The Essentials: Form — Accounting / CPA Firm

Which entity type can a CPA firm use?

It depends on the state. Many states allow professional corporations, PLLCs, LLPs, or ordinary LLCs registered with the board, while others limit professionals to specific structures; California, for example, directs CPAs to sole proprietorships, partnerships, LLPs, and accountancy corporations rather than LLCs. Read your state accountancy act and the board's firm registration page before you file with the Secretary of State. Filing fees range from about $50 to $800, with annual reports and, in some states, annual franchise or minimum taxes. A professional entity limits liability for business debts and other owners' negligence, not for your own professional errors.

What is a firm permit, and how is it different from your CPA license?

Your individual license lets you practice; many states also require the firm to hold its own registration or permit, renewed every one to three years, with fees often in the $100 to $500 range. Applications usually ask for the entity documents, ownership, a list of licensed owners, and, if you do attest work, proof of peer review enrollment. Start the board application before you launch, since processing can take several weeks and some states require the firm name to be approved first. Do not advertise as a CPA firm until the permit is issued.

What ownership rules apply?

Under the model rules many states follow, CPAs must hold a majority of the firm's ownership and voting rights, and the person in charge of attest engagements must be licensed. Some states now allow non-CPA minority owners, which matters if you plan to add a financial planner or a private-equity partner later. Ask the board about any restrictions on names, on non-CPA owners, and on multi-state ownership before you sign a partnership agreement.

Who needs peer review, and what does it involve?

Firms that perform audits, reviews, or compilations and other attest services generally must enroll in a peer review program, most often the AICPA Peer Review Program administered through state CPA societies, and have a peer review every three years. A firm that only prepares taxes and provides advisory services is usually exempt from peer review, though some states ask you to report that you do not perform attest work. Enrollment often has a deadline after you begin attest work, and fees include an administrative fee plus the cost of the reviewer.

What federal and administrative registrations come next?

Get an EIN from the IRS, open a separate business bank account and a trust or client-funds account if you hold client money, and register each preparer for a PTIN (an annual fee of under $25). Apply for an EFIN through IRS e-Services before you e-file returns, which requires fingerprints for some applicants and a suitability check. Register for state payroll and unemployment taxes if you hire, and obtain a local business license. Set up professional liability insurance before your first client engagement.

What should the operating agreement and buy-sell terms say?

With a partner, put in writing the ownership split, capital contributions, decision rights, compensation, client ownership, non-compete and non-solicit terms, and what happens on death, disability, retirement, or departure. Set a valuation method, commonly a multiple of recurring fees such as roughly 0.75 to 1.5 times annual revenue for a small practice, or a formula tied to collected fees, and a payment schedule of several years. Have a business attorney draft it; a few thousand dollars at formation costs less than a partner dispute in year three.

What is a realistic formation timeline and budget?

A typical sequence is to check the board's rules and name (week 1), file the entity (weeks 1 to 3), get the EIN (same day online), open the bank account (one to two weeks), submit the board firm application (weeks 3 to 8), register for peer review if needed, and bind insurance before the first engagement. Budget roughly $300 to $1,500 for filing fees, the firm permit, registered agent, and PTIN and license renewals, plus a few thousand dollars for an attorney if you have partners. Add annual costs for reports, permit renewal, and continuing professional education, which most boards require at about 40 hours a year.

How should the firm name and records be handled?

Boards often restrict names that mislead about ownership, credentials, or specialty. A name that uses only a partner's surname can be fine, while a name that implies a partnership when there is one owner may not be. Check the name against the Secretary of State database, the board registry, the domain, and trademark records. Keep formation documents, the EIN letter, the firm permit, operating agreement, and insurance certificates in a shared folder, since lenders, insurers, and buyers will ask for them.

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