Since the CPA Law has undergone several revisions, and since both the PICPA staff and I regularly receive questions about what legal entities are appropriate for CPA firms in Pennsylvania, now is a good time to familiarize yourself with your options. If you are forming a new firm, though, please consult an attorney, and if you do not handle taxes then you should also consult with a CPA to find out which structure works best for you from a tax perspective.
A CPA firm may be owned by CPAs or, in part, by a non-CPA. There are limitations if a non-CPA is to have any ownership. To begin with, the total non-CPA ownership of a firm cannot exceed 49 percent. This restriction includes both equity ownership as well as voting rights. Additional restrictions include that an individual cannot have been convicted of, or plead guilty or nolo contendere to, a felony; that participation in the firm must be the principal occupation; and that the individual must have graduated with a baccalaureate or higher degree. The principal executive officer of any CPA firm must be a licensed CPA. Non-CPAs cannot have ultimate responsibility for any attest activity, and any office that performs attest activity must have an individual in charge of the attest activity who is a licensed CPA.
CPA firms themselves are required to have a separate license from the licensed individual CPAs within the firm. A new firm has 30 days to apply for its initial license or it is subject to prosecution for the unlicensed practice of accountancy, with a fine of up to $10,000. Firm licenses are renewed at the end of each odd-numbered year, just as individual licenses are.
In Pennsylvania, CPA firms can essentially be any corporate structure. The choices include partnerships, limited liability partnerships, limited liability companies, professional corporations, benefit corporations, and standard corporations. A CPA firm may elect to be an S corporation or C corporation, and an individual may operate as a sole practitioner without any corporate structure. One advantage of a corporate structure is, if formed and managed properly, that the corporation will protect the shareholder from malpractice or other claims against the corporation so long as the individual shareholder is not sued directly for his or her own negligence.
A firm name, too, is very important, no matter what legal structure is elected. The name cannot be deceptive. So a firm name cannot include “& Associates,” or something similar, if there are no associates. A firm may continue to use a deceased, retired, or former CPA’s name in the firm name, even when that CPA is no longer involved in the firm. A fictitious name is allowed, so long as the name is not misleading and it is registered with the Corporations Bureau at the Pennsylvania Department of State.
Even though a partnership is not a corporation, it is an optional entity for a CPA firm and it is a separate and distinct legal entity from the individuals who make up the partnership. A partnership structure allows individuals to collaborate and work together. A partnership agreement is necessary to spell out the ownership interests of the individual partners. Although partners are all equal in a traditional partnership, that does not have to be the case. Profits are generally restricted to distribution in accordance with the ownership interests, although there is the ability to have special allocations. Generally, partnerships are less expensive to form and run than corporations.
A limited liability partnership receives many of the limited liability protections that would be found in a corporation. This entity is more complex, and the limited partners may have limited input in the management decisions of the company that goes along with the limitations of liability. This type of partnership is often used with collaborations between firms that will retain their separate entities.
A corporation is a stand-alone legal entity owned by shareholders. A corporation is formed through articles of incorporation that are filed with the Corporations Bureau at the Pennsylvania Department of State. The typical corporation is referred to as a C corporation, but a CPA firm is not limited to that structure and may elect S corporation status. Perhaps the most widely used corporate form for a CPA firm is a professional corporation, or PC. A PC may elect S corporation status.
Another corporate entity permitted is the limited liability company, or LLC. An LLC provides some of the benefits of incorporation and some of the benefits of a partnership. An LLC should have both articles of formation as well as an operating agreement. Although forming an LLC is more involved than a partnership, it is typically less involved than the other corporate structures. Profits may be distributed in an LLC as the members agree; as long as the distributions are consistent with the default or elected tax treatment of the LLC. Keep in mind that non-CPAs may not take in more than 49 percent of the profits.
A new entity became available in Pennsylvania in 2013: the benefit corporation. A benefit corporation has all of the attributes of a regular corporation plus a commitment to transparency that is evidenced by submission of an annual report to the Department of State that identifies the “triple bottom line” effect of the company. The triple bottom line is the financial, social/people, and environmental impact of the company. The benefit corporation is appropriate for an entity that seeks a higher degree of accountability for its social responsibilities. A benefit corporation can elect to be treated as an S corporation as well.
The PC is perhaps the most widely used corporate structure for a CPA firm, but it does not mean that it is the most appropriate entity for your firm. Your specific goals are critical in determining which entity is right for you. The PC designation, it should be noted, is only available to professionals, such as CPAs or attorneys. If you form a PC but anticipate dropping the PC designation when you refer to your firm, you will want to file for a fictitious name to avoid confusion and possible prosecution by the Pennsylvania State Board of Accountancy.
There are many options to consider when forming a CPA firm. It is important, no matter what the specific choice, that all the corporate formalities are followed in both the formation and administration of the entity.
Jeffrey T. McGuire, JD, is a partner in the Harrisburg office of Cipriani & Werner PC and is general counsel to the PICPA. He can be reached at email@example.com.