• July 2019
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What Is the Difference Between a Principal and a Partner?

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In general, the terms “partner” and “principal” are used within the context of a business-related firm. Whether that firm is legal, financial, investment-based or focused on consulting does not tend to matter. If a business may be appropriately described as a firm, it likely contains both partners and principals. Similarly, if a limited liability corporation or partnership is structured a certain way, that business may contain both partners and principals regardless of whether it may be described as a firm.

 

Partners

In the broadest possible terms, a partner is an individual with an ownership interest in a business structured as a partnership. But most often, an individual that may be described as a partner is someone who possesses equity in a firm that is structured as a specific kind of limited liability company or as a partnership. Depending on the role that a partner has opted to assume, he or she may or may not be entitled to a voting interest, but almost certainly remains entitled to a share of business-related profits. When a business has been structured as a corporation, individuals with a partnership equity interest are referred to as shareholders.

In many firms, individuals who have extensive experience and/or have purchased a certain amount of equity within the firm are elevated to the status of partner over time. Once this status is achieved, a partner becomes entitled to certain benefits and constrained by specific obligations. One of the most pressing obligations a partner is compelled to honor is to bring in a certain amount of new business in addition to helping maintain existing client relationships. Within these structures, there is generally a managing partner and there may be a distinction between general partners and senior partners. Such designations tend to correspond to different equity shares, job descriptions, responsibilities, obligations and pay structures.

 

Principals

In contrast to a partner, a principal is an individual who serves as an executive authority within a corporation, limited liability company or partnership. For example, directors are generally considered to be principals within a corporation. It is certainly possible to serve both as a partner and a principal at the same time. Because the “partner” designation tends to primarily correspond to equity interest and the “principal” designation tends to primarily correspond to a position of authority, principals tend to serve as partners though not every partner serves as a principal.

 

Answers to Additional Questions

It is important to understand that the legal and practical consequences of being a partner and/or principal tends to vary according to business structure, jurisdiction and context. LawTrades boasts extensive experience assisting both aspiring business owners and established companies of all sizes navigate a wide variety of legal needs. If you have questions about business structure specifically or how the law applies to businesses generally, please consider contacting the team at LawTrades can help to provide your business with the guidance it needs in order to thrive.