Choosing the right business structure is a crucial decision for accounting group practices in California. The choice of business entity determines how the accounting group practice is taxed, the extent of personal liability protection and personal asset protection available to the accountant professionals, and the administrative requirements the accountant professionals will need to manage in operating the accounting group practice.

A recent article titled “What are the Business Structure Options for Solo Professionals in California?” discussed the business structure options available to solo accountants starting a solo accounting practice, however, for two or more accountants starting a group accounting practice together in California, there are different options available.

This article provides an overview of the various business structure options available to accountants starting a group accounting practice in California, helping accountants to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Accountants

Summary of Practicing Accountancy as a General Partnership

The primary benefit of a California General Partnership for accountants is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that accountant partners are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for accountant partners, meaning the debts, liabilities, and legal judgments for which accountant partners are liable are satisfied from the personal assets of those accountant partners.

Summary of Practicing Accountancy with a California Limited Liability Partnership (LLP)

For accountants, a California Limited Liability Partnership (LLP) is an option worth examining under certain circumstances. The complexities of California LLPs are equivalent to those of a California Professional Accountancy Corporation, but the complexity of a California LLP may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. Like a California General Partnership, a California LLP is not a separate legal entity, so accountant partners of California Limited Liability Partnerships are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability). However, unlike California General Partnerships, accountant partners of a California LLP are not personally liable for the malpractice of other accountant partners.

Summary of Practicing with a California Professional Corporation

While slightly more complex than California General Partnerships and are equivalent in complexity to California LLPs, the complexity of a California Professional Accountancy Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Accountancy Corporations significantly reduce liability risks and are more tax efficient for most accountants. For accountants in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Accountancy Corporations also means there is a distinction between personal and professional business assets for the accountant, meaning the debts, liabilities, and legal judgments against the accounting practice are not generally satisfied from the personal assets of the accountant owners, and as with California LLPs owners are not personally liable for acts of malpractice by their co-owners, but they do remain personally liable for their own acts of malpractice.

Choosing Between a California General Partnership, a California LLP, and a California Professional Accountancy Corporation

For most accountants, the California Professional Accountancy Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing accountancy as a California General Partnership or a California LLP.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Accountancy Practice

Take the next step toward securing the ideal business structure for your accountancy practice, whether that is a California Professional Accountancy Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Accountancy as a California General Partnership

Practicing accountancy as a California General Partnership is the simplest and most straightforward business structure for two or more accountants practicing together in California. A California General Partnership requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the accounting practice. However, along with these advantages come distinct disadvantages that accountants must consider carefully before considering a California General Partnership as the business structure for their accounting practice.

Administrative Requirements of Practicing Accountancy as a California General Partnership

One of the primary benefits of a California General Partnership for practicing accountancy is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.

California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Taxation of California General Partnerships for the Practice of Accountancy

Tax considerations are a critical aspect to be examined when planning to practice accountancy as a California General Partnership. California General Partnerships file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to accounting practices is essential for accountants when choosing a business structure in which to operate their accounting practice.

Business Income Taxation When Practicing Accountancy as a California General Partnership

California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Accountancy as a California General Partnership

Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for accountant partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from their accounting practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing Accountancy as a California General Partnership

High earning accountant partners of California General Partnerships may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For accountant partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for accountant partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Partners of California General Partnerships must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning accountants to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Accountant Partners of California General Partnerships

Understanding the tax implications of a California General Partnership is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Accountancy as a California General Partnership

Practicing accountancy as a California General Partnership also comes with challenges regarding personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the accountants and the accounting practice.

Personal Liability for Accountants When Practicing Accountancy as California General Partnerships

One of the primary risks faced by accountant partners of a California General Partnership is personal liability. The lack of distinction between the accountant partners and the accounting California General Partnership professional practice means that each of the accountant partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the accounting practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Accountants When Practicing Accountancy as California General Partnerships

The lack of distinction between the accountant and the accounting practice that makes personal liability a primary risk to accountant partners of a California General Partnership also means that all assets of the accountant partners, be they strictly personal assets or assets used in the accounting practice, are subject to claims by creditors and legal claimants against the personal assets of the accountants (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Accountant Partners of California General Partnerships

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for accountants choosing a business structure for their accounting practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Accountancy as a California General Partnership

When deciding whether to establish a group accounting practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to accountant partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for practicing accountancy.

