A note on what an engagement actually is, before it is drafted.
Most people who pay an advisor think they are paying for hours.
The Internal Revenue Code of 1986 (Code) thinks something different. The Code thinks they may be becoming a partner. The line where the law decides which is happening sits in a single sub-paragraph of the Revised Uniform Partnership Act (RUPA). It is one of the quieter doctrines in business law, and it is one of the loudest in practice.
RUPA §202(a) is the first half of the rule. Two or more people associating to carry on a business for profit form a partnership, whether or not the persons intend to form one. The intent of the parties does not control the question. Their conduct does. If two people are co-owning a business for profit, they are partners, regardless of what they signed, what they called the relationship, or what kind of company structure either side has set up around it.
§202(c)(3) is the second half. A share of profits is evidence that the people sharing in them are partners, unless that share fits cleanly inside one of six categories. Six lanes for what a profit-share is, when it is not a partnership.
The lanes are these: (1) repayment of debt; (2) wages or other compensation to an employee or independent contractor; (3) rent; (4) an annuity to the representative of a deceased or retired partner; (5) interest on a loan, even if the interest varies with profits; (6) consideration for the sale of goodwill or other property.
Anything outside the six runs the presumption.
I have spent my career drafting engagement letters in some form. I have written them as a CFO, as a fractional advisor, as a consultant, and as the founder of a strategic-advisory firm. Until I read §202 carefully, I treated engagement letters as cosmetic. The label on the cover page would say “Independent Consultant” or “Statement of Work” or “Advisory Engagement,” and the substance underneath would be whatever the parties had agreed.
§202 says: the substance underneath is what controls. The label on the cover is decoration. If the substance has the parties co-owning the business and sharing in profits in a way that does not fit one of the six lanes, the relationship is a partnership, and a different body of law lights up around it. Joint and several liability lights up under RUPA §306. Fiduciary duties between partners attach under RUPA §404 — loyalty, care, and good faith running between every pair of them. If the federal entity-classification rules also classify the venture as a partnership, partnership tax treatment becomes the default. The check-the-box election can opt out of partnership tax treatment in narrow cases. Tax election is a separate question from the legal one. The legal status holds independently.
The thing that struck me when I read this carefully is how often the trap sits in the second category. Wages or other compensation to an independent contractor. That category is the one most fee-for-service consulting arrangements live in by default. It is also the one that is easiest to walk out of without realizing it.
A clean retainer sits inside lane two. Add a success fee tied to net new revenue, and you have moved partway out of the lane. Add a deferred component paid out of next year’s distributable cash, and you are mostly out. Add equity that vests on a sale of the business, and you have left lane two entirely. Each step away from a fixed fee for services is a step toward the §202 presumption.
I do not think most of the consultants and operators I know are aware of this. I was not aware of it until I read the statute carefully.
The lanes are not, by themselves, a defense or a problem. They are a frame.
If a profit-share fits inside one of the six lanes, the §202(c)(3) presumption is rebutted on its face. The parties can document why the share fits the lane and move forward with whatever underlying engagement they intended. The work is to document the substance against the lane, not to defeat the lane.
If a profit-share does not fit one of the six lanes, the parties have a decision in front of them, not a verdict. They can structure the consideration into a lane that does fit. They can accept that the relationship is a partnership and document it as one. They can revise the consideration so it sits clearly inside the wages-or-comp lane. The choice is structural; what is not available is silence.
The hard cases are the ones where the consideration is in motion. A success fee that started as a marker of “we will figure out the upside” and grew into something that varies directly with partnership profits has migrated out of lane two over time, without anyone noticing. The parties can keep operating as if the original engagement letter governs. The Code does not care what the engagement letter says. The Code asks, on the day the question is examined, what is the consideration actually doing right now.
The thing I keep returning to about this is the way it inverts the surface I had been working off of for years.
I had been working off of the engagement letter as the thing that governed. I had been treating the document as primary and the substance as derivative. What the document said, the relationship was. §202 says the document is descriptive. The substance is primary. The parties can write a thirty-page engagement letter calling each other anything they want, and a court applying RUPA can decide they were partners and run RUPA §404 fiduciary duties between them anyway. Or the parties can write a one-page handshake calling each other client and consultant, and if the substance fits lane two the partnership presumption never fires.
This reads, for me, like a frequency check. Not the metaphysical kind. The mechanical kind. What does the consideration actually do? What does the cash flow look like? Is the consideration tied to a fixed fee that is paid regardless of partnership outcomes, or is it tied to outcomes? If it is tied to outcomes, what is the relationship between the consideration and partnership profits? Does it pass through the partnership’s distributable cash? Does it carry voting or control rights? Does it survive the engagement?
The frequency I am paying attention to is the frequency at which the consideration is a fixed fee versus the frequency at which it varies with partnership profits. That is the substance. The lanes are six different ways for a profit-share to not be a partnership, and they are not equally available. Most of them are narrow, and the wages-or-comp lane is the broad one most engagement letters end up in by accident or design.
The practical upshot of this for the way I draft is small and large at the same time.
Small, because nothing about §202 invalidates the way most fee-for-service engagements are structured. A clean monthly retainer, paid regardless of client outcome, sits inside lane two and stops there. The vast majority of advisory engagements have always been structured this way and were always inside the safe harbor without anyone needing to think about it.
Large, because every engagement variation away from that default is now a screening question. A success fee runs the screen. So does a retention bonus, an equity grant, a contingent fee, a revenue share with a co-host on a podcast. Each one needs to be drafted into one of the six lanes deliberately, or accepted as outside the lanes deliberately, but not assumed.
The work is upstream of the engagement letter, not downstream of it. The engagement letter records the decision. It does not make it.
I am writing this not because I have a fix for anyone else. I am writing it because reading the statute changed the way I think about my own engagements. The 444 Growth Partners default retainer at $11,100 a month with a four-month commitment ($44,400), paid regardless of client outcomes and fixed regardless of how the engagement performs, was not designed against §202. It was designed against the firm’s pricing principles. It happens to sit inside lane two cleanly because the underlying compensation philosophy is structural. I find it useful that the brand-numerology decision and the §202 decision arrive at the same place by different paths. I find it more useful that I now know why.
The same screening will apply to anything I or anyone else does that varies the default. Boundless arrangements with sponsors or co-hosts that involve revenue share. A future engagement that includes any equity component. An advisor relationship that moves to a success-fee model. The discipline is the same in each case. Walk the consideration against the six lanes. Confirm it fits one. If it does not, decide whether to redraft the consideration or to accept the partnership consequence. Do not assume the engagement letter governs.
If it depends on the engagement letter, it does not actually transfer.
The engagement letter is the artifact. The substance is what the law looks at. I am drafting differently now. Slowly, deliberately, against the lanes. Not against the document.