Leveraging the Benefits of Teamwork Between your CPA and Attorney
Originally published on January 18, 2018
Updated on June 16th, 2022
Despite the need for collaboration and teamwork among construction industry professionals, the partnership between a contractor’s construction CPA and attorney is usually considered more of an afterthought than part of a planned service delivery.
Consider the following scenario involving a contractor, CPA, and attorney: A contractor needs to create a new entity and calls his attorney to discuss the matter. The attorney then e-mails the contractor’s CPA to request his opinion on the tax elections. The CPA calls the attorney to request background information and raises financial questions the attorney didn’t discuss with the CFM/owner. The CPA then calls the CFM/owner about the matter and later calls the attorney to discuss further. Six phone calls and five e-mails later, an agreement is finally reached on the entity selection.
Sound familiar? Unfortunately, this inefficient communication and problem-solving occurs too often. If the CPA and attorney were already working together, then the CFM/owner could simply schedule a telephone conference so that all three could determine the best entity option and quickly work out the details.
The CPA’s decision-making is generally based on financial and income tax considerations, while the attorney’s is based on legal and defense ramifications. By gaining awareness and understanding of how your CPA and attorney approach different areas of the same problem, you can better leverage your professional team by having them work together.
This article will illustrate the importance of getting your CPA and attorney to collaborate for your benefit and how to achieve collaboration among the team.
When Should Your CPA & Attorney Work Together?
Let’s review a number of situations that require a legal and financial perspective to derive the best solution:
Determining Entity Type & Structure
Collaboration between your CPA and attorney is essential when determining entity type and structure. Your CPA is concerned with income tax ramifications of the entity type and structure while your attorney is concerned with shielding personal assets from business risk and liability. In addition, the type of owners and plans for future ownership and capital may impact the final decision.
Drafting Shareholder, Partnership & Operating Agreements
In this situation, your CPA is generally most concerned with financial and income tax matters (such as capital allocations, options for future capital or ownership, taxable income and loss allocations, timing and amount of distributions, dissolution allocations, and valuation of interests for buy/sell provisions). Your attorney is often most concerned with the specific effects of triggered events. Consequently, these two professionals should collaborate on drafting a shareholder (for corporations), operating (for LLCs), or partnership agreement that addresses such questions as:
- What if one of the shareholders or members die? Is the estate of the deceased shareholder or member required to sell the deceased’s interest in the company? Do the remaining owners have to purchase the interest, or do they merely have a first right of refusal?
- What if a shareholder or member becomes disabled? What is the definition of disabled? Is there a compelled sale and purchase or a first right of refusal?
- What if a shareholder or member leaves the company (e.g., by retiring, resigning, or being fired)?
If any of these scenarios occur, then your attorney can handle valuation and financing provisions in the operating or shareholders’ agreement. Furthermore, your attorney can also address any owner concerns regarding buy/sell provisions. Both the CPA and attorney can outline the rewards and risks of each of these items and determine the best solution to meet the contractor’s needs in a holistic manner.
While your attorney will address the questions previously outlined in the shareholder/operating agreement as well as voting control matters, your CPA will make sure that language is included to properly allocate net income and losses for income tax purposes as well as value the interests, amount, and timing of distributions.
Disputes Among Owners
Disagreements among owners are often rooted in financial matters. Your CPA often has intimate knowledge of company financials and both the CPA and attorney are familiar with owner personalities and operating styles, which allows them to more easily assist with mediation before a dispute becomes more serious. This can range from getting the owners to discuss the issues to acting as an arbitrator to find a fair resolution for all parties.
Mergers & Acquisitions (M&As)
Joining two business entities is an intricate process that involves numerous financial, legal, and strategic considerations – including financing, management of risk transfer, change in ownership, due diligence, and negotiations. Further, how future decisions will be made is best addressed prior to the transaction. Your CPA and attorney must collaborate and take a disciplined approach to help you effectively carry out a successful M&A.
Joint Ventures & Partnerships
A joint venture is a partnership between two or more persons or entities for a single endeavor. Consequently, unlike partnerships, joint ventures have a limited duration and exist only until the particular project or endeavor is completed. Partners do not typically favor the limited liability protections that are associated with corporations and LLCs. However, joint ventures and partnerships enjoy significant flexibility in terms of how company decisions are made, how profit is distributed, and the percentage of each partner’s ownership interest.
Forming a partnership, corporation, or LLC to work on a specific project involves numerous financial and legal considerations including control, financing, management of risk transfer, and establishing allocations of profit and loss, as well as amount and timing of distributions. A CPA and attorney can work with each partner to provide alternative solutions to differences or assist with resolving disputes between the partners.
