Making the leap to equity partner

25th Jun 2019
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‘Making partner’ remains an illustrious goal for many accountants. Yet when the time comes to make the leap, many are caught unaware about what exactly the transition involves. How you’re taxed, your employment status and the balance of risk/reward all shift.

As the name suggests, an equity partner has a stake in the business. You share in the profits, have greater managerial influence and enjoy better employee benefits. But for those perks, you also assume greater financial risk.

From a tax perspective, your status will change, too. Equity partners face more complicated personal tax liabilities as a result of becoming self-employed and need to make provisions for these payments in January and July.

It’s possible to avoid these risks altogether and become a non-equity partner. Indeed, in many practices becoming a salaried partner is a step towards an eventual equity partnership. A salaried partner continues to draw a salary and retains their employment status. In terms of remuneration, however, the rewards are potentially less.

NatWest’s last accountancy benchmarking report found that the median profit per equity partner reached £141,000. Even at the lower quartile, partners at smaller firms made a healthy £59,000. Overall, profit per equity partner grew by 6%, substantially outpacing inflation.

In short, it’s not a bad time to take an equity stake. With a note of caution, of course. Taking an equity partnership is a decision that requires a lot of thought. It’s critical to perform the necessary due diligence.

Key areas to evaluate include a practice’s historical and projected profitability, profit sharing ratios and whether contingency plans exist for partner succession issues and consultancy arrangements.

All of these risks, when you become an equity partner, will become very real and potentially damaging to your personal finances. But again, the potential rewards are handsome, too.

The other big question is how to manage the substantial investment needed to buy a stake in the practice. One option is a specialist partner equity loan. This type of loan supports you in purchasing equity in your practice or even increasing your equity share.

It also smoothes the transition to equity partner by removing the up-front cost, spreading it over a longer period of time. Wesleyan Bank, for example, offers a repayment period of up to 15 years with amounts ranging from £25,000 to a maximum of £500,000.

Wesleyan has an intimate understanding of the accounting sector and can help guide the process. Our finance solutions are flexible and can be tailored to your needs. So whether you’re buying or selling an equity stake, Wesleyan Bank can help.

Call the team today to discuss your upcoming requirements on 0800 980 9348 and mention ‘AccountingWEB’