Should I Start an LLC for My Accounting Firm?

Starting a limited liability company (LLC) for your accounting firm can provide several benefits.

Most importantly, an LLC structure offers limited liability to its owners, which can protect their personal assets from lawsuits and creditors.

For an accounting firm, lawsuits can arise from things like not paying your office’s lease on time, or needing to compensate a client as a result of an employee giving negligent advice to a customer.

LLCs are also affordable, highly flexible (from a tax point-of-view), and can make your accounting firm seem more credible.

This article breaks down whether you should start an LLC for your accounting firm, as well as explains the benefits (and limitations) of an LLC structure.

Recommended: Use Northwest to form an LLC for $29 (plus state fees).

Do I Need an LLC for an Accounting Firm?

LLCs are a simple and inexpensive way to protect your personal assets and save money on taxes.

You should form an LLC when there's any risk involved in your business and/or when your business could benefit from tax options and increased credibility.

LLC Benefits for an Accounting Firm

By starting an LLC for your accounting firm, you can:

Protect your savings, car, and house with limited liability protection
Have more tax benefits and options
Increase your business’s credibility

Limited Liability Protection

LLCs provide limited liability protection. This means your personal assets (e.g., car, house, bank account) are protected in the event your business is sued or if it defaults on a debt.

Accounting firms will benefit from liability protection because financial service providers, including accounting firms, face a variety of risks associated with clients visiting your office location, in addition to any potential bad advice you give your clients.

Example 1: A longtime client asks a CPA in your accounting firm to execute a 1031 exchange, but they fail to put the money in escrow and can no longer avert capital gains taxes. In this scenario, the client may be able to sue your accounting firm, but all of your personal assets will remain protected.

Example 2: One of your employees loses his work laptop, which is then stolen and accessed. When your client finds out his personal information was exposed, he brings a data breach lawsuit against your accounting firm. Here, the limited liability of an LLC will ensure that you are not held personally liable, regardless of the compensation that may accrue.

Example 3: Another CPA in your accounting firm offers negligent or careless financial advice to a client, which ends up causing a foreseeable and detrimental financial loss. If your accounting firm is sued, your personal assets will remain protected through the limited liability offered by an LLC as long as you didn’t personally act negligently.

Example 4: A client sues you, claiming that one of your accountants misses an important tax deduction that resulted in the payment of several thousands of tax dollars that could have been avoided.

An LLC will also protect your personal assets in the event of commercial bankruptcy or loan default.

To maintain your LLC's limited liability protection, you must maintain your LLC's corporate veil.

LLC Tax Benefits and Options for an Accounting Firm

LLCs, by default, are taxed as a pass-through entity, just like a sole proprietorship or partnership. This means that the business's net income passes through to the owner's individual tax return.

The business’s net income is then subject to income taxes (based on the owner's tax bracket) and self-employment taxes.

Sole proprietorships and partnerships are taxed in a similar way to LLCs, but they do not offer limited liability protection or other tax options.

S Corp Option for LLCs

An S corporation (S corp) is an IRS tax status that an LLC can elect. S corp status allows business owners to be treated as employees of the business (for tax purposes).

S corp tax status can reduce self-employment taxes and will allow business owners to contribute pre-tax dollars to 401k or health insurance premiums.

The S corp status requires that the business pay the employee-owner(s) a reasonable salary for the work they perform.

In addition, the business might need to spend more on accounting, bookkeeping, and payroll services. To offset these costs, you'd need to be saving about $2,000 a year on taxes.

We estimate that if an accounting firm owner can pay themselves a reasonable salary and at least $10,000 in distributions each year, they could benefit from S corp status.

You can start an S corp when you form your LLC. Our How to Start an S Corp guide will lead you through the process.

Credibility and Consumer Trust

Accounting firms rely on consumer trust. Credibility plays a key role in creating and maintaining any business.

Businesses gain consumer trust simply by forming an LLC.

