Engagement - Potential client

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#1
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I have a long time client who are planning to go into business with someone. He asked me about the pros and cons of the structure. I did not charge him for the time. instead of putting my opinion in writing, we talked on the phone.

Now he sent me an email. His potential partner asked him to ask me my opinion on the structure. My client has asked if I would be interested in taking them on as a client but he has to discuss that with this partner.

I have not replied the email because I do not want to put down anything in writing because this new client does not have ongoing relationship with me or engage me. So how should I proceed? Do I send him an engagement letter or give them my rate for a quick advice?
 

#2
ATSMAN  
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I have been put in the same situation a few times and my standard answer is that I am NOT a business attorney so he should seek proper legal advice regarding form and entity. I am willing to consult with the attorney and owner on the tax issues but I draw the line there.

Unless you are an attorney, it will expose you to serious liability for legal advice in writing that your client relied on and something does not work the way they expected. Believe me it is no fun defending a business lawsuit even though at the end you may win.
 

#3
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Thank you so much ATSMAN!

I am pretty careful about not advising on legal works. I almost remember to tell them I am not an attorney and I do not write out email regarding that.

However, as a tax person as well as a business consultant, I think I should address regarding the tax issues of their structure (e.g. they need to issue payroll under the S corp). I already did that part with my client but now that he sent me an email from his partner asking me about what I think.

I talked on the phone with the clients advising him to seek an attorney regarding operating agreement and profit/loss allocation, work allocation.....I think those fall under business advices. What do you think? I did that on the phone as well.

In this case, would you still charge the clients regarding these phone calls about business?

I am hoping to get the tax prep of the new entity as engagement. Thanks.
 

#4
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cyberdom wrote:I have a long time client who are planning to go into business with someone. He asked me about the pros and cons of the structure. I did not charge him for the time. instead of putting my opinion in writing, we talked on the phone.

Now he sent me an email. His potential partner asked him to ask me my opinion on the structure. My client has asked if I would be interested in taking them on as a client but he has to discuss that with this partner.

I have not replied the email because I do not want to put down anything in writing because this new client does not have ongoing relationship with me or engage me. So how should I proceed? Do I send him an engagement letter or give them my rate for a quick advice?


We take a lot of business law and its on the CPA exam thus why do we study it if we can't give basic advice? I agree with the put it in writing caveat.....

I respond normally with language like this..

"My experience has shown me that most entities formed are S-Corps in situations like you describe BUT each situation is different and I am not advising that. I would be happy to consult with you in person at my hourly rates but to address this via E mail is not appropriate. Additionally, I am speaking only form a tax stand point as I am not a lawyer.
 

#5
ATSMAN  
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I agree that based on our training we probably know a lot about business form and entity to talk intelligently. But I think the fine line is rendering advice in writing to a specific situation. I can talk all day with client about pros and cons of Sole Prop, LLC, Sub -S etc. but at the end if the client asks so please tell me in writing which one I should select, I can't do that.

My correspondences to my clients always state in bold that I am an accountant and not an attorney and nothing that I say should be construed as legal advice. They must independently seek legal counsel.

It is a very slippery slope and you can get caught without you even realizing it, especially if it is a friend, relative or close client and you are right on top of the fence! I know people don't want to pay attorney fees to consult but that is their problem not mine.
 

#6
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First, agree with post #2 that there are two sides to this coin. Legal and tax.

I make it very clear, in writing, that I can only consult on the tax side, and that they should consult a business attorney for the legal and asset protection side.

Second, tax entity structuring consulting engagements are good engagements. You should absolutely charge for your time. Create a consulting engagement letter that names both your client and his probable future business partner. The key is to make it very clear in the engagement letter what you're consulting on, and that the decision of what path the clients take is ultimately up to them, not you.

Usually I ask for projected financials and projected 1040 data so I can run an effective tax rate calc, and then a phone call to dive deep into the pros and cons of each tax entity, as well as what they anticipate will be the life cycle of the business, and how each tax entity will behave at each point in the life cycle. Things to consider are allocations partnership vs S Corp, an S Corp's affect on QBI both positive and negative, appreciating assets inside of a corp, etc.

The point is, good advice is very valuable here, and you should therefore charge for your time. How many times do we see a prospect that is in a tax entity he or she shouldn't be in, because they either read some articles online and DIYed it, or took the advice of an inexperience bookkeeper or tax preparer? Getting it right from the get-go saves the client much more money than what you'll charge.

The good news, if you impress them with the tax entity structure consult, you're almost certain to pick up all of the compliance work (entities and 1040s), plus the bookkeeping if you offer that.
 

#7
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We give legal advice any time we discuss or address tax matters and advise clients on such.

