Starting an Accounting Firm: A Step-by-Step Guide

The accounting profession continues to feel the effects of the technology disruption that has impacted all industries. One consequence is that more companies will choose to outsource their accounting functions in 2020 and 2021, according to Finances Online. That’s good news for accountants who plan on starting an accounting firm.A smiling accountant meets with a client

Running an accounting business requires a different set of skills and experience than working as an employee. As with any small business, establishing an accounting practice entails a great deal of work, but as Thomson Reuters notes, accounting firms are currently among the most profitable of all small businesses.

The best way to ensure the success of a new accounting business is to have a rock-solid plan that prepares the operation to survive its critical first year. These steps can convert the dream of running a thriving accounting firm into reality.

Is Running an Accounting Firm the Best Option for You?

Accountants and other professionals are increasingly choosing to work independently rather than as employees. Finances Online reports that big accounting firms are struggling to fill their open positions as the unemployment rate for accountants hovers around 2%. However, not all accountants are cut out to spend their career working for someone else.

For accountants whose dream is to start their own firm, Accounting Today lists the aspects to consider before establishing a business:

  • Meeting the needs of small businesses and individuals on your own requires the right blend of accounting skills and experience.
  • Starting any business calls for drive and initiative.
  • Success also depends on the support of your family.
  • Generating revenue requires marketing skill to drum up customers.
  • The way to earn the highest fees is by differentiating the business via an accounting specialty, which requires its own set of skills and experience.

Do You Prefer Being a Business Owner/Boss or an Employee?

The primary benefit of working as an employee of an accounting firm is the security of having a regular paycheck and employer-provided benefits such as healthcare and retirement plans. However, many accountants chafe at the limitations of being employees:

  • Employees focus on completing individual tasks on time, while entrepreneurs prioritize generating a steady stream of business to keep the operation afloat.
  • Employees generally have limited impact on an accounting firm’s strategic plans and goal setting, while entrepreneurs set their own goals and determine the best path to achieving them.
  • Employees may earn occasional performance-based bonuses, but entrepreneurs can directly reap the financial benefits of their hard work and innovation.

Do You Have the Required Experience, Motivation, and Support?

Few self-employed accountants become their own bosses straight out of school. In nearly every case, they first gain valuable work experience as an employee of an accounting firm. Making the switch from employee to entrepreneur begins with a checklist, as Poe Group Advisors explains:

  • Public practice work experience
  • Determination and motivation to overcome inevitable obstacles
  • A strong work ethic and a razor-sharp focus on results
  • The ability to communicate clearly to clients, potential clients, and staff
  • An upbeat, can-do attitude

Will the Business Be Adequately Capitalized?

A well-thought-out business plan and an unquenchable desire to succeed must be accompanied by ready access to the capital a new business will need to get off the ground. Poe Group Advisors recommends creating a 24-month budget that breaks down revenue and expenses by month. After calculating the funds the business will need via 24-month cash flow projections, 20% should be added to the operating budget to account for unexpected costs or revenue shortfalls.

Thomson Reuters estimates that startup costs for an accounting business typically range from $2,000 to $25,000, depending on the business’s location, its strategic plan, and whether it will be a brick-and-mortar operation or virtual. However, depending on the firm’s long-term goals, startup expenses for a small or midsize accounting firm can total between $50,000 and $150,000.

These are among the expenses for a new accounting firm, as accounting service Wolf & Company explains:

  • Equipment and technology, including professional accounting software and a high-speed internet connection
  • Setting up your place of business, whether it’s home-based, in a storefront, or a suite in an office building; this includes furnishings, lease payments, and staffing
  • Legal fees, licenses, and services for business planning, marketing research, and tax planning

Step 1: Meet Requirements for Starting an Accounting Firm

Many aspects of starting an accounting firm are decided by the founder, such as the business’s name, location, and entity type (sole proprietorship, limited liability company, professional corporation, etc.; see below for more information on business entity selection). However, the formation process requires many other steps, as CorpNet explains:

  • Apply to the Internal Revenue Service for an Employer Identification Number (EIN), which is also called a Federal Tax ID, to identify the business for tax filing and reporting.
  • Acquire local business operation licenses, signage permits, or home operation permits for a home-based business.
  • Create a business bank account.
  • Sign up for business insurance to protect your personal assets: business owner’s policy (BOP), professional liability insurance, and data breach insurance.
  • Research all compliance requirements and deadlines.

Do You Need to Be a CPA to Start an Accounting Firm?

Earning a certified public accountant (CPA) license isn’t required to start an accounting firm, but licensing affects the types of accounting services a business can offer. Thomson Reuters points out that an accountant who isn’t a CPA can provide nearly all the services a CPA does, except for auditing, attestation, and other assurance services. The U.S. Securities and Exchange Commission (SEC) requires that some mandated financial statements be filed by a CPA. Of course, only a firm founded or staffed by CPAs can refer to itself as a “CPA firm.”