A growing business can also benefit from the credibility of an LLC when applying for small business loans, grants, and credit.

Northwest will start an LLC for you for just $29 (plus state fees).

Get Started

How to Form an LLC

Forming an LLC is easy. There are two options for forming your LLC:

You can hire a professional LLC formation service to set up your LLC for a small fee
Or, you can choose your state from the list below to start an LLC yourself

Select Your State

For most new business owners, the best state to form an LLC in is the state where you live and where you plan to conduct your business.

Do LLCs Need Insurance?

Yes, your LLC will need insurance even though it has limited liability in order to protect its assets as well – not just its owners’ assets.

For an accounting firm, such assets can include financial capital, land, company vehicles, and furniture.

Common Situations Business Insurance May Cover for an Accounting Firm

Example 1: A client is visiting the office to go over their tax reports and asks for a hot tea while having the meeting. Your employee accidentally spills the hot liquid on the client when delivering it, resulting in severe burns. General liability insurance will likely cover the resulting medical bills.

Example 2: One of your accountants misses an important deduction for a client, resulting in them overpaying thousands of dollars on their taxes. General liability insurance will likely help you settle any resulting claims or reputation loss.

Example 3: A client sues your business because they believe your marketing to be misleading. General liability insurance will likely help you cover the cost of defending yourself or settling out of court.

Other Types of Coverage Accounting Firms Need

While general liability is the most important type of insurance to have, there are several other forms of coverage you should be aware of. Below are some other types of insurance all accountants should obtain:

Professional Liability Insurance

Professional liability insurance covers professional mistakes or negligence that may occur while on the job, Accountants give a lot of advice to their clients, and this coverage goes further than general liability insurance to help businesses when a particularly egregious error may have occurred.

Property Insurance

An accounting business typically relies on the space and the equipment they have to function. Just one storm, incident of theft, or fire can threaten its livelihood. Property insurance is likely to cover the grounds, physical building, and the business equipment in the event of damage or destruction.

Home-Based Business Insurance

For accountants working from their home, this insurance will cover any damage or destruction that occurs to the areas used for business. So if the accountant is deducting the cost of their mortgage for tax purposes, they’ll likely need home-based insurance to cover common events such as fire, theft, or flooding.

Commercial Umbrella Insurance

Commercial umbrella insurance is designed to cover expenses in the case of a particularly costly legal claim. For example, if a client feels as though you cost them millions of dollars because your financial forecasting proved too conservative. The case drags on for a year, incurring many thousands of dollars in legal costs. Commercial umbrella insurance will cover a business when the limits of its general liability or professional liability insurance policies are reached.

Should I Start an LLC FAQ

Choosing the right business structure depends on your business’s unique circumstances and needs. However, unless your business is very low risk (like a hobby), an LLC is likely the better option.

Visit our LLC vs. Sole Proprietorship guide to learn more.

At a minimum, you’ll need general liability insurance, professional liability insurance, and commercial property insurance.

Read our Business Insurance for Accountants article for more info.

An accounting firm needs an office, furniture, hardware, and accounting software. You will also be required to become a certified public account (CPA), which requires you to sit an exam that generally costs around $1,000.

Generally speaking, you should expect to pay between $600 and $1,500 monthly rent, depending on your location and office size.

Visit our How to Start an Accounting Firm guide to learn more about the costs of starting and maintaining this business.

Ongoing expenses that accounting firms will encounter include rent, utilities, employee salaries, marketing, insurance, as well as the cost of replacing and upgrading office equipment.

Learn more about running an accounting firm.

Accounting firms make money by charging clients fees on projects. This can either be charged as an hourly rate or flat rate for specific projects.

Learn more about starting an accounting firm.

Accounting firms assist individuals and organizations in keeping track of income, expenses, taxes, and other financial information so that they can continue to operate successfully.

The average one-man accounting firm can make as much as $75,000 a year. The larger the client base, the more likely you will earn profit into the six figures.

Learn more about starting an accounting firm.