PROFESSIONAL DEVELOPMENT: TAKING YOUR CAREER TO THE NEXT LEVEL HANGING OUT YOUR SHINGLE WITHOUT MESSING UP There are advantages and challenges to going from being an employee in a large, fullservice CPA firm to opening a small shop with a very narrow service offering. Examine all of the considerations of running a small niche firm, including business considerations, taxes, corporate form choices, insurance, engagement letters, office policies, timekeeping, data security, noncompete agreements, marketing, licensing, and more. JANET MCHARD, CFE, CPA, CFFA Founding Partner McHard Accounting Consulting LLC Albuquerque, NM Janet is the founding partner of McHard Accounting Consulting LLC. She is a Certified Fraud Examiner (CFE), a certification bestowed upon examination by the Association of Certified Fraud Examiners (ACFE), for whom she is also a faculty member. She also holds a CPA in the State of New Mexico. Janet also is a Certified Forensic Financial Analyst (CFFA), a designation offered by the National Association of Certified Valuation Analyst (NACVA). Association of Certified Fraud Examiners, Certified Fraud Examiner, CFE, ACFE, and the ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of this paper may not be transmitted, re-published, modified, reproduced, distributed, copied, or sold without the prior consent of the author. 2012
Those who believe they can do something and those who believe they can t are both right. Henry Ford So you think it s time to go out on your own. You re sure you could make more money and have more fun if only you were your own boss. You are convinced you are ready to take the leap. What things should you consider before resigning from your current position? This session will help you work through some of those questions. The answers will depend on your specific situation but this session will help you define the questions you should answer before jumping off the cliff called self-employment. Here are some reasons you may consider going out on your own: You are ready to own your own firm. It is a natural career move to go out on your own. Being part of a full-service firm is creating legal conflicts for you or independence problems for the rest of the firm. You have your own regular referral sources. You are ready! You are self-disciplined, a self-starter and self-motivated. You hate your current job or employer. You got fired or laid off. You think you can make more money on your own. You are tired of getting hounded about billable hour requirements by your current employer. You can t find a job you like. Now, which of these are good reasons to hang out your own shingle? I d argue the first five bullet points are pretty 2012 1
good reasons and the last five are iffy reasons. You ll have to answer for yourself why you want go it alone and you should be brutally honest with yourself as you answer that question. If you re leaving the current place because you hate the job or employer, be careful that you are not running away and taking the problems with you. Is it the employer that is making you miserable or is it that you aren t satisfied with the requirements of the profession? If, in contrast, you want to hang out your own shingle because you have an established group of referral sources or you will have more access to cases in a smaller firm, go for it. It is also extremely important that you are self-disciplined, a self-starter, and self-motivating. One of the best things I ever heard when I was thinking of going out alone was to keep in mind that if I took the morning off for personal tasks I had to be disciplined enough to work in the evening. Before You Go To climb steep hills requires a slow pace at first. William Shakespeare Before you leave your current position, consider some of the following. Health Insurance How will you get health insurance once you re on your own? Are you eligible for COBRA coverage? Can you afford it? Are you eligible for an individual plan? Do you need to provide health insurance to your spouse, family, or other dependents? Do you have health conditions that will make it difficult to obtain individual or small-business health insurance plans? 2012 2
Other Forms of Insurance Your current employer may provide dental, vision, life, or disability policies. Is it possible for you to qualify for these policies through your small business? How much will this cost? Retirement Savings When you go out on your own, you are responsible for your own retirement savings. Talk to your CPA about retirement options available to you when you re on your own. Also you may have a 401k or other plan through your current employer that you will need to rollover into an individual plan. Before you take any withdrawals from your 401k or IRA to fund your new business, be sure you know the tax implications that will result from the withdrawal. Non-Compete Agreements Non-compete agreements are common in the accounting profession. Do you have one with your current employer? If so, you ll need to consult with an attorney before you leave your current employer to make sure that you can legally open your own firm and whether you can take your current cases with you. Laws about non-compete agreements vary widely between jurisdictions. Be sure to find an attorney in your area who knows the local case law. It s also important to keep a good relationship with your soon-to-be-former employer; no matter how big your community is, it s not that big. And you ll want to keep open the possibility of getting referrals from your former firm. Financial Considerations How much money do you have in your savings account? Most new businesses take the better part of a year to get up to speed. Can you afford a reduction in 2012 3
