That's great. No doubt you have plenty of questions about how to set up a new firm and get off to a great start. Thomson Reuters spoke with some of our industry experts to get answers to the big questions you may have. Here's what they told us.
Starting an accounting firm is like starting any small business – it requires a lot of work. However, industry and consulting firms list accounting firms as one of the single most profitable small businesses a person can start right now.
Here are a few questions to consider when starting a firm:
Starting an accounting firm is no different from starting any other small business. And while there are accounting-specific requirements, it’s important to remember that you’re starting a business first.
Start by figuring out your purpose, goal, and market. This will influence many other decisions, including the function of the services you provide, whether you want a physical or virtual location, your target demographic, and the location of your business.
Once you’ve selected a location and determined your goals, it’s time to consider the nuts and bolts of owning a business.
Additionally, you’ll have to think about the day-to-day needs of running a business, including managing risk, basic administrative tasks, and general questions of how and where you will meet clients.
In most cases, owning and running an accounting firm necessitates an Employer Identification Number (EIN). However, the IRS website provides an in-depth explanation of who is required to have an EIN and when. A good rule of thumb is: if you plan on hiring employees – or plan to in the future – you’ll probably need an EIN.
That said, even if you don’t think you need one – or the website says it isn’t a requirement– most businesses are probably better off acquiring an EIN.
Luckily, the online process is fast, easy, and free.
While all CPAs are accountants, not all accountants are CPAs. There are differences between the two, including education, experience, and certain opportunities. However, the answer goes back to the question, “What services do you want to offer?”
An accounting firm can do almost everything a CPA firm can do with one exception – audits and assurance services. So, if that is a part of your goals or your target market, then it’s probably wise to think about the steps needed to become a CPA.
However, if you are looking to focus on the multitude of other services accounting firms provide, it’s likely not a necessary credential to start. And while there are certain state-by-state exceptions about what can and cannot be undertaken by a CPA, they are not a requirement for starting an accounting firm.
However, if you want to call yourself a “CPA firm” – you will need a CPA.
One of the benefits of starting an accounting firm is flexibility. So, the simple answer to the question is, yes—many accountants can and do work from a home office.
All the regulations that apply to a physical location also apply to virtual or home offices. So not having a physical office does not put an accounting firm at a disadvantage.
In fact, working from home is even easier with modern technology and software solutions that help bring vital aspects of your daily workflow into one dedicated (and usually online) space. For instance, Thomson Reuters makes its CS Professional Suite of tax and accounting software available as hosted online solutions and designed its Onvio products to run entirely in the cloud.
It’s important to note: an accounting firm must have a dedicated EFIN (Electronic Filing Identification Number) for every separate location where they perform work. So, if you have a physical location and do work in a home office, you’ll need to investigate whether you’ll need a separate EFIN for home office.
The answer largely depends on how much – and the extent of the work – you do from home. Check with the IRS for further guidance.
Luckily, accounting firms don’t need a physical space to operate successfully. And like the traditional brick and mortar approach, having a home-based or virtual business brings both opportunities and challenges that are unique to that approach. When considering a home-based business, it’s important to think about the unique challenges and opportunities involved.
In many ways, this question can be answered by once again looking at your goals and target market. What are the key services needed by that population? How can you serve them better? Still, while many services will be dictated by the specifics of your clients and their business, there are a few standards most accounting firms offer, including:
While these are typically the core offerings – and the ones that will provide consistent business in most accounting firms – it’s also important to investigate emerging and buzz-worthy services that are attracting bigger and more progressive accounting businesses.
From consulting and advising to outsourced CFO services (serving as the embedded strategic financial decision-maker for a client), taking a cue from the bigger firms – and anticipating what trends might trickle down to smaller and independent businesses – can increase the clients you serve and put you steps ahead of your competition.
Starting a business is filled with new and challenging decisions. However, once the business is up and running, it’s common to be unprepared for typical day-to-day operations. Anticipating (and planning for) these concerns helps make sure you’re working as efficiently as possible.
Common questions and concerns include:
This, in many ways, is an unanswerable question because the only reliable advice that can be given is, “It depends.” Every context is different and is swayed by factors such as competition, location, service offerings, and level of expertise.
However, even though there isn’t a standard fee, most accounting firms are moving away from an hourly fee structure and choosing to institute to a fixed fee model that allows for better value for clients, a more manageable business plan, and eventually an increase in earnings.
Again, every context is unique, and there are certain situations when an hourly fee structure is best. These include:
Outside of those circumstances, a fixed fee is recommended and preferred. As your skill and expertise grow, so will your abilities to complete tasks quickly. With an hourly fee, this means having to take on more clients to maintain (and hopefully increase) your profits.
A fixed fee structure is about value. The expertise and skill you bring to service are of more importance than just an hour of work for clients. Pricing your abilities based on knowledge is not only good for your business but is ultimately valuable for your clients as well.
While there is still a debate surrounding hourly versus fixed fees in some aspects of the business, accounting and bookkeeping is not one of them.
Accounting and bookkeeping services (as well as other service lines, such as simple tax preparations) are almost universally charged as a fixed fee, and there is a market expectation for that pricing structure.
When determining a fee structure, many accountants call other firms and ask for quotes. They use the average of those quotes to determine a fair and competitive price for their services.
Another resource is local and national affiliations and associations. Many of the larger ones (such as the National Association of Tax Preparers) will distribute recommended price structures and other useful information.
