Financial considerations to make before becoming partner
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Financial considerations to make before becoming partner

1 year ago · 3 min read

Many young CPAs dream of the day when they’ll be named partner following years of hard work. Becoming a partner in a firm is certainly cause for celebration. But those who embark on that path need to be prepared for some financial changes. For instance, becoming a partner doesn’t always mean you’ll make more money immediately. And making the shift from employee to owner can also mean overhauling your finances and your taxes.

If you’re on the path to partner, it’s important to know what to expect. Young CPAs who made partner or are on the ownership track offer the following advice on how to prepare:

Ask about the buy-in process

Public accounting firms can be structured very differently and aspiring partners need to know what will be expected of them financially. South Carolina firm WebsterRogers, for example, requires its soon-to-be equity partners to either write a hefty check or finance a large loan through a local banking institution.

Robert Tilton, CPA, made equity partner at WebsterRogers in 2017. He receives a bill for interest quarterly and then pays on the principal of the loan at the end of the year once bonuses are paid out. “The logic is that I’ll pay the interest, and the money I make during the year will help pay down the principal balance,” he said.

Brandon Allfrey, CPA, became a partner in the tax department at Squire & Co., in Orem, Utah, in January 2015. New partners at Squire & Co. do not need to put money down but their buy-in costs are often financed through money that comes from the firm’s real estate holdings—money that would otherwise be allocated to them as owners. Partners typically take almost four years to pay off their buy-in amounts.

Allfrey, an AICPA Leadership Academy graduate, said he realized late in the process that, while his billing rate would increase as partner, his firm holds back 25% of each partner’s earnings annually to ensure that the firm has a reserve. This amount is reviewed twice annually and is given to the partners if the firm has a good year. This practice, he said, took him by surprise.

“Know what to expect financially,” he said. “Don’t go out and start spending. Wait a bit. Don’t change who you are just because your title will change.”

Scott Smith, CPA/PFS, of Smith, Kunz & Associates in Rexburg, Idaho, bought into his firm and with the expectation to be named partner. Smith, Kunz establishes a valuation of its firm and then figures out each partner’s portion of that valuation based on the partner’s clients. New partners essentially “buy those clients from the firm,” he said. Once the firm establishes what a soon-to-be new partner will owe, those on the partnership track pay down that amount with bonuses they receive from the firm. “As I generated more and more business, the bonuses got bigger and bigger, and at this point I have enough billings where I can make my buy-in payment and take money home,” Smith said.

Realize your tax status will change

Amanda Colgate, CPA, a shareholder at her family’s firm, Godshall Colgate LLC, in Columbia, S.C., noted that tax planning becomes more important after you become a partner. A partner is an owner of his or her firm and, as such, receives a Schedule K-1 from the firm that reports his or her share of the partnership’s income, gain, loss, deduction, or credit. Partners must make estimated tax payments to cover taxes, including self-employment taxes, on the income reported to them on their K-1.

Smith said, “You have to be able to set a lot of money aside to pay taxes and quarterly payments or year-end payments. No one is doing automatic withholding for you.”

New partners say this can be a significant adjustment and that incoming partners need to be prepared to handle this financial reporting shift.

Know the challenges

Partners share in the financial profits of a successful firm, but there are obvious challenges that coincide with being an owner or shareholder. For instance, earnings are often based on performance metrics, and if partners don’t perform as expected, their take-home pay could be less.

Becoming a partner in a CPA firm is an impressive achievement—one that offers many professional and financial benefits. While partnership does bring on some financial changes, knowing what they are ahead of time can help young CPAs prepare to adequately meet them so that they can enjoy the benefits even more.


This article is brought to you by the AICPA Diversity & Inclusion Team. For inquiries about this or other D&I topics, contact Diversity@aicpa.org.

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