In these digital days, any person or group about to establish a professional accounting firm will have to budget for efficient accounting software. But another important consideration for a prospective start-up is the best accounting firm organizational structure. The main types of accounting firm structures in the US are discussed below.
A sole proprietorship is a business owned and operated by one individual. It is the simplest kind of structure when compared to the others. In a sole proprietorship, the business is not a separate legal entity from its owner. Because of this, the owner bears personal liability for all business situations and can be sued personally. A lot of businesses out there started as sole proprietorships before working their way up to more complex business structures.
If you decide to adopt this model as your accounting firm structure, then the formal protocols won’t take you much time since you'll need to get locally licensed, which is a fairly easy process.
In a partnership, two people or more agree to enter into a business alliance in which they will share the profits and bear the losses. There are three relatively common types of partnerships in the US - general partnership (GP), limited partnership (LP), and limited liability partnership (LLP). A fourth type of partnership, known as a limited liability limited partnership (LLLP), is not recognized in all US states.
General partnerships, limited partnerships, and limited liability partnerships all face similar kinds of taxation. However, the owners in general partnerships do not enjoy any liability protection. They are legally considered the same entity as the business. Hence, their personal assets can be considered business assets. Also, each general partner bears responsibility for the actions of his or her other partners. A partnership is easy to set up, just like a sole proprietorship. General partnerships are usually the easiest to establish in addition to having the least ongoing costs, though the partners also face the highest risk.
However, ease of setup should not lead to complacency among the constituent partners when it comes to formalizing their partnership. To avoid unnecessary disputes between the partners in an accounting firm partnership structure, it is best to have a written, legally binding partnership document rather than a word-of-mouth informal agreement.
Limited liability companies have been described as firms using a hybrid structure because LLCs combine some attributes of both sole proprietorships and partnerships with those of a corporation. For instance, establishing an LLC is easy, just like a sole proprietorship or partnership. But like in corporations, the owners of an LLC cannot be held personally liable for the losses, debts, and other liabilities of the business. Also, it is possible to manage an LLC as a corporation, e.g., in a manager-managed LLC, or as a partnership, e.g., in a member-managed LLC.
Their organizational hierarchy can include a president, a board of directors, and other officials as found in corporations. Alternatively, an LLC can also decide not to have such an elaborate hierarchical system. Even with all its similarities to a corporation, all LLCs shouldn’t be seen as an alternative to corporations. Rather, an LLC can gradually evolve through growth and expand into a corporation. But the process of transforming from an LLC to a corporation is often a complex one that calls for careful study from several perspectives, including the legal and tax implications.
Corporation is a word that gets its etymological root from the Latin word ‘Corpus,’ which translates to "body." Therefore, a corporation is regarded as a legal body or entity by the law. This implies that its owners do not bear personal liability for the corporation’s losses and other liabilities. A corporation can be described as a large business entity owned by shareholders, operated by officers, and managed by the board of directors.
Those in charge of the day-to-day running of the business and the business’s modus operandi are decided by the shareholders. Profits are allocated to each shareholder based on his or her shares or stock ownership. Corporations have a perpetual life, so the shares of shareholders who leave the business or die can be transferred to new shareholders to continue the corporation’s life.
However, corporations are taxed twice. The first tax focuses on the corporation’s gains, while the second targets shareholders' dividends. Because of their ability to sell shares, corporations find it easier to raise funds than sole proprietorships and partnerships. There are several types of corporations in the USA. They include C corporation, S corporation, B corporation, non-profit corporation, open corporation, and closed corporation.
C corporations provide their owners with the strongest protection from personal liability, while S corporations make it possible for profits and certain losses to pass through to the owners' personal income without having to account for corporate taxes. B (or "benefit") corporations are profit-based corporations whose shareholders require them to produce a public benefit.
Open corporations offer stock that can be traded publicly, while closed corporations or privately held companies are characterized by a small number of shareholders who have limited liability protection and whose shares cannot be traded publicly. Finally, nonprofit corporations are organizations that are not established for profit-making. These organizations are tax-exempt because they are organized to offer charity work or some other work that is beneficial to the public.
The process of setting up a corporation is not as easy as that of a sole proprietorship or partnership.
Well, whether it is a CPA firm structure or another form of accounting, no particular structure can be described as the best business structure for an accounting firm. Certain factors will help you decide which accounting firm organizational structure is the best option for you.
For instance, if it is just one person who intends to start the accounting business, there is no question that a sole proprietorship is the best accounting firm structure for the individual. Moreover, each of the business structures has legal, financial reporting, and tax implications. So it is very essential to choose an accounting firm organizational structure that best suits your needs after all relevant considerations.
An accounting firm structure can also be based on long-term growth and financial goals. For example, a sole proprietor’s long-term goals may require that, with time, they transform their business into a public company to attract more investment capital needed for expansion and growth.
Overall many accountants are now turning to technology to advance their business goals and create structure in their firms. Investing in an affordable secure cloud based practice management software to successfully communicate with clients and your team such as Basil will create that advancement for your business. Sign up with Basil now and you will receive one month free and complimentary demo with our product expert to review how Basil can assist your unique business goals.