Attention: Becoming a Partner Means Taking on Risk, Sometimes with Debt

Joining a law firm as a partner often comes with prestige, influence and the expectation of future wealth. But it also involves a major shift in financial exposure. One of the biggest and least discussed risks? Borrowing money to fund your capital contribution. 

Whether you’re buying into a Limited Liability Partnership (LLP) or a traditional partnership, the financial decisions you make now can affect your wealth, liquidity and long-term security. 

Interest: How Much Will You Have to Contribute, And What’s at Stake?

When you become a partner, you’ll usually be expected to contribute a lump sum into the firm. This capital forms part of the LLP’s equity and typically stays locked in until you retire or exit the partnership. 

Recent data shows that: 

• Median partner capital accounts exceeded £230,000 by 2023 and are continuing to rise. 

• Entry-level buy-ins still commonly range from £50,000 to £150,000, depending on firm size. 

This capital: 

• Remains a personal asset but is illiquid 

• Is at risk if the firm faces insolvency 

• Rarely earns a direct financial return 

While most LLPs shield you from full personal liability, this protection isn’t absolute. Clawback provisions and insolvency risks still exist if the firm operates while technically insolvent. 

Engagement: Borrowing to Buy In, What You Must Know

Many new partners don’t have six-figure cash on hand and turn to partner equity loans, often arranged through the firm’s banking relationships. While this is standard practice, it’s still debt – and needs to be understood as such. 

Key implications of borrowing:

• Adds a monthly interest overhead to your cash flow 

• Introduces repayment risk, especially if you exit and the firm delays returning your capital 

• Increases your leverage, which can compromise future financial flexibility 

Good news? As of 2024, the interest on partner loans generally remains tax-deductible (if used directly to acquire partnership interest), easing the overall cost burden. 

However, tax rules may evolve, so ensure regular reviews with a specialist adviser to maintain compliance and efficiency. 

Outcome: The Real Mistake Is Not Managing the Risk

Borrowing to buy in isn’t the issue, it’s failing to recognise the full financial implications that’s the issue. Too many new partners: 

• Ignore the debt’s impact on their personal balance sheet 

• Forget that the investment is illiquid 

• Don’t adjust the rest of their portfolio to offset the concentrated risk 

A partner equity loan is effectively a long-term tied-up asset, backed by your own debt. To stay in control: 

• Create a personal liquidity buffer 

• Diversify assets outside the firm 

• Build a debt repayment strategy in sync with your capital return expectations 

FAQs 

Q: Is borrowing to buy in a red flag or a normal step?
A: It’s completely standard. Most new partners don’t have enough liquid assets and opt for partner loans. The key is to fully understand the risk and structure your finances accordingly. 

Q: Will I earn interest or returns on my capital?
A: Usually not. Your capital stays invested in the firm, but it rarely earns direct interest. The return comes from your share of profits if the firm performs well. 

Q: Can I lose my capital if the firm fails?
A: In an LLP, your liability is typically limited to your contribution. However, insolvency or clawback rules could delay or reduce repayment, especially if trading while insolvent is suspected. 

Q: Is the loan interest tax-deductible?
A: Yes, under current 2024/25 rules, if the loan is used to acquire a partnership interest, interest may be deductible. Confirm with your accountant to ensure qualification. 

Q: Should I restructure my other finances if I borrow to buy in?
A: Yes. Increased debt and illiquidity mean your broader financial strategy (savings, investments, insurance) should adapt to maintain balance and security. 

Final Thought

Taking a partner equity loan doesn’t mean you’re making a mistake, it means you’re entering a new financial era. Be proactive, seek advice and make sure your long-term financial strategy accounts for this major shift in liquidity, debt and risk. 

If you’re about to join the partnership track and want clarity on how to protect and grow your wealth, let’s talk.
Book a free 15-minute consultation with me today.

Adrian Johnson