Partnership or corporation? Depends how much flexibility you need

Flexibility is increasingly valued

In the coming years, more firms will adopt a corporate structure to take advantage of the flexibility that comes with it.

The old partnership model was simple – partners had an equal share in profits and an equal say over decisions. Under a corporate structure, partners or staff can hold different levels of equity, however external shareholders are also possible.

“We’re seeing far more corporatised style approaches to practice structures going forward,” says Greg Hayes FCPA of Hayes Knight.

“I think progressively we will see fewer of the partnership model, as practices change and new practices evolve.”

Several factors are driving the move to corporatisation. One is efficiency. As an example, shared decision-making in partnerships can waste a lot of time, with partners meeting to discuss and vote on relatively minor spending proposals.

“The market’s saying, ‘Hey, you accounting firms, you’ve got to be more efficient than the way you have been; you’ve got to spend more time with your clients; you’ve got to have more efficient processes in place’,” says Hayes.

Staff can also be remunerated differently.

“There might be a remuneration band that exists within a practice so all partners or directors are going to be between X and Y in terms of their remuneration. However, based on their experience, based on their responsibility, based on perhaps their deliveries to the practice, there might be some variations in terms of remuneration,” Hayes says.

Grant Bloxham, chief executive of accounting profession research house Bstar, says that “the number one reason” for the trend to corporatisation is to help firms hold on to key staff. Under the partnership model there was nothing to stop a promising accountant who wasn’t yet a partner from leaving.

“There are low barriers to entry for accounting practices so if I’m a future leader it’s quite easy for me to get up and start my own practice,” he adds.

The corporate model can help overcome this.

“It enables you to have flexibility in the way you reward people, and if young people are motivated and they’re keen and they want to grow then we recommend they should get a percentage of the practice profit. It doesn’t mean they’re shareholders in terms of equity,” says Bloxham.

However, an equity share is also a possibility, because rather than having to find the capital to fund a full partnership share, younger staff can buy into the practice with a smaller share.

The equity structure also allows for external shareholders; that is, those who don’t work in the firm. This is an increasing trend as some large listed accounting groups scoop up smaller partnerships as investments.

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“What’s happening is you’ve got some corporate entities going out and buying an interest in accounting practices and they have a preferred or preference share, so the first part of the after-tax profit goes back to them and then the rest is distributed by the partnership,” says Bloxham.

“That’s how some accounting practices are structuring to fund their succession, where they’ve got a couple of partners who are looking to exit but the practice can’t raise the capital itself, so it invites a strategic investor.”

Peter Polgar FCPA, executive chairman of advisory firm Business Intellect Group, says the corporate model affords more flexibility in terms of business restructuring.

“We can wind up a separate entity – that way we don’t wind up a whole entity. If we decide to halve off the tax and accounting division, we can do that. That can just be halved off, without affecting all the other entities,” he says.

The Business Intellect Group also operates overseas through the name Reanda International, and having different corporate entities helps them meet some of the compliance obligations in various divisions.

“It gives us the flexibility to operate internationally without tying everyone up in that international process,” says Polgar.

Accountants can often be resistant to change, so any transition from a partnership structure to an equity model has to be handled carefully.

“The big challenge for changing structures is to actually find the right moment for that change, because when somebody is saying ‘let’s change structure’, the concern always is who’s going to win out of this and who’s going to lose out of it,” explains Hayes.

“Where you really want to do this is when there are no visible events coming up, because that’s the time when you’re likely to get people thinking about it most clearly in terms of what’s right from a long-term point of view as opposed to a vested interest.”

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October 2021
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