In my last post, I shared the advantages and disadvantages of setting up an accounting business as a Limited Liability Company (LLC). In this article, I’m going to discuss the pros and cons of establishing an accounting firm as a corporation.
As you know, selecting a business entity type for your company has tax implications. There are legal considerations, too, so I encourage you to talk with an attorney to make sure you understand the impact registering as a corporation will have in that respect.
To help you in your efforts to compare the benefits of incorporating with those of forming an LLC, let’s look at the main pros and cons of operating as a corporation.
Significant Pros of Incorporating an Accounting Firm
Personal Liability Protection - A corporation is its own legal entity, and therefore, its assets and liabilities are separate from those of its owners (known as shareholders). This offers shareholders some peace of mind financially and legally. If the business has difficulty paying its bills or if someone sues the company, the owners are usually not personally liable for those debts or legal issues.
Tax Flexibility - If the default "double taxation" applied to the corporate structure creates an unfavorable financial situation for a corporation, its owners have the option to elect for S Corporation status and have business income taxed at the individual income tax rates rather than the corporate tax rate.
Depending on where a business is registered, it might find the corporate income tax rate is lower than the rate for individuals, though.
Fortunately, accounting firms have the know-how to determine whether default taxation treatment or opting for S Corp election is the best way to go.
Increased Growth Potential (Possibly) - Where accounting firms are allowed to register as C Corporations, they may sell company stock to raise money to fund growth initiatives and expand their businesses.
States that require an accounting firm to be filed as a Professional Corporation (PC) may or may not allow the corporation to have shareholders other than the principal owners of the corporation. Entrepreneurs should review the rules for their state to determine the rules.
Enhanced Credibility - With "Inc." or "Corp." after the business name, an accounting firm might find it commands more respect and trust from potential clients, vendors and investors. This enhanced credibility can result in more referrals, customers and collaborative opportunities.
Potential Downsides of Incorporating an Accounting Firm
More Complexity Than Other Business Entity Types - A corporation requires more documentation, effort upfront when forming it and more ongoing compliance filings to maintain its good standing. For example, most corporations must establish bylaws, appoint a board of directors and hold regular meetings with that group, hold shareholder meetings, record meeting minutes and file an initial report and annual reports.
Additional Expenses - Forming a corporation, because of its complexity, may require the assistance of an attorney—which results in legal fees. Also, the additional filings needed when registering a corporation and those needed to maintain the business entity add costs.
Basic Steps Involved in Setting Up a Corporation
The exact requirements will vary depending on the state in which your business will be located. Typically, incorporating will involve:
- Selecting a business name and doing a corporate name search to make sure the desired name isn’t already taken by another business
- Selecting a Board of Directors – The individuals who jointly represent shareholders and oversee a corporation’s activities
- Filing Articles of Incorporation with the state – Some states may require an accounting business to be set up as a Professional Corporation (PC).
- Creating bylaws – To define owners’ responsibilities and authority and to establish ground rules for operating the company
- Holding an initial Board of Directors meeting – To cover essentials such as appointing offers, adopting bylaws, selecting a bank, setting the fiscal year, etc.
- Applying for necessary business licenses and permits – I recommend the State Board of Accountancy as a resource for identifying the state requirements and checking at the county and municipality levels for applicable local licenses and permits.
- Obtaining an EIN (Employer Identification Number) – Usually required before a company can open a business bank account
- Opening a business bank account – To keep the corporation’s assets separate from those of its owners
- Obtaining a business insurance policy to provide additional liability protection
- Submitting an initial report, if required by the state – Sometimes called a “Statement of Information”
- Issuing stock to shareholders – Following all securities laws of the state
- Staying compliant with all ongoing filing requirements – Necessary to avoid penalties, fines and possible suspension or forced closure of the business
As you can see, there's a lot to consider when exploring whether a corporation will be the best business structure for your firm. I've given you some basic information to provide you with a head start in your research efforts, and I recommend you ask a business attorney for legal guidance. There's no such thing as being too prepared or informed when deciding on a business entity type.
Author Bio: Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. She is the CEO of CorpNet.com and recently launched a partner program for the accounting community. Accountants, CPAs, Bookkeepers and other professionals can offer business incorporation and compliance services to their client to extend their services but CorpNet does the work. More info at: CorpNet.com/partners