I will freely discuss the pros and cons of different entity types, and strictly from a tax standpoint. If they have any questions that get into legal side of things such as asset protection, then they need to discuss it with a lawyer even though I know most of the answers to their questions. One prospective client talked to a lawyer I know, and wanted to confirm I agreed with what the lawyer said (from a tax standpoint, since the lawyer advised from legal standpoint). Coincidentally, we both said the same thing.

That said, few clients ever consult a CPA about entity structure or there would be far fewer S-Corps. They are more likely to do it with a lawyer but lawyers will not advise from tax perspective unless they are also tax attorneys or CPAs.
 

#8
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CornerstoneCPA wrote:That said, few clients ever consult a CPA about entity structure or there would be far fewer S-Corps.


Amen.
 

#9
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ManVsTax wrote:
CornerstoneCPA wrote:That said, few clients ever consult a CPA about entity structure or there would be far fewer S-Corps.


I still can not figure out why all the hate towards S Corps. I think every profitable operating company should be operating as an S Corp. When I see clients set up as an S Corp, I figure they probably talked to a CPA rather than a lawyer. Most lawyers without a strong tax foundation will default to LLC as the entity of choice.

For real estate, always go with LLC. For profitable operating company, always go with S Corp
 

#10
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BerkshireCPA wrote:
ManVsTax wrote:
CornerstoneCPA wrote:That said, few clients ever consult a CPA about entity structure or there would be far fewer S-Corps.


I still can not figure out why all the hate towards S Corps. I think every profitable operating company should be operating as an S Corp. When I see clients set up as an S Corp, I figure they probably talked to a CPA rather than a lawyer. Most lawyers without a strong tax foundation will default to LLC as the entity of choice.

For real estate, always go with LLC. For profitable operating company, always go with S Corp


Probably referring to small, small companies. I see ton's of companies set up as S corps that don't have net operating profit to warrant the fees etc. But in general, I agree with your statement above.
 

#11
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southpark has it right.

Too many side businesses set up as S Corps.

If net taxable income is $50k or below, they shouldn't even consider it. Just run it as a Sch C.
 

#12
CathysTaxes  
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Too many, ime, become SCorps because their idiot drinking buddies tell them to. Their articles of incorporation show $10 in shares and everything else is a loan. And they refuse to do payroll, they prefer taking draws.
Cathy
CathysTaxes
 

#13
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Thanks for everyone's participation. I really enjoy your sharing of your experience, advice and views.

It gets a bit complicated as I had to respond to the new partner's email

And I think I should communicate to my client about the hourly fee (i did not charge him but had a short phone call with him on this issue when he asked me.) and the need of having the new partner to engage me before I can answer him.
 

#14
fish  
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Cyberdom - if one of the partners wasn't already a client of yours - imagine this is a completely unrelated, brand new prospect - how would you respond to this inquiry? You would say you would be glad to consult with them on forming a new business entity, you look forward to working with them on this venture, and here is your fee structure.

the fact that one of the investors is already a client shouldn't change this.
 

#15
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CathysTaxes wrote:Too many, ime, become SCorps because their idiot drinking buddies tell them to. Their articles of incorporation show $10 in shares and everything else is a loan. And they refuse to do payroll, they prefer taking draws.


When you refer to idiot drinking buddies, I take that personally. :D
 

#16
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ManVsTax wrote:southpark has it right.

Too many side businesses set up as S Corps.

If net taxable income is $50k or below, they shouldn't even consider it. Just run it as a Sch C.


I would say even higher at say 75-100K but we're close enough for jazz.
 

#17
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Answer a simple question: how many small S-Corps pay reasonable compensation vs. taking predominately or entirely distributions?

Does not matter if set up as a formal corporation from the get-go or LLC with S-Corp election.

I will not get into S-Corp discussion unless the owner(s) listen to reasonable compensation rules and consider using RCReports.com to identify that reasonable compensation, if they are not paying sufficient wages, already. I get tired of the question "well, how much should I pay myself?" I don't know! I am not in your field, nor do I know what all you do for the business!

I have zero problem with S-Corps when they are handled properly.
 

#18
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Since the new entity has multiple members you should urge them to have an attorney draft an operating agreement or shareholder agreement, whatever the case, that way an attorney can address all the legal issues we’re all concerned about not getting addressed.
 

#19
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CathysTaxes wrote:Too many, ime, become SCorps because their idiot drinking buddies tell them to. Their articles of incorporation show $10 in shares and everything else is a loan. And they refuse to do payroll, they prefer taking draws.


Sometimes I like those potential clients because I don't have to do any work for them -- usually during the initial consultation they realize that I'm going to require them to do payroll moving forward or I'm not going to take them on as clients, and they look elsewhere. :lol:
 


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