6 key issues a CPA firm's ownership agreement should address

6 key issues a firm's ownership agreement should address

August 9, 2022 11:37 AM

Your CPA firm almost certainly advises its clients about the importance of having a current, relevant and effective ownership agreement in place. But in a prototypical "the cobbler's kid has no shoes" scenario, I come across a number of CPA firms that lack an agreement that meets the "current, relevant and effective" bar themselves (and we lawyers are no different).

That's a big mistake because an ownership agreement is a foundational document used to govern how major decisions are made, how ownership is structured, and other important functions. It's a contract that binds owners to an agreed upon set of rules.

An ownership agreement can enable growth and also help avoid or resolve disputes between owners. Indeed, common areas of disagreement such as roles and responsibilities, rights and obligations regarding finances, decision-making authority, and succession issues can all be addressed through a thoughtful and thorough ownership agreement.

Every CPA firm should have a well-crafted ownership agreement in place. An effective agreement can enhance decision-making, productivity and profitability within your firm, mitigate risks, and also set the foundation for a successful transition to new ownership. Just as you advise your clients to do a yearly tax and financial "check up" for themselves and their businesses, it's important for your firm to revisit its ownership agreement annually to ensure that it properly addresses the firm's current circumstances and future goals and objectives.

If your CPA firm doesn't have an ownership agreement in place, it desperately needs one. It's more likely your firm has an ownership agreement, but it hasn't been updated in years, or even decades. Or perhaps you're thinking of going off on your own and need to think through the terms of an ownership agreement with your prospective business partners. Regardless of the scenario, here are six key issues your CPA firm's ownership agreement should address.

Note: The term "ownership agreement" is used generically in this article to encompass the various agreements, including operating, partnership and shareholder agreements, that are used depending on the type of corporate entity.

Determine ownership interests

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An ownership agreement sets forth the ownership interest, including capital contributions, for each partner. In the absence of a written agreement, partners are assumed to have equal ownership of the business, which means, under most states' laws, partners are entitled to an equal share of the partnership's profits and losses.

While many CPA firms may start out with a couple of partners and an intention to split everything equally, that tends to change as the firm grows and more partners are added, which means their agreement must change, too.

With a written ownership agreement, the partners can allocate ownership and profit according to other terms they agree upon.

Define roles and responsibilities

An ownership agreement should establish each partner's rights and responsibilities. A firm that is managed by committee when it is small may evolve to have a more hierarchical management structure with a CEO and other officers. Regardless, an ownership agreement can and should address issues such as who has the right to make decisions for the business, who has the ability to enter a contract, who owns the property, what decisions require a vote by all partners, and who has authority to hire and fire employees, to name just a few of the roles and responsibilities.

Business dissolution

An ownership agreement should outline the procedure for dissolution of the business and the exit of a partner. It should describe the events and circumstances that result in the end of the business relationship between the parties, which may include death or incapacity of one of the partners or certain actions taken by a business partner. The ownership agreement should also define how the partnership property, profits and losses will be distributed in the event the partnership ends (most often, in accordance with ownership interests).

Partner retirement

CPA firms deal with partner retirements far more frequently than the prospect of dissolution, so an ownership agreement should address when and how partners may retire. Some of the key aspects of a retirement provision include how much notice must be given, whether there is a mandatory retirement age, and what obligations a retiring partner has to transition clients to other partners in the firm.

Buying into the partnership

The long-term health and vitality of any CPA firm, like any professional services firm, depends on the ability to attract and retain talented professionals. Therefore, an ownership agreement should set forth the terms and conditions for someone to buy into the business. In some firms, the ownership agreement will establish a separate tier of "non-equity" partnership.

Non-solicitation

Many ownership agreements will include non-solicitation provisions that prevent partners from leaving the firm and taking clients and staff with them. It's important to understand current laws, regulations and court interpretations of non-compete/non-solicitation agreements to make sure yours is enforceable.