In the world of business formation, the term Accountancy PLLC, or Accountancy Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed accountants for rendering professional services. However, navigating the specifics of using an Accountancy PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Accountancy PLLCs in California, and the alternatives for accounting practice owners.

Spoiler Alert: Acupuncture Cannot Be Practiced Using Any LLC in California

If you are already practicing accounting in California as a California LLC or an LLC or PLLC from a state other than California, you should also read this article which includes information about how to get into compliance with California law for your accountancy practice.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Accounting Services by Licensed Accountants in California

Use of a California LLC to Render Professional Accounting Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional accountancy services in California. This comes as a surprise to many licensed accountants, as Accountancy Professional Limited Liability Companies are commonly used to render professional accountancy services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed accountants in California:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Thus, licensed accountants may not use or form limited liability companies for the provision of professional accountancy services in California.

Use of a California PLLC to Render Professional Accounting Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC to render professional accountancy services, because nothing in the California Corporations Code differentiates the idea of a California Accountancy PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional accountancy services, and nothing establishes a California Accountancy PLLC as a business entity that may be formed under California law.

In short, there is no California Accountancy PLLC as the law currently stands at the time of this writing in 2024, and thus licensed accountants are unable to form a California Accountancy PLLC for their professional accountancy services. This is a significant departure from the norm in many other states, where Accountancy PLLCs are a commonly used business entities for licensed accountants.

Use of a Foreign Accountancy PLLC to Render Professional Accounting Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed accountants to render professional accountancy services, and because the California Corporations Code does not differentiate between a between a foreign LLC or foreign PLLC for purposes of California Corporations Code Section 17701.04(e), neither a foreign LLC nor a foreign PLLC may be used by licensed accountants to render professional accountancy services in California.

Professional practices that are structured as Accountancy PLLCs in other states need to exercise extreme caution when offering professional accountancy services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state accountancy practices operating as Accountancy PLLCs in their home state may encounter legal restrictions if they wish to offer their professional accountancy services in California. Therefore, the licensed accountants practicing under these Accountancy PLLCs in their home states must not use their Accountancy PLLCs when rendering professional accountancy services in California and must do so either as a California Sole Proprietorship or California General Partnership by default, or by establishing a California Professional Accountancy Corporation or a California LLP, as will be discussed below.

What Business Structure Options Do Accountants Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Accountancy PLLCs (and there is no such thing as a California PLLC!) for the provision of professional accountancy services in the State of California, California licensed accountants seeking to practice accounting in California must explore choose one of the permissible business structures, as discussed below.

Selecting the best permissible business structure option will depend on the specific professional accountancy services to be offered and the regulations governing those accountancy services. In the following subsections, we will introduce the various business entities that are permitted to render professional accountancy services in California, including Limited Liability Partnerships, Sole Proprietorships, General Partnerships, and Professional Accountancy Corporations, each of which comes with its own set of advantages and limitations.

Two or More California Licensed Accountants May Practice Accountancy as a California LLP

For accountants who are seeking to practice together in California, a California Limited Liability Partnership (California LLP) can be an attractive business structure. A California LLP allows two or more licensed accountants to join together in a partnership while also providing each partner with liability protection, similar to that of a California Professional Accountancy Corporation.

Liability Protection for Accountants from a Limited Liability Partnership in California

In a California LLP used for the practice of accountancy, all accountant partners enjoy a level of liability protection. This means that each accountant partner is not personally responsible for the debts, obligations, or liabilities of the California LLP arising from errors, omissions, incompetence, or malfeasance committed by another accountant partner or an employee not under their direct control. Thus, the personal assets of an accountant partner, such as their home, personal savings, and vehicles, are safeguarded from the creditors of the California LLP. Unlike California General Partnerships, where each accountant partner can be held liable for the actions of another partner, a California LLP prevents such vicarious liability like a California Professional Accountancy Corporation.

However, and as with a California Professional Accountancy Corporation, it should be noted that this protection does not absolve individual accountant partners from the consequences of their own professional misconduct. Therefore, it is crucial for accountant partners in a California LLP to have adequate malpractice insurance coverage.

Taxation of Limited Liability Partnerships in California

California LLPs are taxed under the pass-through taxation system. This means the California LLP itself does not pay income taxes. Instead, the share of the profits or losses of the California LLP allocated to each accountant partner passes through to their personal income tax return. The individual accountant partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California LLP at their individual income tax rates.