While you do not have to be a CPA to prepare or file taxes, the training and expertise it requires to gain that credential matters. Simply put, you’re a CPA, and you deserve a premium for your services.
When trying to structure fees, it’s important to set a minimum job value. By setting a minimum job value at, say, $500, you won’t get mired in lower-level work that you likely don’t want to take on. Plus, that work can take up time and pull you away from more valuable work that you’d rather be doing.
Knowing what you want to charge and identifying the value you bring to your clients is critical. You are providing a service to your clients, but you’re also giving them a value based on your credentials and experience. So, it’s up to you to set the standards and have them choose between lower costs (them doing it their self) versus the value of having a CPA prepare your taxes.
That said, there’s a balance.
Many CPAs make a practice of “writing down” certain services because they know their hourly rate for larger projects can quickly become untenable for a client. Not only is this seen as a discount by the client, but it also allows you to create a fixed-fee structure for your services and show the clients the savings and value they receive.
When hiring, accounting firms are like many businesses and are looking for a combination of credentials, experience, and the ability to perform the necessary tasks. However, in an increasingly competitive hiring market, many firms are beginning to look at soft skills as valuable for new hires.
For decades, accounting firms have focused primarily on credentials. However, more and more, it’s less and less about certification and more about aptitude. For the most part, it’s easier to train accounting knowledge than it is to build customer service skills. When hiring, it’s important to look at the qualities a candidate can bring into a firm – not necessarily just credentials.
Of course, experience and credentials do matter. Especially when the experience sets for an accountant is specific and narrow. What types of tax returns have you prepared? What specializations do you carry? And credentials such as CPA, EA, attorneys, and state certifications (when required) are all still attractive to firms looking to hire.
Start-up costs can range from $2,500 to $25,000. Your location and your goals will determine cost in several ways, including whether you want to start a traditional brick and mortar firm or are looking to create a virtual office environment.
It’s important to remember that, besides physical (or virtual) space, accounting firms need to find and install the necessary equipment and technology to help their practice run more efficiently. That, in many ways, is the first step for a new entrepreneur. Once they’ve found a tax solution that can help them achieve their goals, they’ll be able to begin tackling the other day-to-day tasks and questions of running a business.
Finding the best business structure for your accounting firm is a critical part of not only ensuring success but helping to minimize both your tax burden and your risk.
While the circumstances of what your incorporation looks like will depend on your approach, it is considered a best practice to become incorporated right off the bat due to the legal protections it provides.
Popular options include:
If you’re running a solo firm, you’re likely going to be looking at an S-Corp, which allows you to pay yourself as an employee. However, if you are working with other partners, a partnership might be more preferential, as it provides a little more flexibility with payment. You are permitted to take draws or distributions, and it doesn’t necessarily require a payroll department because it’s not considered “wages” per se.
Whichever structure you choose at the beginning, know that it will likely evolve throughout the maturity of your firm. For instance, a firm might accept the risk and start as unincorporated to avoid the incorporation fees. Then they might transition to S-Corp. Over time, as additional owners move into the entity structure, the firm can add additional shareholders or can reorganize as a partnership.
It’s better to have a separate legal entity than to not and better to have separate federal filing than to not.
The consensus is word of mouth. However, while a strong work ethic, exceptional service, and competitive pricing will undoubtedly attract clients, a successful business always requires more than just good luck.
Here are a few tips on how to increase your client base:
You’ll find other ideas in our blog post on finding new clients.
Websites, social media, and various other online presences are a great way to establish credibility in the market.
For the most part, a simple online presence is relatively easy to start with minimal start-up costs. And while an online presence won’t guarantee an increase in exposure, not having one can have a negative impact and can discredit you to a potential client. In many cases, website and social media become an augmentation to your word of mouth referrals. Most people won’t simply call a number without the opportunity to do some basic online research.
However, there is a difference between a website presence and social media. In most cases, a website is static and allows businesses to transmit basic, evergreen information such as phone number, services provided, and credentials. Social media, on the other hand, can drive business in a longer and more indirect fashion.
Auto-posting any relevant story or information can help create a brand on social media – one where you’re seen as an authority on tax and accounting subjects. Posting constant content can help with visibility and, ultimately, increasing your customer base.
If you think you may need help with this, take a look at our social media and other digital marketing solutions for accounting firms.
Put simply, the more specialized you are, the more profitable you are. However, it’s not as much a question of “should you” but “can you.”
Many – if not most – firms will start as generalists and then slowly make their way a more niche practice. Sometimes a firm will intentionally build clients in one area. Others realize they have, say, many construction clients and then move to the particular niche.
If moving toward a niche practice, consider:
Niches, like many things, are often dependent on location, interest, and understanding where there is a need across different businesses. However, some of the most successful niches are the ones serving fellow professionals such as doctors, dentists, attorneys.
Services based niches as opposed to manufacturing-based are also on the rise. For example, real estate professionals, landscapers, and farming clients are becoming a more prosperous and unique way to do business.
However, it’s important to remember that you have to target businesses where you have the right location and the right skills. Again, farming has particular needs and goals. If you can fill them, then you have a specialization that is highly valuable to that market.
What are the things that are most likely to influence a client’s perception of you in the little amount of information they’re able to get from a flyer, website, or social media? While the idea that “first impressions matter” may seem a little cliché, they still matter to your clients. As a result, making sure your communication is direct, pleasing, and engaging is critical to your success.
Some important deciding factors include:
Thanks to our subject matter experts Jordan Kleinsmith and Mo Arbas for their input into this article.