Advantages of California General Partnerships for Accountants

The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a group accounting practice.

Disadvantages of California General Partnerships for Accountants

While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most accountants.

A California General Partnership is not a separate legal entity, which means that accountant partners are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For accountants in high liability accounting practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for accountant partners, meaning the debts, liabilities, and legal judgments for which an individual accountant partner of a California General Partnership is liable are satisfied from the personal assets of that accountant partner.

When is a California General Partnership the Right Business Structure for Practicing Accountancy?

A California General Partnership can be an ideal option for two or more accountants joining together to organize a small-scale accounting practice with the expectation of low net profit and low liability risks. However, before choosing to practice accountancy as a California General Partnership, it is essential for the accountant partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the accounting practice. Accountant partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing accountancy as a California General Partnership in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between California General Partnerships and California Professional Accountancy Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Accountancy Corporation” and “What are the Disadvantages of General Partnerships in California?” for more information.

Practicing Accountancy as a California LLP

Like a California Professional Accountancy Corporation, practicing accountancy as a California LLP is a relatively complex business structure available to two or more accountants practicing together in California. A California LLP offers flexibility in managing the accounting practice and flexibility in distributing net profits to accounting partners. In addition, accountant partners of a California LLP are not liable for acts of malpractice committed by other accountant partners, but the accountant partner remains liable for their own acts of malpractice. Along with these advantages come distinct disadvantages that accountants must consider carefully before considering a California LLP as the business structure for their accounting practice.

Administrative Requirements of Practicing Accountancy as a California LLP

California LLPs are about equivalent to California Professional Accountancy Corporation with respect to initial formation, however California LLPs are usually simpler to operate in subsequent years as compared to California Professional Accountancy Corporation. Typically, the initial steps of setting up a California LLP include the mandatory filing a Certificate of Limited Liability Partnership with the California Secretary of State, entering into a Limited Liability Partnership Agreement between all accountant partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the accounting practice will operate.

Taxation of California LLPs

Tax considerations are a critical aspect to be examined when planning to practice accountancy as a California LLP. California LLPs file informational tax returns and accountant partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to accounting practices is essential for accountants when choosing a business structure in which to operate their accounting practice.

Business Income Taxation When Practicing Accountancy as a California LLP

California LLPs report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California LLP does not pay California or federal income tax on its own net profit. Instead, each accountant partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California LLP, and each accountant partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California LLP on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Accountancy as a California LLP

Taxation of the accountant partners of a California LLP is not tax efficient. One significant consideration for accountant partners of a California LLP is self-employment tax. Since accountant partners of a California LLP do not receive a salary from the accounting practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California LLP can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing as a California LLP

High-earning partners of California LLPs may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For accountant partners of a California LLP filing as single, the threshold is $200,000, while it is $250,000 for accountant partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Accountant partners of California LLPs must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning accountants to account for this additional tax in their financial planning to avoid unexpected liabilities.

Annual Franchise Tax for California LLPs

California LLPs must pay an annual franchise tax of $800 per year.

Conclusions About Taxation of a California LLP

Understanding the tax implications of a California LLP is integral when deciding which of the available business entities will be the most tax efficient for a group accounting practice, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Accountancy as a California LLP

Practicing accountancy as a California LLP also comes with challenges regarding personal liability protection and asset protection for accountant partners because a California LLP is not a separate legal entity, and thus does not offer a legal distinction between the accountant partners and the accounting practice.

