Lawyer for Accountants, Accountancy Corporations and Accounting Practices

Article #2 – Should you incorporate your accounting practice?

This is Article #2 in my 9-part series on the basic corporate, business and contract law issues for accountancy corporations and accounting practices in California.  The articles in this series are:

In this Article #2, I answer the question, should you incorporate your accounting practice?  What are the costs and benefits of forming an accountancy corporation?  It’s a tough question.  The answer depends on a balancing of different factors.  Most of us suffer information overload not long after starting this analysis.  All of the factors start swimming around in our minds and we don’t know what to think.

This article gives you a quick roadmap.  For me, as a lawyer, the first factor is whether you want limited liability.  Next you determine the costs of forming and maintaining an accountancy corporation.  Then you delve into the tax advantages and disadvantages of forming a corporation.  Last, you weigh the factors and make a decision.

Benefit – Limited Liability.  I believe that limited liability is the primary benefit of incorporating your accounting practice.  A solo accountant is personally liable for all general debts and liabilities of the practice, including vendor contracts and real property and equipment leases.  On the other hand, a shareholder of a corporation is not personally liable for the corporation’s debts (except payroll taxes, workers compensation premiums and related obligations imposed by the government).  There is one big exception, however: the accountant is always liable for his or her own professional negligence and the negligence of employees under the accountant’s supervision.  Only insurance can mitigate such liability.

Partners Need a Corporation.  Practices with more than one accountant should use an accountancy corporation. The accountancy corporation not only shields each accountant from general liabilities of the accountancy corporation (discussed above), but also shields each accountant from liabilities arising from the acts of other accountants in the group.  Although two or more accountants can work together as a partnership, this is not your best choice.  Partnerships are risky because each accountant is liable for the acts of each other accountant.  Incorporation mitigates this risk by protecting against liability from other accountants in the group.

Costs.  You want the benefits of limited liability.  But it costs money – corporations pay franchise taxes and require legal costs for their organization and maintenance.  Worse yet, because accountants are subject to special regulation, you need specialized legal advice.  An accountant probably will incur more legal fees than the run-of-the-mill service corporation.

I charge $2,000 in legal fees to form an accountancy corporation.  You need at least another $500 or so to cover filing fees and misc. costs of changing your form of business.  In year two you’ll start paying franchise taxes – annual franchise taxes are $800 + 1.5% of net profit.

Tax Factors.  Tax is a major concern when deciding whether or not to incorporate.  Luckily you're in the business, so I'll leave this analysis to you. 

If after all this analysis you decide to incorporate your accounting practice, go to my next article, Legal compliance checklist for an accountancy corporation.

This article only gives a short roadmap of the issues involved in deciding whether or not to incorporate your accounting practice.  There is a lot more to this topic than introduced here.  Please get competent legal counsel before you form an accountancy corporation.

Call me to schedule a legal consultation: 510-796-9144