Nonequity Ownership—Case Studies

Source: Partner’s Report

Nonequity ownership can be a prelude to ownership. Nonequity owners are often viewed by outsiders as if they are owners. Before establishing a nonequity role, check your state law. Some states require owners to be CPAs. Some allow a percentage of owners to be non-CPAs.

Administrative and marketing personnel are increasingly becoming nonequity owners. This arrangement helps in retention, allows a test period to transition into full ownership, and can also be used as a method of transitioning retiring partners to non-ownership status.

Macdonald Page & Co., in South Portland, Maine, appointed Ralph Hendrix director and chief operating officer after he joined the firm as office manager. He is responsible for finance, operations, technology, marketing and HR. Hendrix also runs retreats, leads merger initiatives and is the number-two decision-maker in the firm. Hendrix is a nonequity owner, as are half of the 18 “owners” of the firm. Nonequity owners are referred to as directors. They have employment contracts and divide an annual bonus pool but do not participate in a retirement plan.

Linda Pappajohn, principal at Santora CPA Group, in Newark, Delaware, had been the firm administrator, then she initiated a new service at the firm—HR consulting. The firm had 24 people, including two equity owners and three nonequity principals. She now operates like a partner in charge of a practice area.

Although the practice area was originally intended to provide services primarily to clients, most of the work has come from nonclients, many of which have since become clients.

Some firms bring in lateral hires as nonequity owners who may be on a path to ownership. Neil Fauerbach is director of business development and markets for Smith & Gesteland LLP in Madison, Wisconsin. Other nonequity partners are “partners-in-training.” Fauerbach attends partner meetings, and assists in planning retreats and staff meetings.

There is a trend for marketing personnel to become nonequity owners.

Many firms tend to set a temporary period of one to two years for nonequity status. Other firms don’t specify a time period, letting the person’s performance dictate it.

From Partner’s Report—the Monthly Update for CPA Firm Owners, November 2006, p. 1. For subscription information contact Institute of Management & Administration, Inc., 3 Park Avenue, 30th Floor, New York, NY 10016-5902. One-year subscription $399. 212-244-0360, [email protected].