Personal Liability for Accountants When Practicing as a California LLP

One of the primary risks faced by accountant partners of a California LLP is personal liability. The lack of distinction between the accountant partners and the California General LLP accounting practice means that each of the accountant partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the accounting practice personally, including claims for professional negligence for their own actions or inactions, better known as malpractice, for errors and omissions. However, unlike a California General Partnership, accountant partners of a California LLP do not have liability for the malpractice of other accountant partners, just their own malpractice.

Personal Asset Protection for Accountants When Practicing Accountancy as a California LLP

The lack of distinction between the accountant partners and the accounting practice that makes personal liability a primary risk to partners of a California LLP also means that all assets of the accountants partners, be they strictly personal assets or assets used in the accounting practice, are subject to claims by creditors and legal claimants against the personal assets of the accountants partners (such as their homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Accountant Partners of a California LLP

While the exclusion of liability for the malpractice of other accountant partners of a California LLP is a step up in protection from a California General Partnership, the exposure to personal liability for debts, liabilities, obligations, and all other legal judgments coupled with the inability to separate personal assets from professional business assets underscores the importance for accountants choosing a business structure for their accounting practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Accountancy as a California LLP

When deciding whether to practice accountancy as a California LLP, it is essential to weigh the benefits and drawbacks of this business structure. While California LLPs offer freedom from liability for the malpractice of other accountant partners, California LLPs still come with significant liability risks and limitations. The advantages and disadvantages of operating a California LLP are compared below together with a recommendation for when a California LLP is the best legal structure for practicing accountancy.

Advantages of California LLP

The primary benefit of a California LLP over a California General Partnership is liability protection from malpractice claims alleged against other accountant partners. The primary benefit of a California LLP over a California Professional Corporation is flexibility of management and flexibility on how profits may be distributed to accountant partners of a California LLP.

Disadvantages of California LLP

California LLPs carry significant risks and are not tax efficient for most accountants.

A California LLP is not a separate legal entity, which means that accountant partners are personally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability, but not liability for acts of malpractice by other accountant partners). For accountants in high-liability practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for accountant partners, meaning the debts, liabilities, and legal judgments for which the accountant partners of a California LLP are liable are satisfied from the personal assets of the accountant partners.

When is a California LLP the Right Business Structure for Practicing Accountancy in California?

A California LLP can be an ideal option for two or more accountants joining together to organize a small-scale practice with the expectation of low net profit and low liability risks without liability for the malpractice of the other accountant partners. Before choosing to practice as a California LLP, it is essential for the professional partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the accounting practice.

For accountants in high-risk accounting practice areas or those who anticipate rapid growth in their accounting practice may want to avoid practicing accountancy as a California LLP in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For accountants who desire the flexibility a California LLP provides but are in high-risk practice areas and/or high net profit accounting practices, each accountant partner may form their own California Professional Accountancy Corporation and these California Professional Accountancy Corporations may partner in a California LLP instead of the accountants partnering individually. While this combination of a California LLP with California Professional Accountancy Corporation partners is complex to establish and combines the administrative requirements of both the California LLP and the California Professional Accountancy Corporations, this is the structure of choice for accountants in group accounting practices.

Practicing Accountancy with a California Professional Accountancy Corporation

Practicing accountancy with a California Professional Accountancy Corporation is not as simple or straightforward as practicing accountancy as a California General Partnership, and is about equivalent in complexity to a California LLP, however, a California Professional Accountancy Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the accountant from the professional business assets of the accounting practice that California General Partnerships and California LLPs lack.

Administrative Requirements of Practicing Accountancy with a California Professional Accountancy Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Accountancy Corporation provides, accountants are faced with the complexity of establishing a California Professional Accountancy Corporation. While this formation process is complex, accountants may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Accountancy Corporation, leaving accountants with essentially the same tasks they would undertake to establish a California General Partnership or California LLP. It is also worth noting that legal fees and costs of forming a California Professional Accountancy Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Accountancy Corporation, and every year after the initial formation of a California Professional Accountancy Corporation, a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Accountancy Corporation, the experienced attorneys at San Diego Corporate Law can assist in the annual requirements of practicing accountancy with a California Professional Accountancy Corporation.

