Non-Equity Partnership Agreement

A non-equity partnership agreement is a contract that sets forth the rights and obligations of a partner who has no equity in a partnership business.3 min read

Equity Partner

An equity partner is an individual who co-owns a partnership, is entitled to a proportion of the profits and losses, owns a capital account with the company, and can advance or draw from the coffers of the business.

On the other hand, a non-equity partner is only a partner in name but does not enjoy the privilege of an equity partner. A nonequity partner has no claims to ownership of the business; instead, they receive compensation in the form of salaries and performance bonus. Depending on the company, they may or may not have voting rights or serve on partner committees.

Companies use the non-equity partnership to reward individuals and enable them to progress on the corporate ladder while keeping the control and money within the hands of a few people at the top. The system is also used in other organizations such as the position of non-tenured and assistant professors in universities and vice presidents and directors at large companies.

Non-equity partner programs are most successful when the company is honest and transparent about its purpose, eligibility, and the details of how the program will be implemented.

Factors to Consider Before Entering into a Nonequity Partnership Agreement

The following are things to consider before joining a company as a nonequity partner.

Understand the Company Structure

It is vital to understand the structure of a firm before joining them as a partner or an associate. A good understanding of the company structure will help you decide whether it is the right place for you. Here are things you need to check out:

The Structure of the Partnership

Ask the following questions to understand the partnership structure of the firm.

  • What is the ratio of equity partners to nonequity partners in the firm and your division? Are there any plans to change the balance?
  • Are there permanent income partners or fixed-share partners in the company?
  • Does the company consider income partners as its employees and provide them employee benefits such as health insurance and retirement package?
  • Do income partners contribute capital? How much capital do equity partners contribute currently?
  • Is the firm favorable to women and minorities? How many of them are equity and nonequity partners? If the numbers are low, is the company doing anything to improve the situation?

Understand the Criteria for Compensation

It is essential to understand how a company determines compensation before joining it as a nonequity partner. While there are general criteria that apply to most firms, individual companies have specific standards for compensating their partners. Here are a few questions to ask:

  • What measures are used to determine the compensation of income partners and when is it reviewed? Does the firm use any specific standard?
  • Are income partners entitled to bonuses and how does the company determine the rewards?