5-3structure of CPA firms

Structure of CPA FIRMS

CPA firms vary in the nature and range of services offered, which affects the organization and structure of the firms. Three main factors influence the organizational structure of all firms:

The need for independence from clients. Independence permits auditors to remain unbiased in drawing conclusions about the financial statements.

The importance of a structure to encourage competence. Competence permits auditors to conduct audits and perform other services efficiently and effectively.

The increased litigation risk faced by auditors. Audit firms continue to experience increases in litigation-related costs. Some organizational structures afford a degree of protection to individual firm members.

Six organizational structures are available to CPA firms. Except for the proprietorship, each structure results in an entity separate from the CPA personally, which helps promote auditor independence. The last four organizational structures provide some protection from litigation loss.

Proprietorship only firms with one owner can operate in this form. Traditionally, all one-owner firms were organized as proprietor-ships, but most have changed to organizational forms with more limited liability because of litigation risks.

General partnership. This form of organization is the same as a proprietorship, except that it applies to multiple owners. This organizational structure has also become less popular as other forms of ownership(that offer some legal liability protection) became authorized under state laws.

General corporation. The advantage of a corporation is that shareholders are liable only to the extent of their investment in the corporation. Most CPA firms do not organize as general corporations because they are prohibited by law fro doing so in most states.

Professional corporation. A professional corporation provides professional service and is owned by one or more shareholders. PC laws in some states offer personal liability protection similar to that of general corporations, whereas the protection in other states is minimal. This variation makes it difficult for a CPA firm with clients in different states to operate as a PC.

Limited liability company. A limited liability company combines the most favorable attributes of a general corporation and a general partnership. An LLC is typically structured and taxed like a general partnership, but its owners have limited personal liability similar to that of a general corporation all of the states have LLC laws, and most also allow accounting firms to operate as LLCs.

Limited liability partnership. A limited liability partnership is owned by one or more partners. It is structured and taxed like a general partnership, but the personal liability protection of an LLP is less than that of a general corporation or an LLC. Partners of an LLP are personally liable for the partnership’s debts and obligations, their own acts, and acts of other under their supervision. Partners are not personally liable for liabilities arising from negligent acts of other partners and employees not under their supervision. It is not surprising that all of the big four firms and many smaller firms now operate as LLPs.