Despite the additional administrative requirements of practicing accountancy with a California Professional Accountancy Corporation compared to practicing accountancy as a California General Partnership or California LLP, the right corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Accountancy Corporation” for more information.

Taxation of California Professional Accountancy Corporations

As with accountant California General Partnerships and California LLPs, tax considerations are a critical aspect to be examined when planning to practice accountancy with a California Professional Accountancy Corporation. While accountants practicing accountancy with a California Professional Accountancy Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, accountants practicing accountancy with a California Professional Accountancy Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to accounting practices is essential for accountants choosing a business structure in which to operate their accounting practices.

Business Income Taxation When Practicing Accountancy with a California Professional Accountancy Corporation

A California Professional Accountancy Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again at the shareholder level (referred to as “double taxation”). However, a California Professional Accountancy Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed, so this article will focus on S Corporation taxation of California Professional Accountancy Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Accountancy Corporation after payment of a reasonable salary to the accountant are passed directly to the accountant shareholders who report those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Accountancy Corporation to pay personal income tax of the net profits of the accounting practice.

For more information about the election of S Corporation status for a California Professional Accountancy Corporation, see “Can a California Professional Accountancy Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Accountancy with a California Professional Accountancy Corporation

Unlike accountant California General Partnerships and California LLPs, which require the accountant partners to pay self-employment tax on their distributive share of the net profit of the professional practice, the accountant-shareholders of a California Professional Accountancy Corporation are not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the accounting practice, with a California Professional Accountancy Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the accountants. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salaries of the accountants only and not the net profit of the California Professional Accountancy Corporation, which may result in significant annual tax savings.

Additional Medicare Tax When Practicing Accountancy with a California Professional Accountancy Corporation

As discussed above for accountant California General Partnerships and California LLPs, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Accountancy Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to accountants practicing accountancy with a California Professional Accountancy Corporation if the reasonable salary of the accountants exceed those thresholds, meaning for all intents and purposes, practicing accountancy with a California Professional Accountancy Corporation does not subject accountants to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Accountancy Corporations

California Professional Accountancy Corporations must pay an annual franchise tax similar to that paid by a California LLP, but California General Partnerships do not pay an annual franchise tax. The franchise tax paid by a California Professional Accountancy Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by accountant partners of a California General Partnership, a similar annual franchise tax is paid by California LLPs, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by accountant partners in California General Partnerships and California LLPs.

Conclusions About Taxation of California Professional Accountancy Corporations

Understanding the tax benefits of a California Professional Accountancy Corporation is integral when deciding which of the available business entities for two or more professional to practice together will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Accountancy Corporations, see “What Tax Benefits Does a California Professional Accountancy Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Accountancy with a California Professional Accountancy Corporation

Practicing accountancy with a California Professional Accountancy Corporation, while more complex than practicing accountancy as a California General Partnership, overcomes many of the personal liability protection and asset protection shortcomings of accountant California General Partnerships or California LLPs. A California Professional Accountancy Corporation is a separate legal entity distinct from the accountants, thus offering a legal distinction between the accountants and the accounting practice as well as personal and business assets of the accountants.

Personal Liability Protection for Accountants When Practicing Accountancy with a California Professional Accountancy Corporation

Practicing accountancy with a California Professional Accountancy Corporation resolves most of the risks faced by accountant partners of California General Partnerships and California LLPs for personal liability. California Professional Accountancy Corporations provide a separate legal entity distinct from the accountant owners, meaning the accountants are generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the accounting practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of accountants are personal to those accountants committing acts of malpractice and liability is not shielded by the existence of the California Professional Accountancy Corporation. Similar to California LLPs, California Professional Corporations do shield accountants from the malpractice liabilities created by the other accountants in their accounting practice; accountants are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the accountant from this risk of their own acts of malpractice.

