The Best Business Structure for a Bookkeeping and Tax Practice

One of the first decisions that any type of business has to make is the structure under which to organize itself. This decision is especially weighty for a bookkeeping and tax practice for two reasons. First, the nature of the business means that the business owner could be exposed to a great deal of liability for any mistakes. Second, since a bookkeeping business is selling its financial expertise, a bad choice could reflect poorly on it.

The limited liability company is a relatively popular option for a small business. LLCs offer a blend of the best parts of a corporation and a sole proprietorship. Like a corporation, the LLC's owner isn't personally liable for what his business does, so if the business gets sued, his property is usually safe. Like a sole proprietorship, an LLC reports its income on the owner's personal tax return and it gets taxed only once, as personal income.

The C corporation can be a good structure for a large bookkeeping and tax practice. C corporations are separate legal entities. The owners of C corporations enjoy liability protection from what their business does. Usually, they get paid as employees of the corporation, and the corporation can distribute additional profits to them as dividends for the shares that they hold. The key drawback to a C corporation, other than the record keeping requirements, is that a C corporation's income is taxed twice. First, its profits get taxed under the corporate income tax. Second, they get taxed as personal income when and if they are transferred to the corporation's owners.

An S corporation functions like a hybrid between an LLC and a regular C corporation. When a bookkeeper sets his business up as an S corporation, the income and losses flow through to his tax return just like they would with an LLC. One of the benefits of an S corporation is that while the corporation must pay a fair market wage to its owner, the balance of the company's profits can be paid through as dividends, avoiding self-employment tax. S corporations also require the structure and responsibilities of a corporation, including holding scheduled meetings of directors and keeping minutes.

Sole proprietorships and their multiperson counterparts, general partnerships, have common benefits and common challenges. They're both very easy to set up and, for tax proposes, are pass-through entities whose income is treated as personal. This can make them suitable for small practices that just want to set up a business, make some money and pay the legally required taxes. The problem with these businesses is that they have no separation from the owner. This means that if a bookkeeper makes an error on someone's taxes and the error costs the client $150,000, the client can take the business's $25,000 worth of assets, then get the next $125,000 from the owner. Given the amount of money that can be involved in even a small bookkeeping and tax practice, this risk potentially makes a sole proprietorship or general partnership dangerous. While a limited partnership offers protection to the limited partners, the one general partner retains personal liability. One way to reduce these risks would be to purchase professional liability insurance.