8 points worth noting.
for 20 years or more, the cpa profession has been expanding services beyond traditional audit, accounting and tax, supplementing its portfolio with a wide variety of consulting services. indeed, in recognition of this, most cpa firms’ logo states something to the effect of “cpas and consultants.”
more: non-equity partners: why have them? | making partner: today’s 15 essential skills and traits | how to specify managing partner duties | when votes must be taken, what are the options? | ownership percentage and capital accounts
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some firms have cpas on board who provide consulting services. other firms hire outside, non-cpa consultants in areas such as technology, wealth management, m&a and health care.
in many cases, these non-cpa professionals attain a high degree of talent and skill, becoming drivers of their firm’s success. ordinarily, firms would recognize these accomplishments and skill levels by making them equity partners. however, state laws restrict non-cpa ownership of cpa firms.
to satisfy these professionals while complying with state cpa ownership rules, some firms have created the position of principal (or other titles such as director or vice president). principals have virtually the same rights and privileges as equity partners who are cpas.
what to pay particular attention to in your principal agreements
in comparing a cpa firm partner to a non-cpa principal, it’s interesting to identify what exactly are the rights and privileges of an owner in a cpa firm. from a firm governance point of view, what rights and privileges do “partners” have that staffers don’t? here is a partial list:
- partners share in the profits of the firm. this results in compensation levels for most partners that are 5-10 times higher than those of staff. “compensation” includes fringe benefits such as travel allowances, automobiles and club memberships.
- partners receive partner retirement/buyout benefits upon termination from the firm. for owners of many multipartner cpa firms, this figure is in excess of $1 million.
- partners contribute capital, benefit from its virtually guaranteed increase over time and get it repaid with interest upon their termination. instead of partners having a capital account, they may have a loan account.
- partners have a vote and related privileges such as attending partner meetings and retreats at which key firm issues are addressed.
- once one makes partner, there is a level of “tenure” that is very similar to the type professors enjoy in academia. this “tenure” is not official or in writing, but might just as well be because cpa firm partners are rarely fired. upon becoming a partner, there is almost nothing an owner can do short of committing egregious acts that will result in termination. this tenure is much more common at firms under $15 million than over. (i apologize if a wee bit of sarcasm creeps into this section.)
- partners have opportunities to earn additional, sometimes significant remuneration from non-cpa activities. two chief examples are investing in the businesses of non-attest clients and sharing in the profits of separate divisions, with wealth management being perhaps the most common example.
- if the firm is sold, partners obviously participate in the proceeds of the sale.
- being a partner carries a level of prestige and stature that staff can never enjoy. these things are good for the ego, but there are more tangible benefits too: partner status helps people bring in business, establish referral sources and obtain positions on various boards of outside organizations.
these items should be specifically included in a principal’s agreement, which should mirror the partner agreement for cpas who are owners in their firms.
sample language for your partner agreement
non-cpa principals shall be elected as such by election of the equity partners in the same way a cpa would be elected partner. principals shall enjoy all the rights and privileges and incur all the responsibilities of being an equity partner in the firm, as permitted by law and professional ethics.