Each accountant partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California LLP earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California LLP income allocated to each accountant partner and passed through to their personal tax returns.

A California LLP is also subject to an annual franchise tax of $800 payable to the California Franchise Tax Board.

When Should California Licensed Accountants Practice Using a Limited Liability Partnership in California?

California licensed accountants should consider practicing under a California LLP if there is a compelling reason to not choose a California Professional Accountancy Corporation. For example, if the licensed accountant partners wish to separate equity ownership from allocation of profits, a California LLP would allow this whereas allocations of profits from a California Professional Accountancy Corporation must be done on a pro rata basis based on share ownership. Another example would be where licensed accountants want to limit their liability but do not qualify for S Corporation status and the partnership taxation of a California LLP would be more tax efficient than taxation of a California Professional Accountancy Corporation taxed as a personal services corporation subject to double taxation. Otherwise, a California Professional Accountancy Corporation is likely to be a better business structure than a California LLP for most California licensed accountants.

A California Licensed Accountant May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed accountants in California. In a Sole Proprietorship, the individual accountant is the sole owner and operator of the accountancy practice.

Liability Protection for Licensed Accountant Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed accountant is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the accountancy practice. This means that if the accountancy practice incurs a debt or is sued, the personal assets of the licensed accountant, such as their home, car, and personal bank accounts, can be used to settle these obligations.

The lack of liability protection is a significant disadvantage of operating an accountancy practice as a Sole Proprietorship and is a critical factor that a licensed accountant should consider when deciding on the most appropriate business structure for their accountancy practice in California.

Taxation of Licensed Accountant Sole Proprietors in California

In California, Accountant Sole Proprietorships are subject to pass-through taxation, meaning the business itself is not separately taxed. Instead, the income or loss of the business is passed through to the licensed accountant. The licensed accountant reports business income and expenses on Schedule C of their personal federal income tax return (Form 1040). The net profit or loss is then reported on the personal tax return of the licensed accountant and taxed at individual income tax rates.

In addition to income taxes, a licensed accountant practicing as a Sole Proprietorship in California is also subject to self-employment taxes, which cover Social Security and Medicare taxes. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

At the state level, California has one of the highest state income tax rates in the country, and these rates apply to business income that passes through to the personal tax returns of the licensed accountant practicing as a Sole Proprietorship.

When Should a California Licensed Accountant Practice as a Sole Proprietorship in California?

A California licensed accountant should only consider practicing as a Sole Proprietorship in California when they are starting their accountancy practice and have limited financial resources, will not have employees, do not expect to grow their practice beyond just a few clients, and have substantial insurance coverage for the liabilities and risks associated with their accountancy practice.

However, as the accountancy practice grows, the licensed accountant should reconsider the use of a Sole Proprietorship for their accountancy practice as revenue increases, before hiring employees, or as professional liabilities increase. Upon the first to occur of increasing revenue, hiring employees, or increases in professional liability, it will be advantageous for the licensed accountant to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Accountants Professionals May Practice as a General Partnership in California

A California General Partnership used for an accountancy practice is a business entity in which two or more licensed accountants join together to provide professional accountancy services in California. In such a setup, all accountant partners share equal rights and responsibilities in managing the business of the accountancy practice.

Liability Protection for Accountant General Partners in a California General Partnership

General Partnerships in California do not provide accountant partners with liability protection. This means each accountant partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the accountancy practice, including those incurred by other accountant partners which includes acts of malpractice by the other accountant partners. If the California General Partnership providing professional accountancy services is sued or incurs debt, the personal assets of each accountant partner, such as their home, vehicles, and personal savings, could be at risk, even if they are not found personally at fault for incurring the debt or committing the act of malpractice.

This lack of liability protection is a considerable drawback for California General Partnerships rendering professional accountancy services and something California licensed accountants should seriously factor into their decision when considering a California General Partnership for their accountancy practice in California.

Taxation of General Partnership Accountancy Practices in California

In California, accountancy practices structured as General Partnerships are taxed under the pass-through taxation system. This means the California General Partnership itself does not pay income taxes. Instead, the share of the profits or losses of the California General Partnership allocated to each accountant partner passes through to their personal income tax return. The individual accountant partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California General Partnership at their individual income tax rates.

Each accountant partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California General Partnership earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California General Partnership income allocated to each accountant partner and passed through to their personal tax returns.

