October 27, 2021

Equity Partners vs. Non-Equity Partners

The two main compensation and ownership systems have different benefits and drawbacks and it is important to know how each type of partnership could affect your work. Many firms offer two types of partnerships, equity partner and non-equity partner.

Equity partnership

Equity partnership is based on the principle of investment-&-returns. An equity partner is one who contributes to the capital of the firm in terms of investment. By contributing to the capital means that they are the ones who provide monetary resources to the firm and in return claim ownership of the profits. In simple terms equity partners “buy into” the company which means that their income is directly generated from the profits of the company. The profits are equally divided among all equity partners.

Benefits of Equity Partnership

The biggest benefit of equity partnership lies in the principle of “more the profit, higher the income”. Equity partners income is the profit made by the firm therefore higher the profit of the firm; the higher will be the income for the equity partners.

Another benefit equity partnership has, is the right to vote in major decisions of the firms. Some examples of the major decision could be, new product launch, expanding to new markets, or adopting a new policy, etc.

Drawbacks of Equity Partnership

The biggest benefit of equity partnership can also be translated into the biggest drawback as if the company doesn’t make profits, then the equity partner’s income shrinks. As well as equity partners must bear the debt liabilities in case the company defaults. It means that if a company/firm is unable to pay the debt then it’s the individual equity holders’ responsibility to pay off the debt from their personal belongings.

Non-equity Partnership

A non-equity partnership is not ownership, unlike the equity partnership. Non-equity partner is more of a title than a responsibility. Non-equity partners don’t have to invest in the company’s capital and therefore are not the owners. They are also called salaried or junior partners because they don’t have the right to the company’s profits and are paid in terms of salary.

Benefits of Non-equity partnership

The most important advantage of a non-equity partnership is that you are not liable for the company’s debt unlike the case of an equity partnership. Therefore, a non-equity partnership is more financially sound than an equity partnership. The most notable benefit of a non-equity partnership offers the title of “partner” without even contributing to the company’s capital. Being a partner of the firm, your horizon of getting bigger clients expands, hence you can get big clients without even pitching into the company’s capital.

Drawbacks of Non-equity partnership

Being a non-equity partner means being left out of the company’s profits. The prominent drawback of a non-equity partnership is that a non-equity partner has no claim on the profits of the company. As well as, being a non-equity partner, you don’t have the voting right in company decisions which means you won’t have any say in the company’s matters.

The decision?

If you are a risk-taker and wish to enjoy greater rewards and benefits, as well as want to enjoy the entitlement of the decision-making authority for the firm then you should go for being an equity partner. On the other hand, if you want to expand your client profile without any heavy investments and want to have the honor of being called a partner without taking on any liabilities and responsibilities then you should go for being a non-equity partner.

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