income for that long? Do you have sufficient money set aside to pay both your personal expenses and business start-up costs for the first year of your business? Business Cycle Identify the business cycle for your specialized service line. You ll find that you have certain months of the year where you get significantly higher revenues and other months where you get significantly lower revenues. (Remember this month s billable time is next month s revenue.) You ll need money set aside for those low periods. Even after you start the business and it s going well you ll want to keep two or three months of expenses in a savings account to cover those low periods. Business Plan If you don't know where you are going, any road will get you there. Lewis Carroll You've got to be very careful if you don't know where you're going, because you might not get there. Yogi Berra Write a business plan. Yes, it s that simple; write a business plan. To paraphrase Lewis Carroll and Yogi Berra, if you don t have a plan, there s no telling where you ll end up. It doesn t have to be 100 pages of details and it doesn t have to be perfect but it does need to contain sufficient, realistic detail that you know your business can be viable. It also needs to have sufficient detail so that you know what kind of work you ll do and what you won t. Your business plan helps you 2012 4
determine your billable rate, what kinds of cases you want, and how you ll market your business. And once it s written, revise it, refresh it, and revisit it, at least annually. What sorts of things should you consider in your business plan? Here are some suggestions. Service Lines Evaluate possible niche offerings considering your unique strengths, training, passion, interest, and qualifications. Also evaluate what your local market already has and what it needs. (But remember if you hate the niche, don t do it! You ll be miserable, your clients will be unhappy, and your business will fail.) Desired Clients Who are your ideal clients? How are they referred to you? What is your ideal referral source? Sometimes this is easier to define by figuring out what you don t want. In other words, you don t want deadbeat slow-paying clients, so your ideal client will pay your bills as soon as they are invoiced and they see the value in your services. The definition of your desired clients should include industries, geographic area, types of cases, jurisdiction, and so on. Budget Your business plan should include both your budgeted revenue and your budgeted expenses. These aren t going to be exact budgets. But it is well worth the exercise of determining your expected annual revenue and figuring out whether both your business and your personal finances can exist on the expected revenue. (See important note about setting aside money for taxes 2012 5
below.) Part of doing the budget portion of your business plan is figuring out what your billable rates should be. Ask your trusted referral sources and see if you can determine what your competitors are charging. This will help you set your rates competitively. We ll cover business expense considerations in a bit. Marketing Include a rough draft of your marketing plan in your business plan. You will want to expand your marketing plan after you get started but it s important to figure out how you ll get your clients. Some marketing considerations include designing your website, logos, letterhead, business cards, mailings, gifts, holiday cards, and so on. Employees Taking on employees is a huge commitment. Not only do you have to earn enough money to pay for your own expenses but you now have responsibility to pay an employee on a regular basis. There are also additional tax implications if you have an employee. You might wish to consider using independent contractors instead of employees, if they meet the IRS definition. You should also consider whether it is cost effective for you to do the filing and administrative work or whether you can afford to bring someone in to help you. Infrastructure Where will you work? What are your office space needs (not wants)? Are you going to start by working at home? Will you rent an office space? What will space cost you? Do you need space that will impress clients? What equipment do you need? Are you going to create a paperless system? Computers, servers, phones, cell phones, Internet service providers, email servers, filing 2012 6
space, copiers, printers, and security systems are all possible considerations. Timekeeping and Bookkeeping How will you track your time? How will you create invoices for your services? How will you do your bookkeeping? Buying software gives you more control but is expensive up front. There are good cloud apps that will keep up-front costs down. If you use cloud apps (for any part of your business), be sure you know the vendor s confidentiality and backup policies. Your firm s client confidentiality is only as good as your vendor s policies. Forming the Business The secret of getting ahead is getting started. The secret of getting started is breaking your complex overwhelming tasks into small manageable tasks, and then starting on the first one. Mark Twain So you ve decided to do this, for all the right reasons, and you ve written your initial business plan, now what? Now you get to do the footwork to legally create your business. Business Form One of the first decisions you ll have to make is what business form your company will take. Each type of business has its own positive and negative qualities, most of them centered around tax and legal qualities of the business form. Some of the options are: Sole proprietorship C-corporation S-corporation Partnership 2012 7