Banking Credit Agreements
Obtaining, increasing, or maintaining banking credit involves both financial and legal implications. Banks rely on financial and legal information in their decision to provide credit to a contractor. While your CPA can assist with financial documents, analysis, and reporting, your attorney can explain the significance of the documents that you must sign. Credit lines, mortgages, letters of credit, and other credit instruments are often essential parts of contractors’ financing needs. Your CPA can assist with determining the company’s financing needs, while an attorney can help negotiate and clarify loan documents and loan closings.
Surety Credit Agreements
In addition, obtaining, maintaining, and increasing surety credit is a must for many contractors. Contractors are concerned about maintaining their bonding capacity as well as increasing their single job and total line bonding limits. Since it’s critical for sureties to have accurate and clearly presented financial information, your CPA should assist with the financial reporting. Your attorney can review the significance of the documents that you must sign.
Getting the Team Together
In order to assemble your team, make sure you have the right players. Do you need a compliance-oriented CPA who primarily performs audits and prepares income tax returns? Or, do you need a CPA for such matters as bonding capacity or succession planning? (For more on how to select a CPA, read “More Than a CPA: Selecting a Partner for your Company’s Financial Well-Being” by Sam G. Clark in the January/February 2016 issue.)
The same holds true for an attorney. Do you require basic consultations and contract reviews? Or, do you need assistance creating complex contracts, negotiating settlements, and litigating amounts due? (Refer to the sidebar on page X for what to look for in a construction attorney.)
If you need more than a tax return preparer and contract reviewer, you may want to consider a CPA and attorney with a supporting firm that offers a variety of services under one roof.
Create a Plan
To maximize your relationship with your CPA and attorney, first create a structured plan that promotes collaboration, following through to ensure its successful execution. Here’s how to accomplish this:
- Assign a leader – whether it’s you or one of your advisors. Assigning the leadership position is imperative to the team’s success. Building your team and establishing expectations is a good start, but without a clearly defined leader, your team can’t move forward. The leader must proactively direct the team and help ensure projects are completed. (More details on selecting the team leader will be discussed in the next section.)
- Set firm expectations for working and communicating together. This can be done on a project-by-project basis or across the board.
- Define preferred methods and frequency of communication, such as e-mail correspondence, telephone conferences, and face-to-face meetings. Determine which partners should be included in the correspondence.
- Outline important decision points and assign responsibility.
- Establish a timeline and deadlines for larger projects or milestones.
- Include both CPA and attorney at strategic meetings and important business milestones.
- Create an environment where ideas are openly expressed and exchanged. Encourage your professionals to remain objective (even if contrary advice is warranted). If your team does not work well together, then reconsider and reevaluate the team members.
Designate the Leader
When it comes to assigning the leadership role to you, your CPA, or your attorney, it’s best to either determine the most qualified professional or designate the person with whom you interact most frequently as the leader.
On the one hand, your CPA is generally familiar with your company’s financial components because he or she interacts with you on a regular basis to handle your company’s income taxes, assist with periodic financial statements for surety and bank credit, and answer general business questions throughout the year. Through this communication and involvement with your business, your CPA likely has a more complete understanding of the company and consequently may be in the best position to share this knowledge with the team.
On the other hand, if your work involves frequent transactions such as contract negotiations, real estate transactions and closings, owner-contractor agreements, and subcontract agreements, then the attorney may be better suited for the role.
Regardless of who is selected, the team leader creates and tracks each project’s road map – the step-by-step process for completing a particular endeavor. The leader assists in moving projects forward and keeping them on schedule by holding the team accountable for tasks and due dates assigned during team meetings.
Benefits of Working as a Team
You, your CPA, and your attorney can greatly benefit by working together as a team. Disseminating the same information at the same time to all team members reduces misunderstandings and provides an open forum for discussion and debate. Without collaboration, key information can easily be lost, misunderstood, or altered between team members. Harnessing the “power of many” maximizes creative problem solving, opportunity development, and strategic thinking. It also enhances the team’s understanding and commitment to the resulting solution.
The team approach allows your CPA and attorney to spend more time talking to you instead of to each other, which enhances their knowledge and understanding of your business. You, your CPA, and your attorney bring unique insight and distinct specialties to the table. Each professional should articulate the finer points of the legal agreements, income tax, financial situations, and operational impact to the group to ensure each has a complete understanding of your business.
Sharing information not only improves strategic thinking, but also helps you in the case of an emergency. Your CPA and attorney are valuable resources for those who may need to maintain your business affairs in the event that you aren’t available.
In the end, the process provides the most efficient use of everyone’s time by streamlining communication and reducing misinformation.
CPAs and attorneys play a pivotal role in helping you and your company navigate the financial and legal challenges that define the construction industry. You will increase your chances of success and lower your overall costs by ensuring these professionals are not only the right fit for your company, but also work together to find solutions. This is best accomplished by engaging professionals who value working with other professionals as a team. This collaborative approach will result in better decision-making process and improved solutions, often with less of an impact to your company’s bottom line.
All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.
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