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The limited liability company - a new form of accounting practice.

Members of AICPA recently voted by mail ballot on whether Rule 505 of the current AICPA Code of Professional Conduct should be amended to allow them to conduct their practice under any form permitted by state law. The current Rule 505 adopted in 1969 allows a member to practice only as a proprietor, partner or professional corporation (PC). Deleting the word "professional" from Rule 505 would permit any form of practice organization that state law permits.

Currently, we are not aware of any state that permits a licensee of the board of accountancy (that is, a PA or a CPA) to practice as a business corporation whose members (shareholders) have limited liability. Accordingly, the search is for an organizational form permitted by state law for licensees of the board of accountancy that will provide for limited liability of the individual licensed accountant or firm, protecting in a lawsuit those licensees or partners who were not negligent, but not protecting those who were.

While the practice organization of accounting licensees may take the permissible form of a professional corporation (PC), the PC does not give licensees the extent of legal protection they seek, namely an organizational form of practice that will minimize liability exposure of shareholders. The PC does not always minimize that liability exposure. In most states the PC shareholders could be held liable for a judgment against the PC even though the shareholder was not an individual party to the litigation. Thus, the liability exposure under the PC is greater than that under the ordinary limited liability business corporation. In a few states (California is one) shareholders under the PC form of organization have the same unlimited personal liability as partners and hence the same liability exposure. Also, state PC statutes lack uniformity and tend to vary somewhat from state to state, creating a problem for the large licensed firm engaged in a multistate practice.

A new form of corporate organization has recently appeared that may decrease liability exposure if the statute is properly worded and if the state accountancy laws are amended to provide for adoption of the new form. This new form is called the limited liability company (LC) which combines the limited liability of the business corporate form with the tax benefits of a partnership. Virginia is one of several states that has acted in this area. In 1991, it adopted the Virginia Limited Liability Company Act, which provides that no member, manager or other agent of a limited liability company shall have any personal obligation for any liabilities of a limited liability company, whether such liabilities arise a contract, tort or otherwise, solely by reason of being a member, manager or agent of a limited liability company. (VA Code, Sec. 13.1 - 1019, 1991).

As with any LC, the Virginia law provides that the profits and losses of the company shall be allocated among members and the classes of members in the manner provided for in the written articles of organization or operating agreement. If the articles of incorporation or an operating agreement do not provide for a division of the profits and losses, then the profits and losses will be allocated on the basis of the value as stated in the company's records regarding the contributions made by each member.

However, there is an annoying fly in ointment. The Virginia Limited Liability Company Act specifically excludes "professional services" as defined under the Virginia Professional Corporations (PC) law. Public accountants and certified public accountants are specifically included within the term "professional service." Therefore, CPAs in Virginia (or other states that have a similar provision in their limited liability company law) may not take advantage of the LC form of organization. To the CPAs in these jurisdictions, it makes no difference whether or not AICPA rule 505 is modified. Even if the rule is modified, the LC law excludes professionals and individuals and firms providing "professional services."

The remedy, of course, is to lobby the legislature to modify the state's LC law. Additionally, state accountancy laws will require further amendment to bring them into conformity with AICPA Rule 505 as modified, since practically all of the states limit the organizational form of practice for board licensees to proprietorships, partnerships and professional corporations. This is akin to the distinction in the rules regarding commissions and contingent fees. These fees are allowed by AICPA rules under limited circumstances. If, however, the state board regulations prohibit its licensees from accepting commissions and contingent fees, licensees must comply with those regulations. In other words, where there is a conflict in AICPA's rules and the board's rules, the board's rules take precedence.

Before licensed accountants may practice as an LC thus substantially reducing exposure to tort and contract liability, considerable lobbying remains to be done to persuade the legislature to amend at least two different laws. It is conceded that LCs have characteristics favorable for a limited liability professional practice. However, the LC law must not follow the Virginia model excluding "professional services." Also it is necessary to amend the accountancy laws to permit licensees to practice under the LC type of organization.

How does all of this affect the enrolled agent or the unlicensed accountant? So far, it doesn't. Only an individual may become an enrolled agent and practice before the IRS, but there are no Circular 230 regulations prohibiting the type of organization in which EAs conduct their practices. In one or two states, we are advised that the PC law recognizes EAs, enabling them to form PCs. If the jurisdiction does not recognize EAs for the PC form of organization, then EAs may take advantage of either the business corporate form or the limited company form of organization, assuming that the state has such an LC law.

No unlicensed accountants are authorized in any jurisdiction that we are aware of to conduct their practice as a PC. Like EAs, unlicensed accountants may use the business corporate form or the limited company form. In this regard, serious consideration should be given to the use of the LC form wherever it is available. As stated previously, the LC not only limits the individual's risk exposure, but it also has the tax benefits of a partnership.

One word of caution for unlicensed accountants who form an LC. Just because the risk exposure in the LC organization is reduced, unlicensed accountants should not drop their errors and omissions insurance. Negligence insurance should continue to be carried because the policy may pay for litigation defense expenses in the event there is a negligence suit. As an additional word of caution, the errors and omissions policy should be checked out to be certain it does cover legal expenses resulting from a suit. Legal expenses incurred in defending negligence litigation are high (and are increasing) so it is wise to make sure that specific coverage is contained in the policy.

The limited liability company is a relatively new form of business organization. The Virginia LC law contains no benefits for the licensed accountant. It contains a fair number of benefits for the EA and the unlicensed accountant. LC laws as they exist in Virginia or similar laws in other jurisdictions deserve the attention of unlicensed accountants and enrolled agents.
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Article Details
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Title Annotation:Washington Comment
Author:Sager, William H.
Publication:The National Public Accountant
Article Type:Column
Date:Mar 1, 1992
Previous Article:Internal controls.
Next Article:NSPA testifies on expiring tax provisions.

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