Divorce for Accountants, What Happens to My CPA Firm?
The interest gets classified, valued and divided like any other professional practice, but Missouri’s accountancy statute is materially more permissive about who may own part of a CPA firm than the rules governing lawyers, and that changes what a settlement can look like.
That difference is the first thing worth establishing, because it opens a door that is simply closed to a lawyer and it is not widely understood.
It also comes with a second half nobody mentions. What the accountancy statute permits and what your own firm agreement permits are two different questions, and the second one usually decides the case.
So a divorce for accountants runs on two tracks at once. An ownership question with unusual room in it, and a valuation question with unusually little room in it, because Missouri’s professional goodwill rule is stricter than most states.
Can My Spouse Own Part of My CPA Firm?
Possibly, because Missouri requires only that a simple majority of the firm belong to licensees.
Section 326.289.4(1) RSMo requires an applicant for a firm permit to show that “a simple majority of the ownership of the firm, in terms of financial interests and voting rights of all partners, officers, principals, shareholders, members or managers, belongs to licensees who are licensed in some state.” The same paragraph adds that “although firms may include nonlicensee owners, the firm and its ownership shall comply with rules promulgated by the board.”
Section 326.289.4(2) then says it outright. “Any certified public accounting firm may include owners who are not licensees,” subject to four conditions.
- A designated licensee. The firm names a licensee responsible for the proper registration of the firm and identifies that person to the board
- Active participation. All nonlicensee owners must be “active individual participants in the certified public accounting firm or affiliated entities”
- Good moral character. The statute requires it of all owners, not only of licensees
- Board rules. The firm complies with any other requirements the board imposes by rule
Read condition two twice, because it is the one that usually decides this. A former spouse with no role in the practice is not an obvious fit for a provision written around working owners.
The requirement attaches to the firm permit, which is issued and renewed by the Missouri State Board of Accountancy under Chapter 326 RSMo.
How Does That Compare With a Law Firm?
It is the opposite position, and the contrast is the reason this page exists.
Missouri Supreme Court Rule 4-5.4, Professional Independence of a Lawyer, provides that “a lawyer or law firm shall not share legal fees with a nonlawyer” outside five listed exceptions, and that “a lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.” None of the five exceptions is a spouse, a former spouse, or a transfer under a decree.
So in a lawyer’s dissolution a buyout is structurally forced. In a divorce for accountants it is a choice, which means the terms of that buyout are negotiable in a way they otherwise would not be.
Does the Firm’s Entity Form Change the Answer?
It may, and this is the point most discussions of this topic miss entirely.
Section 326.289 governs the firm permit. It does not govern what a particular entity may do with its ownership units, and Missouri has a separate statute that does.
Section 356.111.1 RSMo provides that a professional corporation “may issue shares, fractional shares, rights or options to purchase shares, and other securities only to” natural persons authorized to render that professional service, certain trusts, partnerships and professional corporations whose owners are licensed, and limited liability companies “in which all members are licensed.” Subsection 2 adds that “all shares issued in violation of this section or any rule adopted under this section shall be void,” and subsection 3 applies the same restriction to transfers.
And accountancy is inside that chapter. Section 356.021 RSMo defines professional service to include, among others, “an accountant” and “an attorney at law.”
So a CPA firm organized as a Chapter 356 professional corporation faces a share restriction that a CPA firm organized as a partnership or a limited liability company does not obviously face, even though Section 326.289.4 would permit nonlicensee ownership at the permit level. We could not identify Missouri authority resolving how those two provisions interact in a dissolution, and we are not going to guess at it. Establish the firm’s actual entity form before anybody drafts a term about ownership, and put the question to the firm’s own business counsel rather than to a family law page.
What If the Firm Falls Out of Compliance?
A cure obligation attaches to the firm, and the ultimate consequence is the permit.
Section 326.289.8 RSMo provides that “firms which fall out of compliance with the provisions of this section due to changes in firm ownership or personnel after receiving or renewing a permit shall take corrective action to bring the firm back into compliance as quickly as possible.” The board “may grant a reasonable period of time” to do it, and “failure to bring the firm back into compliance within a reasonable period as defined by the board may result in the suspension or revocation of the firm permit.”
