BDO Offers New Playbook as Firms Reconsider Partnership Model

EY was poised to be the accounting industry trendsetter as the first firm to splice its consulting business into a standalone company since a wave of restructurings in the early 2000s.

Instead BDO USA P.A., the sixth-largest US accounting firm, is the one blazing a new path for other big players in the industry to consider.

BDO converted its partnership to a professional services corporation on July 1. More than just a name change, the new legal structure could bring a lower tax burden, equity incentives for employees, and streamline governance for a firm that counts more than 800 partners and raked in revenue of $2.8 billion over the last year.

The move has already piqued the interest of other Top-25 firms interested in streamlining their tax structures and modernizing operations for the 21st century. In particular, as more firms turn to private equity for cash, BDO’s makeover offers an alternative approach.

“We are playing in new waters with great leadership that for the first time is being allowed to make transformative and tough decisions,” said Allan Koltin, a consultant who has advised BDO on other matters and business combinations over the past decade.

BDO did not respond to requests for comment for this article, but it said previously that the new structure offered tax benefits and other perks it could leverage as the firm prepared to “grow and transform.”

The professional services corporation model also gives BDO and other firms a powerful tool to invest in their businesses while luring top talent with the promise of stock incentives.

A New Playbook

Other accounting firms are likely to borrow from BDO’s playbook—in what could be a wave of restructurings as the industry looks to shrug off the constraints of a partnership over the next few years, Koltin said. Since BDO announced its new legal structure in June, several the Top-25 firms have reached out to Koltin wanting to know how they could benefit, he said.

What works for one firm may not be the right fit for another. But firm leaders understand they can’t stand still, and they’re increasingly wielding more control over operations and strategy.

“The dysfunctional, stale, partnership way of doing things is going by the wayside,” Koltin said.

Partners, who have been converted into shareholders, will still have some say in the direction of the firm. But firm leaders will have more room to make tough decisions that the collective partners may have deferred indefinitely.

BDO’s switch to a professional services corporation offers several other benefits over its former limited liability partnership structure including possible tax savings.

The new structure will also streamline how the firm pays its taxes, eliminating paperwork headaches and risks of underpayments or missed payments that partners had faced.

Under a partnership, income is taxed at the partner level and at the highest individual tax rate. But as a corporation, the firm’s earnings would be taxed at a lower corporate rate. The partner-shareholder would pay taxes through payroll withholding, like the rank-and-file accountants and advisers they supervise.

The corporate structure also preserves the limited legal liability partners enjoyed under the partnership model, said Larry Hamermesh, a Widener University professor emeritus who specializes in corporate governance laws.

Capital Flexibility

Beyond those benefits, the switch to a corporation opens the door to outside capital, either through traditional lenders or private or public markets.

As a corporation able to issue shares, a firm could more easily raise capital to fuel its growth, invest in technology or offer wages and benefits that attract top talent.

“I think that the flexibility that will be provided in doing that opens up a lot of innovative ways to continue to grow their company and potentially raise funds,” said Marc Staut, chief innovation and technology officer at Boomer Consulting Inc. “And it could be truly a cash infusion or it could be leveraging the value in the company to do exciting things.”

Employees too could buy or earn small stakes in the business—a perk accounting firms haven’t been able to offer in the past.

Employee stock plans could make it more attractive for non-CPAs to work in consulting—an increasingly lucrative part of a top firm’s businesses. Rising stars could benefit from their firm’s success earlier in their careers without having to wait years for the chance to buy into the partnership and years more for such investments to pay off.

“You might be missing some of the best talent that’s out there because they also want to build something,” Staut said. “They want skin in the game. They want a stake in what they’re putting together. And the traditional partnership structure may be very limited in how you can give them a piece of that.”

EY’s shelved split was driven in part by the need to attract and retain non-accounting professionals like software developers and data scientists. The firm intended to offer equity compensation to lure in staff members to the planned consulting company.

But stock incentives also may be a tool to recruit and retain accountants, workers in high demand amid a growing shortage of licensed CPAs.

Many accountants leave CPA firms long before the typical 15 years it takes to make partner. By switching to corporate jobs, accountants can command better pay and a healthier work-life balance just three years into their careers, said Elizabeth Almer, accounting professor at Portland State University.

“They may or may not be working a lot of hours, but they have opportunities to make more money both on salary and on potential for stock compensation,” Almer said. “That could be pretty intriguing if firms start doing that.”