The article recently published in the AFR ‘You’d be negligent: Why professionals are abandoning partnerships' poses many questions for current and future owners around decision making, profit sharing and legal structure.
Whilst the article poses a number of interesting questions, we submit that legal structure does not necessarily drive decision making, sharing of profits and ultimately organisational behaviour.
For example, whilst corporatisation with a formal board may allow decisions to be made relatively quickly and easily, it will only work if those who are not on the board are prepared to accept the decision of the board and act accordingly. That is, a top down approach. But just as easily a partnership could establish a management committee and empower it the same way. This committee would be responsible for the day to day management of the practice, its strategic direction and the setting of budgets, financial reviews, forecasts, and so on. That is, it is not the legal structure in question, but the management structure.
But is this what the owners want?
It is therefore essential to understand the structure options available to you and ensure that ultimately you choose a structure that meets your current and future goals and objectives. Ask yourself, what would you like your firm to look like?
In determining what structure is right for you, and acknowledging that decision making is vital to the success and growth of a firm, an owner should at least consider:
- asset and income protection
- ease of admission and exit of partners (including CGT on introduction or sale of interests)
- distribution and remuneration flexibility
- complexity of administration and taxation compliance, and
- whether the practice be a goodwill practice?
In considering these factors, it may become apparent that your initial legal structure of choice may not provide best access to the CGT small business concessions or could unnecessarily result in the requirement of an annual financial audit and financial reporting to the Australian Securities and Investment Commission (ASIC).
Do not forget though, you are never locked into any one structure but if you ask anyone who has undertaken a restructure, the costs, complexity and time involved clearly support the value in taking the time to consider all factors when first establishing, including asking the right questions.