit gets divided up among the partners.

[SilasX]

What is that replying to?

[matthewmcg]

A partnership interest is an ownership stake in the firm which has significant value. Typically you buy in by paying this value.

The firm could just give it to you, but the value of the interest would then be taxable income to you that you would need to pay taxes on in cash.

As others note, buying in also makes you literally and figuratively “invested” in a way that is thought to promote better behavior.

[patmorgan23]

Partners must buy equity (stock) in the partnership.