Personal Asset Protection for Accountants When Practicing Accountancy with a California Professional Accountancy Corporation

The separate legal entity and distinction between accountants and the accounting practice provided by a California Professional Accountancy Corporation means that, unlike California General Partnerships and California LLPs, a California Professional Accountancy Corporation separates the personal assets of the accountants from professional business assets of the accounting practice. Therefore, claims by creditors and legal claimants against the California Professional Accountancy Corporation are generally limited to the professional business assets of the California Professional Accountancy Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the accountants.

Conclusions About Personal Liability and Asset Protection When Practicing Accountancy with a California Professional Accountancy Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against a California Professional Accountancy Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Accountancy Corporation the choice for accountants who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their accounting practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Accountancy Corporations, see “What Liability Protection Does a California Professional Accountancy Corporation Provide?” for more information.

Conclusions About Practicing Accountancy with a California Professional Accountancy Corporation

When deciding if practicing accountancy as a California Professional Accountancy Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Accountancy Corporations are more complex, California Professional Accountancy Corporations resolve many of the significant risks and limitations inherent to practicing accountancy as a California General Partnership or California LLP. The advantages and disadvantages of operating with a California Professional Accountancy Corporation are compared below together with a recommendation for when a California Professional Accountancy Corporation is the best legal structure for practicing accountancy in a group accounting practice.

Advantages of California Professional Accountancy Corporations

While practicing accountancy as a California General Partnerships is simple to establish, doing so carries significant risks and is not tax efficient for most accountants. California LLPs reduce liability for partners from the malpractice of other partners, they otherwise still carry significant risks and are not tax efficient for most professionals. California Professional Accountancy Corporations significantly reduce liability risks and are more tax efficient for most accountants.

A California Professional Accountancy Corporation is a separate legal entity, which means the accountants are generally shielded from personally liable for business debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each of the accountants for their own, individual acts of malpractice). For accountants in high liability accounting practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for accountants, meaning the business debts, liabilities, and legal judgments against their accounting practice are not generally satisfied from the personal assets of the accountants (other than for their own acts of malpractice).

Disadvantages of California Professional Accountancy Corporations

The primary disadvantage of a California Professional Accountancy Corporation is the relative complexity of formation and operation. However, accountants may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Accountancy Corporation, leaving these accountants with essentially the same tasks they would undertake to establish and maintain a California General Partnership or California LLP.

When is a California Professional Accountancy Corporation the Right Business Structure for Practicing Accountancy?

A California Professional Accountancy Corporation can be an ideal option for accountants starting group accounting practices based upon factors such as tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Accountancy Corporations provide. Small-scale accounting practices with the expectation of revenue growth can benefit from starting as a California Professional Accountancy Corporation to avoid the future need to reestablish the accounting practice as revenue grows. Similarly, small-scale accounting practices in high-risk practice areas may benefit from the limited liability protection, separation of personal assets from professional business assets of a California Professional Accountancy Corporation, and for accountants to avoid malpractice liability for the errors and omissions of the other accountants in their group accounting practice regardless of revenue or profitability.

For a more detailed understanding of the differences between accountant California General Partnerships and California LLPS and California Professional Accountancy Corporations, and when a California Professional Accountancy Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Accountancy Corporation” for more information.

Accountants in California May Not Practice Accountancy as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies as California business entities, so this will be briefly discussed here.

California law explicitly prohibits accountants from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“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.”

This restriction applies to all licensed professionals for which a California Professional Corporation may be formed. Instead, California requires accountants who wish to operate in corporate form to utilize other types of business entities, such as California Professional Accountancy Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for accounting practices in California, see “Can an Accountant Practice Accountancy Using a California LLC?” and “Can I Use a PLLC to Practice Accountancy in California?” and for more information.

If an LLC or PLLC is currently being used for a group accounting practice in California, see ” 10 Steps to Convert LLC to Professional Accountancy Corporation in California” and “Four Reasons Not to Convert LLC to Professional Accountancy Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Accountancy Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Accountancy Corporation ” for more information about bringing the professional practice into compliance with California law.