Kara Sears
The practice of law is governed by corporate law, which deals with the rights, relations, and conduct of persons, companies, organizations, and businesses. In the United States, a company may or may not be a separate legal entity, and the laws vary from state to state. For example, in California, attorneys cannot practice law using a General Stock Corporation or an LLC and must instead form a California Professional Law Corporation. This distinction is important for attorneys intending to establish or continue their practices within the legal frameworks of California or any other state. Forming a law corporation in California offers benefits such as tax savings and continuity, but it is important to carefully consider the specific requirements to avoid issues in the event of a lawsuit or audit.
| Characteristics | Values |
|---|---|
| Corporation type | California Professional Law Corporation |
| Corporation structure | Critical vehicle for attorneys to practice law within a corporate framework while adhering to legal requirements and professional standards |
| Tax benefits | S corporation status preferred for payroll tax savings and avoidance of double taxation |
| Liability | Does not limit exposure for malpractice but helpful for other types of lawsuits, e.g. claims by employees and contractual disputes |
| Compliance | Compliance with specific legal stipulations, including liability and practice requirements, to protect attorneys and the public |
| Registration | Must file an Application for Issuance of Certificate of Registration before practicing law |
| Bank account | A separate bank account should be opened solely for financial transactions associated with the law corporation |
| Business license | Required to obtain a business license and pay local taxes in most cities |
| Ownership | All officers, directors, and shareholders (owners) must be licensed to practice law in California |
| Shareholder structure | If one shareholder, that individual shall be the director, president, and treasurer |
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What You'll Learn
California attorneys and law practices
In California, a law firm must be a corporation to practice and provide professional services. The correct business entity for law firms in California is a professional law corporation. Law firms in California cannot be limited liability companies (LLCs).
The State Bar's Law Corporations Program certifies professional corporations that wish to practice law in accordance with applicable statutes and court rules. A Certificate of Registration from the State Bar of California is required before a corporation can be considered a Professional Law Corporation and before it can engage in business.
The name of a law corporation, as registered in the State Bar records and on file with the Secretary of State, is the only name under which it may practice law. The name of the law corporation should also comply with the California Rules of Professional Conduct and the California Business and Professions Code and should include wording or abbreviations that denote corporate existence. For example, a law corporation name should include "Professional Corporation", "Professional Law Corporation", "A Professional Legal Corporation", "Incorporated", "Corporation", "L.C.", "Ltd.", or "Professional Association".
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General Stock Corporations vs California Professional Law Corporations
In California, a General Stock Corporation is a standard type of corporation that can engage in any legal activity, except banking and trust company businesses. It is formed under the General Corporation Law of California. On the other hand, a California Professional Law Corporation is a specific type of corporation used by licensed professionals to render professional services. It is formed under the Moscone-Knox Professional Corporation Act and is subject to the rules and regulations of the California State Bar.
The primary distinction between the two types of corporations lies in the nature of the services provided. While General Stock Corporations can operate in a wide range of industries, California Professional Law Corporations are exclusively established by licensed attorneys to practice law. This differentiation ensures that attorneys comply with specific legal stipulations, including liability and practice requirements, protecting both the attorneys and the public they serve.
General Stock Corporations, whether formed under California law or the laws of another state, cannot be used to render professional services in California. They are not permitted to engage in the practice of a profession as incorporated by the California Corporations Code. In contrast, California Professional Law Corporations are specifically designed for rendering professional services that require a state license. This structure allows attorneys to practice law within a corporate framework while adhering to the legal and professional standards of the practice of law in California.
It is important for attorneys to understand the differences between these corporate structures to ensure they are practising law in compliance with the relevant regulations. While a General Stock Corporation provides a degree of uniformity in business operations across states, a California Professional Law Corporation offers a way to manage the business aspects of a law practice and provides protection against certain liabilities. Additionally, the taxation of these two structures differs. General Stock Corporations are subject to state income taxation, while California Professional Law Corporations face federal income taxation at the corporate level.
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Benefits of forming a California law corporation
California has specific requirements for lawyers who want to start their own business and provide legal services. They must form a professional law corporation, which is the entity of choice for law firms in the state. This is because the State Bar of California does not certify LLCs for the purpose of practicing law.
There are several benefits to forming a California law corporation:
- Lawyers can save on taxes. California law corporations can benefit from pass-through taxation (as opposed to double taxation) by electing to be treated as an S Corporation. This is accomplished by filing IRS Form 2553.
- Additional liability protection.
- The ability to hire employees, open a business bank account, and conduct other vital business operations.
- A solid foundation for your professional law practice.
- Personal asset protection.
- The ability to set up as a small business corporation.
The process of forming a California law corporation can be straightforward, but it is complex and there are many regulations and legal requirements to navigate. It is recommended that attorneys seek advice from a business law specialist or corporate attorney to ensure their corporation is formed correctly the first time.
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Requirements for forming a law corporation
In California, lawyers are required to create a professional corporation, also known as a California Professional Law Corporation, rather than a traditional corporation. This is a critical vehicle for attorneys who want to practice law within a corporate framework while adhering to the legal requirements and professional standards of the practice of law in California.