  • Differences between assurance services and other accounting services: The services typically available from an accounting firm are tax planning and preparation, business accounting, bookkeeping, payroll, and assurance services. Assurance services are offered only by CPAs and entail formal reviews of a business’s financial documents and transactions, as Investopedia explains.
  • Differences between attestation, auditing, and assurance: S. Partners describes attestation as verifying the validity of a company’s financial data for compliance, internal reviews, or financial reporting, while auditing focuses the review on a specific aspect of the organization’s operation to identify potential risks or compliance shortcomings. By contrast, assurance is intended to promote the company’s reputation for honesty, support business decisions, and enhance the credibility of the information supplied by the company.

Options for Starting an Accounting Firm

Most people envision starting a business as building it from the ground up, but this may not be the best option for every new accounting venture. For example, many professionals begin the process of striking out on their own by freelancing, as Home Business magazine points out. This allows you to make valuable contacts among potential clients while retaining your regular job.

These are the most popular options for starting an accounting firm:

  • Start from scratch: One of the benefits of creating an entirely new accounting business is not having to deal with legacy pricing, technology, or past client service problems, according to Accounting Today. However, startups must determine their pricing strategy and devise a marketing strategy.
  • Begin with a part-time practice: A popular way for accountants to shift from employee to owner is by picking up a few clients on the side as they continue to work as a staff accountant. This allows them to get a sense of what running a full-time practice would be like without the risk of making a clean break from their current employer.
  • Find a partner: With a partner, a firm is able to offer a wider range of services to attract a broader clientele; but the chemistry has to be right between partners, and all will need to compromise for the sake of the business’s success.
  • Buy a practice: While buying an existing practice may appear to be a straightforward approach to starting an accounting business, the market usually has more buyers than sellers. This gives sellers the opportunity to choose a buyer with extensive experience to protect the interests of the business’s existing clients. Purchasing a practice means inheriting a client list and other assets, but it’s also the most expensive option.

Writing Your Business Plan

The most important document for any new commercial endeavor is its business plan, which identifies the goals for the business, the services it will offer, and the market it will focus on, among other information. The business plan is the source for the firm’s pitch to potential customers, and it’s essential for securing financing.

These are among the topics that the business plan should include:

  • The business’s specific goals based on the experience and skills of its staff
  • The structure for the firm:
    • Sole proprietorships are the simplest structure, but they put business owners’ personal assets at risk.
    • General partnerships, limited liability partnerships (LLP), limited liability companies (LLC), and professional LLCs offer more protection for business owners.
    • S corporations (S corps) are a popular option for solo accounting firms because they allow owners to pay themselves as employees, although they require incorporation fees.
    • C corporations (C corps) are the most common form of business entity for corporations because they limit the liability of owners and shareholders. However, operating a C corp comes with many requirements, such as the need to hold annual meetings and file financial disclosure statements.
  • Capital requirements and sources, including a breakdown of startup costs and monthly operating costs
  • Marketing and pricing strategy based on the services to be offered and the experience of the staff
  • Office, equipment, software, and staffing

Resources for Starting an Accounting Firm

Step 2: Choose an Accounting Specialization

Within the broad field of accounting are eight branches, as FreshBooks describes:

  • Financial accounting records and manages business transactions and maintains a history of the transactions.
  • Cost accounting is a form of managerial accounting that deals with manufacturing expenses, primarily those related to operations.
  • Auditing may function within an organization (internal) or as a third party (external). The former oversees the company’s accounting operations, while the latter provides an independent review of an organization’s accounting systems.
  • Managerial accounting collects financial data and makes it available to business managers to support their decisions related to budgeting, forecasting, cost analysis, and other matters.
  • Accounting information systems focuses on the accuracy, completeness, and efficiency of the company’s accounting systems.
  • Tax accounting helps clients formulate a tax plan and handles tax preparation and filing, ensuring that the client’s returns comply with all applicable tax regulations.
  • Forensic accounting involves investigating legal cases such as fraud, business disputes, and claims resolution.
  • Fiduciary accounting manages the affairs of a person or business, including property, estate matters, administration, and guardianship.

Alongside the eight branches are three types of accounting specialties:

  • Tax accounting ensures that clients’ tax records and filings comply with applicable regulations. Accountants who specialize in tax services confirm that a business’s accounting records are IRS-compliant. They also transfer the business’s tax information to the appropriate business tax forms.
  • Financial accounting confirms that a business’s tax records will meet the requirements of potential investors or lenders. Financial accountants apply generally accepted accounting principles (GAAP) to provide an accurate assessment of the business’s financial picture.
  • Management accounting focuses on budgets, product costs, cash management, and other financial operations. Management accountants deal with balance sheets, profit and loss statements, and cash flow statements.

The duties of the three specialties may entail tapping skills from several of the eight accounting branches. For example, a tax accountant may apply aspects of fiduciary accounting, financial accounting, auditing, and forensic accounting while serving an individual client.

Doctors, Lawyers, and Other Professionals

Accounting firms frequently seek other professionals for their primary client base, although they are likely to have general business and personal clients as well. The company’s target market is identified in its business plan and is central to its overall goals, even if it begins with a more general clientele.