Note what the statute does not give you. There is no fixed number of days on the face of it. The period is whatever the board defines as reasonable.
A decree moving enough interest to a nonlicensee to break the simple majority test is a change in firm ownership. That makes it a pre-signature item in any divorce for accountants, because the obligation runs to the firm and its other owners and not only to you. Raise it with the firm before a settlement is signed rather than after.
How Is a CPA Firm Valued in a Missouri Divorce?
Under a professional goodwill rule that is stricter than most states and that tends to favour the practitioner.
In Hanson v. Hanson, 738 S.W.2d 429 (Mo. banc 1987), an oral surgery partnership case, the Supreme Court of Missouri defined goodwill “within a professional setting to mean the value of the practice which exceeds its tangible assets and which is the result of the tendency of clients/patients to return to and recommend the practice irrespective of the reputation of the individual practitioner.”
Hanson is not an accounting case, and no page should pretend it is. It is the leading Missouri authority on professional practice goodwill and it reaches an accounting practice by analogy rather than on its own facts.
For an accounting practice the distinction it draws is sharper than in almost any other profession. Clients who stay because of the firm’s systems, its staff, its software, its niche and its recurring engagement letters point one way. Clients who follow a particular partner because that partner has done their return for twenty years point the other.
Hanson also closes a door people walk into. “Professional goodwill may not be confused with future earning capacity. We have not declared future earning capacity to be marital property.”
What Does the Other Side Have to Prove?
Market evidence, in one of three forms only.
Hanson holds that “evidence that other professionals are willing to pay for goodwill when acquiring a practice is, in our view, the only acceptable evidence of the existence of goodwill,” and that goodwill “is shown only when there is evidence of a recent actual sale of a similarly situated professional practice, an offer to purchase such a practice, or expert testimony and testimony of members of the subject profession as to the existence of goodwill in a similar practice in the relevant geographic and professional market.”
Three features of that sentence matter in a divorce for accountants. The comparison has to be local. It has to be accounting rather than professional practices generally. And the third route usually calls for two witnesses rather than one, a valuator plus testimony from members of the profession, which is the requirement most often left unmet.
The court also rejected “the use of capitalization formulae as a substitute for fair market value evidence of the value of goodwill in a professional practice,” reasoning that such formulae “draw no distinction between the future earning capacity of the individual and that of the entity in which he or she practices.” That is a rejection of capitalization as a substitute for market evidence, not a blanket ban on the arithmetic.
There is an irony worth naming here. An accountant is often the one person in the room who can read an opposing valuation report properly, and also the person least likely to have been told that Missouri applies a specific proof rule most reports do not account for. Fluency in Revenue Ruling 59-60, 1959-1 C.B. 237, which the IRS reproduces in full at Appendix A of a job aid for its own valuation analysts, is not the same thing as fluency in what a Missouri dissolution court will accept as proof of goodwill.
One honest limit. We could not identify a Missouri appellate decision valuing or dividing an accounting practice specifically. That is a failure to find rather than proof that none exists, and it means Hanson is being applied here by analogy from an oral surgery practice.
Is My CPA License Marital Property?
No, and Missouri has said so directly. It is the first fear people bring to a divorce for accountants and it is the easiest one to put down.
In Riaz v. Riaz, 789 S.W.2d 224 (Mo. App. E.D. 1990), the Eastern District stated that “Missouri courts have not recognized that an educational degree, or a professional license secured as a result of such education, constitutes marital property subject to division.”
The qualification comes from Sullivan v. Sullivan, 159 S.W.3d 529 (Mo. App. W.D. 2005), a case about a spouse who earned a medical degree during the marriage. The court held that “a spouse’s contribution to the other spouse’s obtaining a professional degree, as was the case here, may be considered by the trial court in making a fair and equitable division of the parties’ marital property, and, if warranted, the contributing spouse may be awarded a higher percentage of the property that is properly classified as marital.”
Note the verb. May be considered, and only in dividing property that is already marital. The license has no sale price. The contributions made while you earned it are a different subject and they are live.
What Happens to the Client List?
It is usually the most valuable thing the firm owns and the most sensitive thing in the case.
