Life Cycle Planning for the CPA Practice: Practical Strategies and Forms

As a CPA you have considerable business, tax, and planning expertise. You have the wherewithal to evaluate and finalize a significant range of decisions before retaining an attorney to reduce those decisions to formal agreements. But the consequences can be considerable and costly. Whether you are starting your first solo practice, retiring, or somewhere between, this book will provide you the resources you need to really "hash out" the details of all your major practice decisions and go to your lawyer with clear instructions on exactly what documents you need and what they should contain. In each chapter of the book you’ll get a sense of the issues surrounding a specific practice milestone such as leasing or buying office space, merging with another practice, promoting staff to partner, or winding down, to name a few. 

Companion CD-ROM

The companion CD-ROM provides over 700 pages of indexed, searchable, annotated sample forms and checklists. By reviewing the appropriate chapter and then following the checklists you and your colleagues can comprehensively "work out" the details of your next practice milestone and instruct your attorney in a way that will allow for efficient drafting of exactly the right documents to protect your interests.

About the Author

Martin Shenkman, CPA, MBA, JD, an attorney in private practice, is author of thirty-two books and more than seven hundred articles. He is quoted in the financial media, and has appeared on The Today Show, CNBC, CNN-FN, and others.

Praise for Life Cycle Planning for the CPA Practice

“When it comes to business planning too many accountants are like the shoemaker whose own children went barefoot because he was too busy making shoes for everyone else. We spend our lives advising clients on how to plan their businesses, but we don’t apply that advice to ourselves. This book takes away any excuse we ever had for practicing without a plan.  Martin Shenkman is a brilliant practitioner. He has done an outstanding job of thinking through the issues from every angle and gathering all the information and sample forms we need to plan, structure and document our own businesses with the same care and attention to detail that we counsel for our clients.”

— Sidney Kess,practicing CPA and nationally renowned accounting industry expert, lecturer and author.

Chapter 1

Addressing Life-Long Practice Issues

The focus of this book is planning for the life cycle of your accounting practice.  However,  before addressing the key practice life-cycle milestones, it is important to consider some basic issues  which will affect your practice at every stage of its life cycle.  These include:

• Ancillary business activities
• Practice facilities
• Malpractice concerns
• Personal asset protection

These issues can affect how you structure and document important aspects of your practice, and the decisions you make about these issues, and their impact, may evolve as your practice moves through its life cycle.   We’ll discuss each issue in turn.

ANCILLARY BUSINESS ACTIVITIES Ancillary Activities.
It is becoming more common for accounting practices to be engaged in ancillary services and revenue generating activities. From the outset these ancillary activities should be comprehensively considered and addressed to minimize disputes over revenue allocation, to address responsibility for expenses, to avoid ownership and succession issues, and to minimize liability concerns.

Some examples of ancillary or special activities that may warrant special planning include:

• Ownership of a building partially or wholly used by the practice
• Offering a financial planning service or Registered Investment Adviser (RIA) service
• Offering a specialized consulting practice
• Offering sports or other business management services

When structuring and planning for the ancillary activity, consider the following:

• Is there a regulatory, compliance, or licensing reason that it is required (or just advisable) to have a separate entity own the ancillary business activity?
• Is there a liability reason to have the ancillary business activity owned by a separate entity? This is clearly the case for real estate, but might be true for other activities as well.
• If the ancillary business activity is to be owned by a separate entity, what steps can be taken to support the independent legal viability of that entity so the objectives of segregating it are met?  This can present challenges because many factors, from physical facilities to overhead cost allocations, may result in at least partial integration of the two entities. However, even if independence in the event of a suit or claim is not assured, every effort should be made to maintain the separate and independent nature of the ancillary business activity (for example, separate signage, separate letterhead, adherence to business formalities, or no commingling of funds).
• Who should own the ancillary business activity entity? Do you want to limit ownership to those who are members of the accounting practice? Do you want to mandate an identity of ownership for the accounting practice and the ancillary business entity?
• How are joint costs to be addressed? How are allocations to be made? What approaches can be used that will demonstrate the independence of the ancillary business entity while being fair to the partners of the accounting practice?

Example of a Reasonably Segregated Ancillary Business:
 Able, Baker, and Carnie are principals in ABC CPAs. A, B, and C form a separate investment advisory firm, ABC Advisors, and hire an employee to run the operation. The three initial partners own ABC Advisors directly; it is not established as a subsidiary of the ABC CPAs accounting practice. Some portion of the overhead from the accounting practice is allocated, based on a reasonable arm's-length formula, to the advisory practice. The advisory practice is in the same building as the CPA practice, but it has a separate office entrance, separate conference room, file area, and a separate office for the employee managing the advisory practice. The advisory practice pays directly to the landlord a pro-rata share of the overall rent for the building that it shares with the accounting practice. Other overhead costs are allocated to the advisory practice, which reimburses the accounting practice. When a client of the accounting practice becomes a client of the advisory business, or a client of the accounting practice purchases an investment from the registered representative of the advisory practice, the client is required to sign an appropriate disclosure statement  that, among other matters, acknowledges the lack of independence between the accounting and advisory firms. The accounting practice grows, and new partners join. The accounting practice's shareholders’ agreement incorporates each of the above cost allocation agreements and formulas. The new partners do not automatically qualify to own an interest in the advisory practice. The founding members, A, B, and C, can decide to extend an opportunity to a new partner to buy into the advisory practice at its then fair value.

Addressing these and other issues in advance, and in specific language in the appropriate documents for each entity, will minimize issues between the various owners and help secure the various benefits which motivated the formation of the separate entity.

Since the most common ancillary business activity for accounting practices tends to be ownership of the practice’s real estate, this is addressed in greater detail below. Many of the issues evaluated in the context of practice real estate and facility decisions can be applied to other ancillary practice activities as well.

PRACTICE FACILITIES

There are many different approaches you can use to obtain office space for your practice. Each approach has implications to you personally and to your practice. A key decision is whether you lease space or purchase a building or condominium.