Poe Group Advisors highlights the earnings potential of specializing in an accounting niche. Aspects to consider when selecting an accounting specialty include the following:

  • Choose an industry that you and your staff enjoy interacting with, and whose accounting needs match the services and specialties that your company offers.
  • Identify the industries that your best customers are involved in, and the characteristics that make working with them rewarding.
  • Find a specialty that will add the most value to the firm, such as estate and tax planning, business tax advice, or some other area.

Real Estate, Landscaping, Farming, and Other Niche Industries

Many accountants have experience and skills that make them particularly well-suited to business niches. Tax software vendor Canopy describes the importance to accounting firms of establishing a personal relationship with small business owners.

  • Start by envisioning the company’s ideal client.
  • Study the industry the client is involved in and learn about the challenges clients in this industry face.
  • Determine the accounting services these clients currently use and their accounting budget.
  • Learn more about the clients’ preferred communication methods and their financial status.

Skill and Location Requirements for Specialty Accounting Firms

Many accounting specialties require a particular certification. The top certification is CPA, which requires passing an exam administered by the American Institute of Certified Public Accountants (AICPA) and licensing by the state. Other accounting certifications include the following:

  • The Certified Management Accountant (CMA) certification overlaps somewhat with the CPA certification, as Investopedia explains. It emphasizes financial analysis, organizational efficiency, budgeting, and strategic planning.
  • A Certified Bank Auditor (CBA) works to confirm that banks comply with their own accounting procedures and state and federal finance regulations. They typically conduct audits annually, but may do so more frequently at the request of state or federal agencies.
  • Enrolled agent is an IRS-administered designation that confirms an accountant is authorized to represent taxpayers in matters relating to the agency. Becoming an enrolled agent requires passing an exam or having enough experience as an IRS employee; agents must also pass a background check.

Location has much to do with the selection of an accounting firm’s specialty. For example, accounting firms in rural areas are more likely to specialize in serving the accounting needs of agriculture-related businesses. Similarly, a suburban accounting firm will probably have more success focusing on lawn care and similar businesses than a firm in an urban area.

Resources for Choosing an Accounting Specialization

Step 3: Attract Business to Your Accounting Firm

Once the startup pieces are in place and you’ve chosen a specialty, promoting the business to develop your client base is the next step. The CPA Journal points out that the fastest and most reliable form of marketing is positive word of mouth. Ask your existing customers for referrals and for permission to use them as references.

Promoting the Business and Attracting Clients

Beyond building on your existing customer base, starting an accounting firm entails communicating your skills by growing your professional network:

  • Take every opportunity to schedule a casual meet-and-greet session with prospective clients.
  • Join a local business association, such as the Chamber of Commerce, and consider becoming active in civic or professional organizations.
  • Provide pro bono services, which is a great way to establish new business contacts.
  • Let family, friends, and business associates know that your business is seeking referrals.

Building the Business’s Brand Online

As more business activity and communication moves online, promoting your services on social media, the business’s website, and other online platforms is becoming vital. CPA Practice Advisor describes the five elements of a consistent brand for a small accounting practice:

  • The business’s logo is the most recognizable element of a brand and sets the tone for the company’s message to the world.
  • Its tagline is a short phrase that communicates the business’s most important aspect or attribute.
  • Adopting a consistent color scheme that is used in all online and printed material helps communicate the business’s brand.
  • Also stick to a single set of fonts to use in all online and printed correspondence. Ensure that the fonts you choose are from a web-safe collection.
  • The imagery that accompanies the firm’s online presence and correspondence should represent a single style in photographs, illustrations, and backgrounds.

Factors Prospective Clients Consider When Choosing an Accounting Firm

Small businesses aren’t likely to require the services of a full-time accountant, but larger companies have to decide whether they’ll use inside accounting or go with an outside accounting firm, as Inc. explains. However, the key qualifications that businesses look for in an accounting firm apply to organizations of all sizes.

  • Certifications: As mentioned, the most common accounting certifications are CPA and CMA, but others include Accredited in Business Valuation (ABV), Certified Valuation Analyst (CVA), and Personal Financial Specialist.
  • Industry expertise: Let prospective clients know about your existing customers in the same or a similar industry. This demonstrates that the business is familiar with the field’s common issues.
  • Size: While large accounting firms can offer more expertise in a greater number of areas, some small businesses prefer to deal with accounting firms that won’t make them feel overlooked. For example, large accounting firms may farm out some work to smaller companies.
  • Complexity: Demonstrate to prospective clients that your accounting firm is capable of meeting all their needs, whether simple year-end tax documents and financial records, or more detailed financial planning and retirement advice.

Resources for Attracting Business to Your Accounting Firm

Assembling the Pieces of a Successful Accounting Firm

Accountants understand the importance of approaching a task deliberately. Having a well-thought-out plan and being thoroughly prepared for success are key steps when starting an accounting firm. The skills and experience that accountants use in their work also come into play when launching an accounting enterprise. Combined with a specialty focus and an effective marketing plan, a laser focus on meeting your clients’ needs will propel your business plan toward its goals.

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