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Forming Your San Diego Professional Accountancy Corporation

Here in San Diego and elsewhere in California, accountants can form California professional accountancy corporations. Accountants are licensed and regulated by the California Board of Accountancy (“CBA”). The only corporate form that can be used to operate an accounting firm is a California professional corporation as allowed by the Moscone-Knox Professional Corporation Act (the “Moscone-Knox Act” or the “Act”) originally passed in 1968. See Cal. Corp. Code, §13400 et seq. No other form, such as a regular corporation or a limited liability company, is permitted.

Of course, accountants may operate as a sole proprietorship, but that may not always be the best fit. A California professional accountancy corporation provides a shield for your personal assets that is not available when operating as a sole proprietorship. An experienced San Diego corporate attorney can help you set up your California professional accountancy corporation correctly and can give advice and counsel on the other legal necessities such as who can be elected to the board of directors. Here is some general information on the requirements.

Who may be Shareholders and Directors of Your California Professional Accountancy Corporation?

As many know, corporations are owned by their shareholders. Annually, the shareholders elect a board of directors, and the board runs the corporation at a strategic level. In turn, the board hires the President or Chief Executive Officer and the other members of the senior management. Senior management then operates the corporation on a day-to-day basis. Often, shareholders overlap in their roles, being owners, directors and members of senior management. In general, under the Moscone-Knox Act, at least 51% of shareholders of a California professional corporation must be licensed in the profession of the corporation — in this case, accountants. The remaining 49% can be from allied professions. The Moscone-Knox Act provides a list of “allied professions” for several professions, but not for accountants. However, Cal. Bus. & Prof. Code, § 5154, which requires that, “… each director, shareholder, and officer of an accountancy corporation shall be a licensed person …” also provides as an exception reference to Cal. Bus. & Prof. Code, § 5079.

Cal. Bus. & Prof. Code, § 5079 allows any firm lawfully engaged in the practice of public accountancy to have owners who are not licensed as certified public accountants if, subject to the limiting language of § 5079, if “(1) Nonlicensee owners shall be natural persons or entities, such as partnerships, professional corporations, or others, provided that each ultimate beneficial owner of an equity interest in that entity shall be a natural person materially participating in the business conducted by the firm or an entity controlled by the firm; (2) Nonlicensee owners shall materially participate in the business of the firm, or an entity controlled by the firm, and their ownership interest shall revert to the firm upon the cessation of any material participation; (3) Licensees shall in the aggregate, directly or beneficially, comprise a majority of owners, except that firms with two owners may have one owner who is a nonlicensee; (4) Licensees shall in the aggregate, directly or beneficially, hold more than half of the equity capital and possess majority voting rights; (5) Nonlicensee owners shall not hold themselves out as certified public accountants or public accountants and each licensed firm shall disclose actual or potential involvement of nonlicensee owners in the services provided; and (6) There shall be a certified public accountant or public accountant who has ultimate responsibility for each financial statement attest and compilation service engagement.”

Note that the California Business & Professions Code requires that “… each director, shareholder, and officer of an accountancy corporation shall be a licensed person …” under Cal. Bus. & Prof. Code, § 5154, and Cal. Bus. & Prof. Code, § 5079 only permits non-licensed shareholders. Thus, a California professional accountancy corporation should still have accountant officers and directors. Note also that, as part of bi-annual licensure renewal, California professional accountancy corporations are required to provide information about their owners and directors. Note further that each office location must be managed by a currently-licensed CPA. See Cal. Bus. & Prof. Code, § 5158.

What About the Name of My California Professional Accountancy Corporation?

In general, accountants must operate their firm under their own name (although sole proprietors may operate under a doing-business-as-name as long as the name is not false or misleading and there is compliance with the laws about using fictitious names.) See Cal. Bus. & Prof. Code, §5060. When setting up a professional accountancy corporation, however, one or more of the surnames of the CPAs should be used along with a word or words designating the corporation as a CPA and/or accounting firm.

What About Bylaws and an Owners Agreement?

Your professional accountancy corporation must have corporate bylaws. These are adopted by the board of directors at the first meeting of the board. It is recommended that your bylaws be custom drafted to fit the unique needs of your accounting firm. An Owners Agreement is also highly recommended if there is more than one owner. The Agreement sets out details about how the firm is managed, rules with respect to what happens if an owner or director loses his/her licensure, buy-out provisions, and/or restrictions and other matters.

How do I Start?

Start by contacting a trusted San Diego corporate attorney. The next step is filing properly-prepared articles of incorporation with the California Secretary of State and paying the applicable fees, electing a board of directors and appointing officers, holding a meeting of the board to adopt bylaws and other resolutions, issue securities, and other compliance steps that may be required by the California Board of Accountancy.

Who Should I Contact for Help? Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard can assist with the formation of your California professional accountancy corporation and any other business entity — corporations, LLCs, and other forms. Mr. Leonard can also assist with sales, mergers and acquisitions, contract drafting and review including commercial leases, and establishment and licensing of trademarks, copyrights, and trade secrets. Like us on Facebook.