As the case for an alternative business model for accounting firms becomes more compelling, traditional partnership arrangements in public practices are being challenged.
By Zilla Efrat
Accounting firms are expected to increasingly embrace “corporatised” structures as they diversify their activities and bring in younger practitioners.
Hayes Knight chairman Greg Hayes CPA acknowledges that historically partnerships have been the most common type of structure used to create what he calls “tie-ups”. They enable partners to have equal say over decisions and an equal share of profits. However, firm structures continue to evolve.
“We are now seeing a clear shift from the old collegiate partnership style of practice ownership to corporatised structures in various forms,” Hayes says.
“It really comes down to understanding what the practice is about and then putting in a structure that can accommodate where you are now and where you’d like to take it in the future. You don’t want to be in a situation where you need to change structures, [which] can bring tax and other consequences.”
Hayes, who advises other accountants, says there are various reasons for the structural shift.
“Part of it is because there is a level of firms bulking up. Firms are getting slightly larger and introducing new partners. The corporatised model is certainly an easier way to manage practices as they grow and it does sit better with Gen Ys [also known as Millennials] looking at opportunities to get into a practice.”
Hayes says a drawback of a partnership is that every time there is a movement in the partnership – for example, the addition of new partners or a partner leaving – the partnership has to be reconstructed and becomes a new or different identity for tax or legal purposes.
“In contrast, a corporate structure has continuity,” he maintains. “If I sell my shares in a corporate structure, nothing changes at the corporate level. Shares just move from person A to person B.
“The other issue with a partnership is that partners have joint and several liability. That means their liability is unlimited and there’s no proportionate liability. So at the risk management level, a corporate structure would generally be preferable to a partnership.
“Assuming you haven’t done anything dishonest, if anything goes wrong within a corporate structure, the damage is typically contained in the corporate entity. If something goes wrong in a partnership, damages reach through to individual partners, including all their personal assets.”
Hayes says the way a firm is structured also makes a difference when it wants to bring in new people, retain them or plan for succession. In other words, a corporate structure allows different levels of ownership.
Newcomers, for example, can be offered a stake in the firm, but it doesn’t have to be equal to that of the founding partners.
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Firm structures: the ATO is watching
When choosing a practice structure, Hayes warns that the Australian Taxation Office (ATO) will more closely scrutinise structures that potentially lend themselves to income splitting and where income is diverted from the principals doing the work.
“It’s not that you can’t use trust structures or partnerships of discretionary trusts, but the more exotic the structure and the more the structure potentially lends itself to income splitting or deferment of income, the more likely it is to gain the attention of the ATO,” he says.
“It’s also a business risk. The ATO uses accountants as the gatekeepers of businesses across the country and when it comes across an accounting firm that is taking a very aggressive approach with its own tax management and planning, the ATO may conclude that if someone is doing that themselves, they are more likely taking [the same] approach with clients.”
Tax office takes on professionals over income splitting
One approach that is certainly in the ATO’s cross hairs is Everett assignments. Among other things, these are a form of income splitting that allows a partner in a firm to assign a share in their partnership to a spouse. The spouse gains the right to future income earned from the firm, reducing the partner’s tax liability.
In December last year, the ATO announced it was suspending its guidelines on Everett assignments because of its concerns that some different partnership, company and trust arrangements were using a variety of alienation techniques that went beyond the scope of the guidelines.
A more practical alternative to partnerships
Hayes expects a continued move towards corporatised structures.
“We may also see more practices broadening their spread of services,” he says. “The most common one is into financial services, but we are seeing practices establishing bookkeeping and specialist consulting businesses.
“It will not be uncommon where the economic unit that represents the practice might be made of two or three or four different companies [each] with their own particular focus – for example, financial services, accounting, bookkeeping, IT or HR consulting
“Those businesses will, in reality, all represent one economic unit, all running under the same roof and in some cases, with different levels of ownership. The entry point has to be lower to get people through the door.”
The ‘corporate’ model in action
One accounting group that has already taken this route is Perth-based Fortuna Advisory Group.
Founder and managing director Dinesh Aggarwal explains that about six years ago, he decided to create a multidisciplinary practice. Using his accounting practice as the centre point, he wanted to expand into finance and mortgage broking, legal services and financial planning in order to provide a one-stop shop for clients.
According to Aggarwal, the best way to do this was via a corporate structure.
“A partnership model is very inflexible,” he says. “It’s difficult to modify that structure or bring someone in.
“To be able to successfully run a multidisciplinary business, you also need leadership at the top and to be able to make fast decisions, which isn’t always easily achieved in a partnership. A corporate structure allows more flexible decision-making.”
Fortuna has one director heading each division. In addition, each division may have a few partners, who may not necessarily be a partner of the head entity but can have equity in the division they work in. Notably, not all may necessarily have the same level of equity.
Like Hayes, Aggarwal expects more firms to take the multidisciplinary route and embrace a corporate structure.
“With digitalisation and the evolution of technology, and especially artificial intelligence affecting professional practices, it’s going to become more and more challenging at the base level of accounting services,” he believes.
“So, unless you evolve and diversify, a major chunk of your work could [and will likely] become automated.”
He does not, however, suggest that all partnerships will eventually be extinguished.
“Small-scale firms will continue to operate at that level, but I [expect] that as more young practitioners come in, the landscape will continue to evolve and take a different shape.”
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Practising in NZ resources
Factors to consider in a partnership or shareholders agreement