When Should California Licensed Accountants Practice as a General Partnership in California?

Based upon the unlimited liability and tax structure of a California General Partnership, a California General Partnership should probably not be considered by licensed accountants practicing accountancy in California, as there are superior options for a professional practice in California that provide more personal liability protection than a California General Partnership for accountancy practices.

One or More California Licensed Accountants May Practice Accounting as a California Professional Accountancy Corporation in California

California Professional Accountancy Corporations are a specialized form of California Professional Corporation established by the California Corporations Code and California Business and Professions Code specifically for licensed professionals in accountancy who seek personal liability protection and tax benefits for their accountancy practice. These California Professional Corporations for licensed accountants are separate legal entities distinct from its licensed accountants owner(s) and permitted non-accountant owner(s), referred to collectively as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed accountant personally practicing accounting) or a California General Partnership or California LLP (which is a group of licensed accountants practicing accounting together).

Liability Protection from a Professional Accountancy Corporation in California

In a California Accountancy Corporations, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Accountancy Corporation. This means that in most instances, if the California Professional Accountancy Corporation is sued or incurs debt, the personal assets of the licensed accountant owner(s) and other licensed shareholders (such as their home, vehicles, and personal savings) are shielded from creditors.

It is essential to note that this liability protection does not extend to professional malpractice claims against a licensed accountant. The personal asset protection applies only to debts and obligations incurred by the California Professional Accountancy Corporation, not to the individual actions of a licensed accountant. However, when two or more licensed accountants are practicing accounting in a California Professional Accountancy Corporation, a malpractice claim against one licensed accountant is not a malpractice claim against all the other licensed accountants and other licensed shareholders, which is a significant increase in personal liability protection for professional malpractice compared to a California General Partnership.

While the use of a California Professional Accountancy Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Accountancy Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Accountancy Corporations in California

Professional Accountancy Corporations in California can opt to be taxed as personal service corporations subject to double taxation or S Corporations, which alters the tax landscape for these entities. As the vast majority of California Professional Accountancy Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Accountancy Corporations.

With S Corporation status, the California Professional Accountancy Corporation itself does not pay income tax. Instead, the income and losses of the California Professional Accountancy Corporation pass through to the personal income tax returns of the licensed shareholders.

To qualify for S Corporation status, the California Professional Accountancy Corporation must meet certain requirements including having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock.

One of the key advantages of S Corporation status for a California Professional Accountancy Corporation lies in the area of self-employment taxes. Salaries and wages paid to licensed shareholder-employees are subject to payroll taxes (Social Security and Medicare). However, any additional profits distributed to licensed shareholders are not subject to either payroll taxes or self-employment taxes. This can result in significant tax savings.

In terms of state taxes, California taxes S Corporations at a rate of 1.5% of their net income, with a minimum tax of $800 paid annually to the California Franchise Tax Board. Licensed shareholders in a California Professional Accountancy Corporation taxed as an S Corporation are also required to pay state income tax on their allocated share of the income of the California Professional Accountancy Corporation.

When Should California Licensed Accountants Practice Using a Professional Accountancy Corporation in California?

A California licensed accountant should consider practicing as a Professional Accountancy Corporation in California when seeking personal liability protection and tax benefits for their accountancy practice. This structure is particularly advantageous if the accountant wishes to shield their personal assets from business debts, liabilities, and obligations while also shielding themselves from legal judgments against the California Professional Accountancy Corporation, with the exception of individual professional malpractice claims against the licensed accountant personally.

If the licensed accountant can meet the requirements necessary to qualify for S Corporation status, they can enjoy significant tax advantages. This includes the potential for tax savings through the having no self-employment tax liability on profits distributed to licensed shareholders, and only payroll tax liabilities on a reasonable salary paid to them as an employee of the California Professional Accountancy Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed accountant, the California Professional Accountancy Corporation should be the go-to business entity for California licensed accountants.

Secure Your Future with Legal Services from Experts in California Professional Business Structures: Let San Diego Corporate Law Guide Your Business Structure Selection

Choosing the right business structure for your accountancy practice in California is a critical step for every California licensed accountant. It can significantly influence your tax obligations, personal liability, and the overall success of your accountancy practice. At San Diego Corporate Law, our experienced legal team is well-versed in California business laws and can help you navigate the complexities. Whether you are considering a California Professional Accountancy Corporation or other structure for your accountancy practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your accountancy practice starts in California on solid legal footing.