A valuation of an accounting practice runs on recurring revenue by client, retention rates, and which partner controls which relationship. Producing that in discovery means producing a list of who your clients are and what they pay, which is the quiet problem in every divorce for accountants.
Your confidentiality obligations do not switch off because you are a party. Protective orders, aggregated schedules, anonymized client codes and in camera review are the ordinary tools, and in camera review simply means the judge examines the material privately rather than putting it in the public file. All of them work far better raised before discovery is served than after a spreadsheet has changed hands.
Where the case is mediated, Rule 88.08(a) provides that mediation proceedings “shall be regarded as settlement proceedings” and that communications made during the mediation are confidential, not admissible and not subject to discovery, subject to the rule’s exceptions. One of those exceptions matters here. No fact independently discoverable becomes immune from discovery merely because it was mentioned in mediation. Our mediation practice page covers how that fits a case with sensitive records.
Can the Same Earnings Be Counted Twice?
It is a real concern, and Missouri has answered part of it rather than all of it.
If the practice is valued by reference to what it earns and maintenance is then ordered out of those same earnings, the same dollars have done two jobs.
In Hill v. Hill, 53 S.W.3d 114 (Mo. banc 2001), the Supreme Court of Missouri held that “when calculating maintenance, a trial court must consider the income from retirement and IRA accounts to be apportioned as marital property,” while “the trial court determines the amount of income, if any, imputed from these accounts based on the facts and circumstances of each case.”
Now read what Hill was about. Roughly half a million dollars in retirement and IRA accounts. The opinion contains no discussion of a closely held business, a professional practice, goodwill or capitalized earnings.
So the retirement version of the question has been decided and the practice earnings version has not. Anyone who tells you Missouri has resolved the second one is going further than the published law does. The argument is still worth making deliberately, with the valuation methodology in front of the court, and our spousal maintenance page covers the standard on the support side.
What Should I Gather First?
The documents that decide what the interest is worth, before anybody commissions an appraisal.
- The partnership or operating agreement, with every buy sell provision, capital account definition, withdrawal term and amendment. This is also where you find the entity form question above
- Any prior offer, merger discussion or letter of intent. Accounting firms consolidate constantly, and that is precisely the market evidence Hanson asks for
- Recurring revenue by client and by originating partner, which is where the personal versus enterprise goodwill argument is actually won
- Work in progress and unbilled time, frequently the largest number nobody has quantified
- Three to five years of firm and personal returns, K-1s, and compensation history
Bring the partnership agreement to the first conversation. In a divorce for accountants it usually decides more than the appraisal does. Our page on divorce for business owners covers the wider records question, and our FAQ on business owner divorce covers the mistakes that cost the most.
What Does the Firm Question Not Decide?
Three things, and each gets confused with it.
It does not decide whether the interest is marital, separate or mixed. That is classification under Section 452.330 RSMo, and our pages on marital versus separate property and on whether a business is marital property cover it.
It does not decide how the marital estate is divided. Section 452.330.1 RSMo asks for proportions the court deems just after weighing the statutory factors, and just has never meant equal. Our FAQ on dividing marital property covers those factors, and our page on property and asset division covers the allocation.
And it does not convert future earning capacity into an asset, which is the specific confusion Hanson warned against and the one that costs the most in a divorce for accountants.
Who Can Help With a Divorce for Accountants in St. Louis?
An accounting practice raises an ownership question with more room in it than most professions allow, alongside a valuation question with less room than most states allow, and the two get argued together rather than in sequence.
Bardol Law Firm practices only family law and handles property and asset division for accountants and other professionals in St. Louis County, St. Louis City, St. Charles County and Jefferson County. You can read more about our high net worth divorce practice, our work for business owners, and the rest of our family law questions and answers.
You should not have to chase your attorney for basic updates while a valuation is running. Every client here has a named paralegal on the file, and we generally return calls within one business day.
Family Law, Simplified.
Bring the partnership agreement to a first conversation. Contact Bardol Law Firm or call 314.918.0100.
This page is general information about Missouri law and is not legal advice, and it is not advice about an accountant’s own licensing obligations. Bardol Law Firm practices family law only. Every case turns on its own facts. The choice of a lawyer is an important decision and should not be based solely upon advertisements.