The Limited Liability Company - a New Form of Accounting Practice
Sager, William H., The National Public Accountant
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. …