The process of forming a California Professional Law Corporation involves drafting and filing Articles of Incorporation. These must comply with the California Corporations Code, California Business and Professions Code, and the rules of the California Secretary of State. The Articles of Incorporation must include specific details that fulfil the legal requirements of the California Corporations Code and the Moscone-Knox Professional Corporations Act. They must also comply with the California Business and Professions Code sections applicable to the profession of law. A standardised form, the California Secretary of State Form ARTS-PC, can be used as a template for creating the Articles of Incorporation. However, this form does not address the specific legal and operational needs that may emerge for a California Professional Law Corporation.
Every California Professional Law Corporation must also designate a Registered Agent for Service of Process. This agent, who can be an individual or a corporation, is responsible for receiving any legal documentation, notices of lawsuits, and other official government correspondence on behalf of the California Professional Law Corporation. If the agent is an individual, they must reside in California and their address must be listed in the Articles of Incorporation. If the agent is a corporation, they must be a Registered Corporate Agent for Service of Process and have the appropriate certificate on file with the California Secretary of State.
Other requirements for forming a California Professional Law Corporation include:
- Bylaws: These set forth the corporation's operating procedures and rules, including how the corporation is operated, where it is located, the time and place of shareholder meetings, director powers and elections, officer types and duties, stock issuance, record-keeping, and other general matters.
- Stock issuance: Shareholders are the owners of the corporation, and their ownership must be documented by shares of stock. Stock certificates must include the corporation name, shareholder name, number and date of shares issued and authorised, and should be signed by the corporation's president and secretary.
- Application requirements: The application for a Certificate of Registration requires a list of all shareholders, directors, officers, and attorneys practising law on behalf of the corporation; a Declaration of Compliance with Rule 1-400 California Rules of Professional Conduct; a law corporation guarantee; a certified copy of the corporation's Articles of Incorporation; excerpts of the corporation's bylaws, including the required language from the State Bar; a photocopy of the corporation's stock certificate with the required legend; and a $200 application fee.
- Business license: If the law corporation will be operating in the City of Los Angeles, a business license, also known as a Tax Registration Certificate, can be obtained online.
- Insurance and taxes: Insurance carriers should be notified about the new corporation, and an accountant should be consulted to discuss federal and state income, payroll, and other taxes. Law corporations are required to pay an $800 annual franchise tax starting the second calendar year of existence.
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Corporate law and its relation to corporations
Corporate law, also known as company law or enterprise law, is a body of law that governs the rights, relations, and conduct of persons, companies, organizations, and businesses. It covers the legal practice relating to corporations and the theory of corporations. Corporate law deals with all aspects of a company, from its formation and funding to its governance and dissolution. It also encompasses matters such as mergers, acquisitions, business transactions, and regulatory compliance.
One of the critical aspects of corporate law is its focus on the corporation as a separate legal entity. Corporations are treated as single fictional persons, distinct from their owners or operators. This feature allows corporations to enter into contracts, own property, take out loans, and be subject to legal proceedings. The separate legal personality provides corporations with flexibility in tax planning and managing overseas liability. However, it is important to note that courts can, in certain circumstances, "pierce the corporate veil" and impose liability directly on the individuals behind the company.
Corporate law also regulates the internal management of corporations, including the rights and responsibilities of shareholders, directors, and employees. It establishes the authority of the board of directors to manage the company in the best interests of the investors. Shareholders retain specific decision-making rights, particularly when their fundamental interests are at stake. Corporate law also outlines the procedures for removing and replacing directors, which typically involves voting at meetings.
In addition, corporate law addresses employment-related matters within corporations, such as hiring, wages, discrimination, workplace safety, and employee rights. It provides a framework for handling situations where a corporation cannot pay its debts, including restructuring and insolvency processes. Furthermore, corporate law offers provisions for dealing with bankruptcy, including settling creditors' claims during liquidation.
Understanding corporate law is essential for attorneys intending to practice law within a corporate framework. In California, for example, attorneys must comply with specific legal stipulations by establishing a California Professional Law Corporation, ensuring they adhere to legal requirements and professional standards in their legal practice.
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Frequently asked questions
No, a corporation cannot practice law. However, a law corporation is a corporate framework that attorneys can use to practice law while adhering to legal requirements and professional standards.
A General Stock Corporation can operate in a wide array of industries and offer any service or product, except for banking, trust company business, or the practice of a profession permitted by the California Corporations Code. A California Professional Law Corporation, on the other hand, is exclusively established by licensed attorneys to practice law.
Forming a California Professional Law Corporation offers several benefits, including tax savings, continuity, business credibility, and protection against certain liabilities. Additionally, it provides a clear structure for managing the business aspects of a law practice.
To form a California Professional Law Corporation, attorneys must follow specific requirements. These include registering with the California State Bar and ensuring that all officers, directors, and shareholders are licensed to practice law in California. The corporation must also have a unique name that is different from any other law practice in the state.
No, attorneys in California cannot practice law using an LLC. According to the California Corporations Code §17375, lawyers must use professional law corporations that are certified by the California Secretary of State.
