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Lawyer for Accountants, Accountancy
Corporations and Accounting Practices
Article #7 – Bringing a new partner into an accounting practice
This is Article #7 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:
This article gives an outline of how to
bring a new accountant into an accounting practice. I go
from common sense to legal advice, from the accountant’s
purchase of ownership to the parties’ exit strategy and
unwinding of the relationship.
Culture Fit.
Before anything else, think hard
whether the new accountant will fit in with the practice’s
culture. The primary risk is that the existing group and
the new accountant might not fit together. For example,
the group and the accountant might differ on hours
(especially during tax season) or the handling of employees.
Compensation.
An accounting group’s compensation structure is the most
important part of its culture. The hardest thing to get
right and keep right is a group’s compensation structure.
Every group has its own compensation structure ranging from
“eat what you kill” to equal shares. I give a common
formula for fixing compensation in Article 4,
Accountant
employment agreements and independent contractor agreements.
Buying into the
Practice.
After salary, think ownership. Frequently the
practice asks the accountant to wait a period of time
(e.g. one year) before the parties discuss the buy-in. This
ensures that the new accountant fits-in before buying-in.
Accountant employment agreements sometimes have clauses
for the accountant’s purchase of ownership in the
practice. Usually the clauses are vague and non-binding,
and only express the parties’ expectations on the subject.
If the accountant’s buy-in is a material part of the deal,
however, specify these deal terms:
- The ownership percentage that the accountant
will get
- The purchase price
- The period over which the accountant will pay the
purchase price
- The extent of the accountant's participation in
control decisions for the practice, e.g. is he or she on the board of directors?
Corporate Structure.
The new accountant must buy into something, and
usually that something is an accountancy corporation. The
accountancy corporation’s structure should protect both the
incoming accountant and the existing group. You need to
shield each accountant from two kinds of liabilities: (1)
liabilities arising from the acts of the other accountants
in the group, and (2) general liabilities of the accountancy
corporation (such as real property leases
etc.). At the same time, the corporate structure must
comply, to the letter, with the laws and regulations that
govern accountants.
Group Liabilities.
If the existing accountants are liable for group
debts, be clear about the liabilities for which the new
accountant will become responsible. Will the new
accountant guarantee existing loans or leases? Will the
new accountant step into a capital call?
Exit Strategy.
Now that you’ve structured the entry of
the new accountant, structure the exit. The existing
accountants and the incoming accountant all need an exit
strategy. The most common exit is the termination of the
accountant’s employment plus the buy-back of his or her
equity. The practice also might give severance pay to the
departing accountant.
This is where a buy/sell agreement comes
in. A buy/sell agreement is essentially an agreement for
exiting a practice. A buy/sell agreement works like this –
the agreement names certain trigger events for buy-back
(e.g. termination of employment, death) then it either
requires or permits the buy-back of the accountant’s equity
on the occurrence of that specific event. Then the
agreement sets a price for the buy-back. For more on
buy-sell agreements for an accountant practice, see Article
5,
Shareholder
buy-sell agreements for accountancy corporations.
This article only gives a short roadmap
about bringing a new accountant into an accounting
practice. There is a lot more to this subject than
introduced here. Before you do anything, get competent
legal counsel to help you.
Call me to schedule a
legal consultation: 510-796-9144 | 