Updated Oct 15, 2020

When an LLC Actually Needs an Accountant

A simple checklist by Matt Jensen

Overview

There’s 2 schools of thought on hiring an LLC accountant: always and eventually. While many seem to be in the always camp (often CPAs), as a business owner I’m going to make the latter case:

Most LLCs only need an accountant when they become profitable enough to justify the additional expense of hiring them.

Reason I say most is because some LLC owners have a more complicated tax situation. We’ll explore these as well as other key events that should prompt you to consider hiring an accountant.

#1 Your LLC’s Profiting $10,000

When your LLC’s profits are growing it makes sense to start planning with a tax strategist.  Now to be clear $10,000 is a rough estimate, waiting later on until $20,000 or even $30,000 isn’t terrible.  When your LLC is not that profitable taxes should probably not be your biggest concern anyway.

A small business accountant is critical to helping you form a tax strategy.  They can help you pick an optimal tax classification for your LLC and they know when to make the switch.  While a $10,000 mile mark may be too early for some, it’s better to be too early than too late in this regard.

#2 Prevent Multi-Member Disputes

Having a multi-member LLC or partnership is a sign you should hire an accountant.  While common tax software may claim to handle partnership income, you can be taking a risk.

In my opinion I’d at least want to talk to a CPA or accountant about any ideas they have about supporting the goals of each member of the partnership.

#3 You’re a High Income Earner

LLCs are pass through entities that reflect on your personal situation.  That means other sources of income such as W-2 can play a big role in your overall tax strategy.  What tax strategies are best for you will likely be completely different from lower income earners.

Given that you should probably already have an accountant anyway, I’d encourage you to find one now.  An accountant will be able to recommend ways for you to use your LLC to improve your tax situation.

There’s many strategies high income earners can use to leverage their business.  For example helping you leverage any losses from your LLC to offset your other income.  An accountant will help you make the most of this and other tax strategies.

#4 Your LLC Changed It’s Tax Classification

If you know your LLC has changed its tax classification from the default (disregarded) then I strongly urge you to get an accountant.  Tax software is more liable to create expensive problems for this situation, based on my personal experience.  Even if you don’t really have much net income from your LLC, it’s best to leave the filing of S & C Corps to tax professionals.

#5 Your LLC Pays For Health Insurance / HSA

While not as definite as #4, having your LLC pay for members health insurance premiums and other health expenses is a sign you need a CPA.  Deducting premiums and leveraging Health Savings Accounts (HSA) can yield big tax savings. Unfortunately this also invites the potential for error.

An accountant will not only make sure you’re declaring these deductions correctly, but can make recommendations on how to optimize them.  Also failing to manage these deductions properly and early on could invite IRS scrutiny.

#6 Your LLC Contributes to Your IRA

Using tax advantaged retirement accounts like SEPs and Roth IRAs is a wonderful tax strategy, but unfortunately makes things more complicated.  Like health insurance premiums and HSA contributions, failing to document and deduct these properly can cause long term issues.

To be clear you may not need an accountant if your LLC contributes to your retirement.  However they can help you understand what investments are available to you and set them up correctly.

#7 Your LLC Has Investors

If your LLC is planning on taking on investors, you need an accountant as well as a business attorney.  Firstly, They will ensure you are correctly handling your investments. Secondly, they will help your shareholders maintain their passive shareholder status.

Your investors will thank you for helping them keep their tax savings and manage their investment properly.

Finding an Accountant

A difference I’ve noticed between new and experienced business owners is how they think of accountants.  New entrepreneurs often think of accountants as a commodity.  However based on my experience working with accountants I could not disagree with this more!

Great accountants are an invaluable asset helping you navigate the complex and ever changing world of taxes.  However, bad accountants can cause more problems than they fix!  Sometimes these problems can even be very expensive.  So you’ll need to find an accountant that’s a valued member of your financial team, not a paycheck player.

Since you’re going to need to look through many accountants, Yelp or Google is a good start.  While online reviews on accountants are helpful, don’t rely on them exclusively.  Do your due diligence and review their website: is it professional, do they discuss their values, and do they currently have happy small business clients.  From this you’ll create a short list to begin the next step of finding an accountant.

How to Choose an Accountant

Once you have a short list, come up with a tax question you’d like answers on.  The more complicated the better!  You’ll use this tax question as a way to gage each CPA’s qualifications.

Avoid Accounting Busy Season

Do not try and hire in the busy season of accounting unless absolutely necessary!  Any time around April accountants are extremely busy and not likely to have time to onboard new clients.  Your best bet is to do this afterwards between May and December.

Next, call each accountant on your list and ask for high-level solutions to your question.  Some CPAs may want to do in person only, however it’s up to you if you want to spend that extra time.  I’ve interviewed accountants over the phone to save time and they were very understanding.  Be sure to take extremely detailed notes on everything and ask about their pricing.

Finally, it’s time to make a decision!  Compare the notes from each CPA to see if someone:

  • Went above and beyond the others recommendations.
  • Gave answers that were more clear to you.
  • Had pricing that was 5x higher than the others.
  • Had a personality you were a better fit for.
  • Last but not least: did your follow up research on their answers reveal anything that was wrong?

These are all valid things to consider because when you find a great accountant you’ll want to work with them for a long time.

Next Steps

Hopefully, even if you don’t need one today, you’ll see why eventually you’ll need an accountant.  For new LLCs and small businesses without complicated tax needs: an accountant can be overkill in my opinion.  The best advice for these businesses is that you should focus your time and resources on growing your business, not on hiring an accountant.

Popular tax software is more than capable of handling your basic self employment income needs.  When your LLC starts becoming more profitable you should start pursuing a better tax strategy with an accountant.

You also now have one solid process for vetting a quality accountant.  This is so important because once again: accountants are not a commodity!  Running a small business I’ve worked with accountants that were incredible while others caused expensive problems.

If you’re now leaning towards finding an accountant know that finding the right CPA can be trial and error.  This is fairly normal!  Keep your own detailed records so you can switch CPAs if needed.  Please remember, as hard as it can be to find the right accountant it is tremendously rewarding when you.