Video Summary:

In this transcript from a video of Andy Gale from Gale & Vallance, a business law firm based in Orange County, explains why CPA firms cannot register as LLCs in California. He breaks down the legal restrictions outlined in the California Corporations Code that prevent licensed professionals, such as CPAs, from forming limited liability companies (LLCs) to offer their services. Andy also touches on the risks of noncompliance, the importance of forming a professional accountancy corporation, and the possible consequences of incorrectly structuring your business.

To learn more about why CPA firms cannot register as LLCs in California and how to structure your practice properly, check out our detailed article on CPA business formation rules in the state.

This video is intended for informational purposes only and does not constitute legal advice. We strongly recommend consulting with a qualified attorney to assess your specific situation.

Introduction and Legal Restriction on LLCs for CPAs

[00:01:03 – 00:02:15]

I believe is the fact that we as licensed Professionals in the state of California cannot use a limited liability company as a type of business entity from which to offer Professional Services. That particular prohibition is codified in the California corporations code section 17701. But it says that there’s just nothing in this particular section that is our California limited liability Act—there’s nothing in that entire act that permits a domestic or foreign limited liability company to render Professional Services. And when you’re providing accounting services, those are Professional Services. So my opinion is that LLCs are out.

In the accounting world there are a variety of services that are provided. Some obviously require a licensure, and then others—basic bookkeeping—are not. So there are slightly different rules that apply for those folks. On the other hand, there’s other problems with CPAs just restricting themselves to bookkeeping work and then wanting to hold themselves out as CPAs as well if they haven’t filed a professional corporation. And we’ll sort of dive into that in just a second.

Forming a New Corporation vs. Converting

[00:02:26 – 00:02:54]

With the conversion versus forming something new—if we go through a conversion process, basically all of the paperwork that shows that we started our business wrong or incorrectly will be made part of the public and permanent record that relates to our professional corporation from now till the end of time. And my thought is, why on Earth would we want to memorialize a mistaken formation when we could simply have a clean start?

When to Use a Professional Corporation

[00:03:03 – 00:03:24]

So at what point is it better to have a professional corporation than an LLC? Now, there’s just no room for LLCs in the business. They’re going to just cause you problems. And the California Board of Accountancy has a fairly rigorous enforcement division. So if they catch you stepping outside the rules, it won’t take them long to find out. And it’s not a pleasant process to get sorted out.

Advertising Limitations for CPAs Doing Bookkeeping

[00:03:33 – 00:03:51]

You can, as a CPA, offer the basic bookkeeping services. But the CBA, you know, places limitations on how you can advertise. And the biggest one is that they really restrict how you can advertise to your clients that you’re a CPA—and it’s not much.

Limited Exception: Not Holding Yourself Out as a CPA

[00:04:54 – 00:05:14]

Except in this one situation where they have a little carve-out. They’re like, “Look, you’re not engaged in public accountancy if you do these things—and you don’t hold yourself out, solicit, or advertise to clients using your CPA account or public account designation.”

Form a Professional Accountancy Corporation

[00:05:17 – 00:05:45]

She was like, “Well why on Earth, if you’ve become a CPA and you’ve gone through all of that work—and it obviously distinguishes you from the sea of people who offer accounting services—even if I restrict my practice to this…”
So my recommendation, whether or not you are doing just audits for public companies or just taking care of books for mom-and-pop stores: if you’re a CPA, go through the trouble of forming a professional accountancy corporation.

Importance of Maintaining Your CPA License

[00:05:52 – 00:06:18]

Yes you do. What you need to do is, I think, keep up that license. You worked very hard to get it. And once you become a professional corporation, one of the requirements is that you remain actively licensed. And if you lose your status as a CPA because you haven’t kept up with your continuing education credits, then you no longer qualify to be an owner of a professional accountancy corporation—which then creates a whole set of problems for you.

Conclusion: Why CPA Firms Cannot Register as LLCs in California

If you’re a CPA in California, it’s essential to understand why CPA firms cannot register as LLCs in California. The state has strict legal restrictions that prohibit licensed professionals from forming LLCs for providing professional services. Forming a professional accountancy corporation is not only the compliant route but also safeguards your license and your ability to practice. Always seek personalized legal advice before choosing your business structure.