Nellie Akalp form CorpNet guides you to make one of the most impactful decisions you will make when starting your accounting business - choosing the entity type that works for your and your company.
One of the most impactful decisions you will make when starting your accounting business is choosing the entity type for your company.
I often encounter entrepreneurs who are torn between forming their company as a Limited Liability Company (LLC) or a corporation.
Both business structures have their advantages and disadvantages, so it is important to explore—and understand—your options thoroughly. While you likely already have expertise regarding the tax implications, I also recommend talking with an attorney to learn about the legal considerations.
Until you start that conversation, I’m going to take a moment to highlight some of the pros and cons of forming a business as an LLC. (In a future post, I’ll tackle the pros and cons of forming a corporation.)
Primary Pros of Forming an LLC
Personal Liability Protection - Like a corporation, an LLC is its own legal entity. In most states, its assets and liabilities are separate from those of its owners. Therefore, if an LLC runs into financial or legal troubles, its owners' personal assets typically are not at risk. This is a huge advantage over running a business as a sole proprietorship or partnership, in which owners' and the business's assets and liabilities are considered one in the same. This is something specific to discuss with an attorney about LLC laws in your state.
Simplicity - Business owners that want liability protection but don't want to deal with much complexity often find the LLC structure an ideal choice. Forming an LLC involves less paperwork than establishing a corporation. It also comes with less ongoing compliance formalities.
Tax Flexibility - By default, an LLC’s tax obligations pass through to its owners, who pay income tax and self-employment taxes (FICA and Medicare) on the business’ profits. However, to avoid some of the self-employment tax burden, owners can elect for S Corporation tax treatment. Again, in some states, in an S Corp, only owners’ wages and salaries are subject to self-employment taxes. This tax treatment may serve an accounting business better financially than if it were a corporation and taxed at the corporate tax rate.
Main Cons of Forming an LLC
Limited Growth Potential - LLCs may not sell stock to shareholders, so they lack some of the fund-generation opportunities of corporations. Also, some investors are hesitant about backing LLCs because they perceive them as less credible than corporations.
So, if entrepreneurs have their sights set on growing their companies, they might find themselves at a disadvantage with the LLC structure.
Self-Employment Tax Sting - If an LLC’s owners don’t elect for S Corporation tax treatment, their self-employment tax obligations could hit them hard on their personal income tax returns. Because these LLCs must pay income and self-employment taxes quarterly, they must carefully track their tax liability to ensure they’re not coming up short at the end of the year.
Possible Lack of Clarity in Roles and Responsibilities - Without the same organizational formality as a corporation, an LLC with multiple owners might experience confusion in who has authority to make certain decisions and what each owner's responsibilities are. One way to avoid these issues is to create an Operating Agreement that clearly defines individuals' roles and rules for operating the business.
Basic Steps Involved in Setting Up an LLC - Depending on a business's home state, exact requirements will vary. Generally, forming an LLC will involve:
- Choosing a business name and doing a corporate name search to ensure another business has not already taken it.
- Registering the business with the state. (Note that some states require accounting businesses to be Professional Liability Companies (PLLC) rather than LLCs).
- Applying for business licenses and permits – The State Board of Accountancy is a useful resource for discovering which requirements apply.
- Applying for an Employer Identification Number (EIN) – Most banks will require this before opening a business bank account. A company’s EIN will be used on other business documentation and in tax filings, as well.
- Opening a business bank account to ensure a business’s finances and those of its owners maintain separation.
- Obtaining a business insurance policy to provide additional liability protection in the event a business owner's personal actions result in a legal claim.
Also, after you have set up your LLC, you must stay current with all ongoing requirements to remain in good standing with the state.
While I’ve shared some basics about the LLC here, I encourage you to enlist the guidance of an attorney for legal direction when deciding which business entity type to choose. Also, stay tuned for my next post, which will talk about the pros and cons of incorporating an accounting business.
Author Bio: Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. She is the CEO of CorpNet.com and recently launched a partner program for the accounting community. Accountants, CPAs, Bookkeepers and other professionals can offer business incorporation and compliance services to their client to extend their services but CorpNet does the work. More info at: CorpNet.com/partners