partnership – a business where two or more people jointly own and manage a company
To remember what partnership means use the following mnemonic:
My partner and I build ships (partnership). It's a business that we own and manage jointly.
Partnerships are owned and operated by a minimum of two but possibly up to hundreds of people. They are normally not limited unless they form a Limited Liability Partnership (LLP). (Note: LLP means no personal liability for a business failures).
A partnership is like a sole trader but with more than one owner. Imagine working with a partner to get a job done.
Partnerships are often formed by lawyers, doctors, accountants, dentists and vets.
Owners agree on a set of rules under a deed of partnership. This is where the partners set out how profits are allocated, and how the roles and responsibilities of each person are defined. It documents how many votes each partner has and how a partnership ends.
Why aren’t all partnerships Ltd? The main reason is that if you form a Limited Liability Partnership your financial accounts have to be submitted to companies house or the Securities and Exchange Commission (government bodies that store information on all the limited liability companies and limited liability partnerships registered in the UK and US respectively). Any member of the public can see the profits you make and many people don’t want others to know what the business makes.
Why do people choose partnerships? This can be explained with an example. When you want a vet's practice to be open 24/7 for emergencies and critical care, it is not possible to do this without partners. Forming partnerships allows you to take holidays and for others to work hours you can’t. Different people can bring different specialities, like a horse or parrot specialist. Sharing responsibilities for a practice means you can share problems and work through them together.
There are disadvantages too. Decisions will take longer to make and the practice may not go in the direction you were hoping. Disagreements between partners can be devastating to the business. You will also have to share the profits.
Lockstep model partnership
The most widely used law firm partnership in both the UK and the US is the lockstep model. In this system, a partner’s share of the profits increases in line with their seniority within the firm (i.e. how long they have worked there). This means that all equity partners in the same year are paid the same. All seventh-year partners will be paid the same.
‘Eat what you kill’ model partnerships
Another model which is the opposite of lockstep partnerships is the ‘eat what you kill’ partnership. This bases the lawyer’s wages on a proportion of the revenue that each individual earns. The partners shave off the cost of running the firm but then split the remaining profits based on performance. This does however cause problems because lawyers don’t always share referrals to increase business between partners. Senior lawyers may also be less inclined to offer mentorship to new partners in the firm so as to not dilute their earning capacity.