LLC LLP HANGING OUT YOUR SHINGLE WITHOUT MESSING UP Your choices are governed both by tax regulations and local laws. Check with an attorney or accountant in your area who is well-versed in business law and setting up new businesses. You ll need this attorney for other purposes too, so ask around and find an attorney who is good at working with small businesses. The best recommendation is always one given by a satisfied customer. Malpractice Insurance Malpractice insurance may or may not be legally required for your business. Whether it s legally required or not, it is highly recommended. Depending on your firm s service lines, you may have only limited options for malpractice insurance. You might need coverage for accounting malpractice or a bond for private investigations. Professional requirements or state statute may govern which of these you need. Other Business Liability Insurance Find an agent who can get you set up with business liability, fire, casualty, business interruption, and data loss policies. All may be required or recommended. If you have employees, you might be required to carry worker s compensation insurance as well. You may also wish to consider key employee life insurance, particularly if you are forming a partnership. Tax Numbers and Business Licenses You will need a tax identification number (for U.S. entities this is a Federal Employer Identification Number or FEIN). You may also need a state or local tax identification number. Some state agencies that may 2012 8
require you to register are departments of labor and workers compensation administrations. Municipalities and states may require business licensure or assumed name (DBA) registration. You also may need to register with a corporations commission or public regulatory commission. The attorney who helped you with the initial company formation documents can help you sort out which governmental agencies require registration. Professional Licensure You will likely require licensing as an individual by your professional board (accounting, private investigation, or other authority). Your firm may also be required to register with the same agencies. Engagement Letters You ll need a good, strong engagement letter that has been reviewed by your attorney for compliance with laws in the jurisdiction in which you practice. The AICPA has a practice guide that can be helpful. See Engagement Letters for Litigation Services, Practice Aid 04-1 published by the AICPA. Also ask your trusted colleagues if they ll share their engagement letter forms with you. Your engagement letter should include your collections policies and establish whether you can charge interest or late fees. It should also establish the jurisdiction to adjudicate any disagreements, including whether arbitration or alternative dispute resolution is required instead of court filing. Conflict Checks Be sure you have an established methodology for confirming that potential new clients do not have any conflict with current or prior cases or clients. This may consist of a software solution or may be a process for 2012 9
checking a listing of all your cases and parties. This should be done prior to any engagement letter being prepared on all new cases. Paying Taxes Create a tax calendar that lists all the deadlines for all the different taxes you ll have to pay. This should include employment taxes such as 941 deposits, unemployment taxes and federal corporate tax payments. If you are taxed at the individual level, such as with a sole proprietorship, be sure to include all personal tax payments on your calendar too. Any sales or gross receipts taxes should be on this calendar as well. You also should consider whether you are liable for any taxes when working outside your normal geographic area. For example, the Navajo Nation requires payment of sales tax for all service work performed on Nation land. Reserving for Taxes This should really be called over-reserving for taxes. One of the most common mistakes of small business owners is failing to pay taxes when taxes are due. Usually this happens because the business owner has not saved enough money to cover the tax payment. Work with your CPA to realistically determine your tax liabilities to all taxing authorities and set aside that amount plus 15 percent. You may wish to open a separate bank account where money is saved for the sole purpose of paying taxes. Go Forth and Prosper!!!! Be sure to ask for help. No one can start a business alone. You ll need help from your family or spouse, even if that help is simply understanding the stress you are under. But also find a good attorney and a good CPA to help you. Also 2012 10
keep in mind that there are lots of folks out there who have successfully started their own businesses, some of them in our profession and some of them in completely different industries. Talk to them. Find out what worked for them and find out what didn t work and why. Going out on your own is stressful in all kinds of ways. Use their counsel to help you hang out your shingle without messing up. There is no passion to be found playing small in settling for a life that is less than the one you are capable of living. Nelson Mandela 2012 11