Scalable Tax Prep + Advisory for Multiple LLCs / Corps Nationwide

[Andrew Fielder]

Hello everyone. I run a real estate investment company that focuses on investing in defaulted promissory notes secured by commercial and residential real estate nationwide. We also invest directly in fee simple real estate.

These projects vary in length. While we intend to hold on to as many projects as we can long term, from time to time there are some early exit opportunities that make sense for us.

We typically fund these deals with all equity through private placement with varying % interests of ownership and different investors and investor types (ie. IRA, personal, LLCs, corporations) on each project. Accordingly, we set up a pass through LLC on every acquisition.

For 2017 we have 6 entities that would require state and federal filings including K-1s for investors. In 2018 we expect another 8-10 additional entities to be added to the existing 6 entities.

I consulted with a CPA that specializes in this field. The fees were $1,500 for entities that hold only a loan and $2,000 for entities with fee simple real estate owned. This includes federal and one state filing. So 2017 we're looking at about $12,000 in tax prep and in 2018 we're looking at about $32,000 in tax prep. 

That pricing model doesn't seem scalable to me. I get that price includes CPA advisory but over time, as deals are similar to another, the advisory component becomes less valuable, as you already have the model in place. At the pace we're growing, why not just hire an accountant/CPA in house?

Is there a better pricing/compensation model that works for both a tax filer and a business with multiple LLCs that's scalable?

[Brandon Hall]

@Andrew Fielder For tax prep, the fees seem high to me, but I don't know how many K-1s you are issuing nor do I know the complexities the CPA firm may be facing. If you are issuing tons of K-1s to investors, I can see how the fees could be justified. 

In terms of the fixed prices for tax prep, ideally, in the future, the price will always remain fixed. Thus, when your profit increases, the fees don't increase proportionately. 

Ultimately, every tax return will be labor intensive, some more so than the other. I always laugh when someone says "If I bring you 50 entities, will you discount them?" No, because it's still the same cost for me. There's little-to-no economies of scale related to this type of tax preparation (and trust me, we've invested a crap ton into our technology). 

Should you hire an in house accountant? It's a decent thought, but your talent pool will be limited. You'll be relying on one person, rather than a firm with processes in place. You can scale into a CPA firm, but a single hire will always have some form of ceiling. 

Over time, as you scale, I'd argue the advisory component will become more and more valuable. Your model may be the same, but the larger you get the more complex it will become to manage. Knowing when to make strategic financial/accounting/tax moves will become much more valuable than preparing tax returns. 

I have no idea how much revenue you're generating, but you may want to look into outsourced CFO services. @Taylor Brugna is the guy at our firm that runs that side of the business, so he may be able to dive deeper into it than I can.

An outsourced CFO will help you navigate everything, from advice to compliance, and help you make financial decisions. They will manage your books, taxes, your budgets, vendors, clients, investors, and provide transparency into the financial side of the business. In my opinion, that's where the most value is added once you scale to a certain point. 

Hire a good CFO, pay $250k. Outsource to a CPA firm, pay 1-2% of revenues (generally).

If you're not at that point yet, but you plan to scale to that point, you need to look into CPA firms that provides that service. Because at some point you'll need it, and already having built out relationships will save you tons of time, money and stress.