Law Firm Structure: Llc Or Not?

The business structure of a law firm is an important consideration for lawyers starting their own practice. The choice of structure will impact the firm in several ways, from taxation to state requirements and liability protection. Law firms can choose to be incorporated as an LLC, a C (corporation), or an SP (sole proprietorship). However, the requirements for forming an LLC vary across states. While most states allow law firms to operate as LLCs or professional limited liability companies, California explicitly prohibits lawyers from forming LLCs. This is because practicing law is considered a professional service in California, and no LLC can be used to provide professional services. Instead, lawyers in California can choose to form a Professional Corporation (PC) or a Registered Limited Liability Partnership (RLLP).

Law firms in California cannot be LLCs

Law firms in California cannot be structured as limited liability companies (LLCs). This is because the State Bar of California does not certify LLCs for the purpose of practicing law. Instead, law firms in California must be structured as corporations.

The California Corporations Code states that an LLC may be used for any lawful purpose, regardless of whether it is for profit. However, there are exceptions to this rule, including the banking business, the business of issuing policies of insurance, and the trust company business.

Practicing law is considered a "professional service" under California law because it requires a state license. Therefore, no LLC can be used to provide legal services in California. The only entity choice for law firms intending to practice law in California is a corporation, specifically a professional corporation or a registered limited liability partnership (RLLP).

There are several reasons why someone might want to structure their law firm as an LLC. LLCs offer liability protection, flexible management structures, and tax advantages. While law firms in California cannot be LLCs, they can still achieve some of the benefits of an LLC by structuring as a professional corporation or an RLLP.

Professional corporations are the entity of choice for law firms in California. To form a professional corporation, the articles of incorporation must clearly state that it is a professional corporation, and all shareholders, directors, and officers must be licensed professionals in California. RLLPs, on the other hand, offer partners more autonomy in the firm's operations and are simpler to establish and maintain, with fewer ongoing formalities. Ultimately, the decision between a professional corporation and an RLLP will depend on the specific goals, preferences, and circumstances of the law firm.

LLCs offer liability protection

In California, lawyers are prohibited from forming a standard LLC. This is because practicing law is considered a "professional service" under California law, and no LLC can be used to provide professional services. However, this doesn't mean that lawyers in California are without options when it comes to seeking liability protection.

LLCs, or limited liability companies, are business structures allowed by state statute that offer liability protection to their owners (also called members), managers, and the LLC itself from certain types of legal liability. The main reason people form LLCs is to avoid personal liability for the debts of a business they own or are involved in. By forming an LLC, only the LLC is liable for the debts and liabilities incurred by the business, not the owners or managers. This is because the LLC itself is a separate legal entity from its owners.

However, it is important to note that the limited liability protection provided by LLCs is not absolute and may depend on the state in which the LLC is formed. There are certain exceptions to the limited liability provided by LLCs. For example, LLC owners can be held personally liable if they commit wrongdoing during the course of their LLC business, such as negligence, malpractice, or other personal misconduct. Additionally, LLC members may be held responsible if the company does not pay certain federal and state tax liabilities.

In California, lawyers seeking to establish their own practice can choose between two viable alternatives that offer liability protection: the Professional Corporation (PC) and the Registered Limited Liability Partnership (RLLP). Both structures can provide the liability protection and professional legitimacy that lawyers seek. It is important to consult with legal and tax professionals to ensure compliance with all applicable laws and regulations when forming a law firm in California.

LLCs have different taxation to corporations

In California, law firms cannot be structured as LLCs (Limited Liability Companies). The only entity choice for law firms intending to practice and provide professional services in California is a corporation. This is because the State Bar of California does not certify LLCs for the purpose of practicing law. However, this does not mean that lawyers in California are without options. There are two viable alternatives for lawyers looking to establish their own practice: the Professional Corporation (PC) and the Registered Limited Liability Partnership (RLLP).

Regarding taxation, LLCs are treated differently from corporations. LLCs are considered "pass-through entities," meaning they do not pay federal income taxes on business income. Instead, income is passed through to individual members of the LLC, who pay federal income tax on the LLC income via their own individual tax returns. This is how LLCs avoid double taxation, which is a type of federal tax that C corporations (corps) are subject to. LLCs also have the option of choosing their tax status, such as LLC, S corp, or C corp, which can yield further tax advantages. For example, filing as an S corp allows the owner of an LLC to be considered an employee and receive a salary, with self-employment taxes only being paid on that salary. The rest of the profits can be distributed as dividends, which are not subject to self-employment tax.

On the other hand, corporations like C corps are subject to double taxation. Profits are taxed at the corporate level, and then again when the owner pays taxes on dividends. However, LLCs can also elect to be taxed as C corps if they wish, which may be beneficial in certain circumstances. It is important to note that changing the tax classification of an LLC can have consequences, as the new classification will be locked in for the next 60 months.

In summary, while law firms in California cannot be structured as LLCs, LLCs have different taxation rules compared to corporations. LLCs have the advantage of avoiding double taxation and have the flexibility to choose their tax status, which can provide tax benefits.

Lawyers can practice through a limited liability partnership

In California, lawyers cannot form a limited liability company (LLC). This is because the State Bar of California does not certify LLCs for the purpose of practicing law. The only entity choice for law firms in California is a professional corporation. However, there are two viable alternatives for lawyers looking to establish their own practice: the Professional Corporation (PC) and the Registered Limited Liability Partnership (RLLP).

A limited liability partnership (LLP) is a business structure that combines the benefits of a partnership with limited liability for each partner. LLPs are typically formed by professional offices, such as doctors, accountants, or law offices. LLPs are well-designed to protect partners from claims against other partners and offer flexibility in customizing profit-sharing terms. They also allow for a partnership structure where each partner's liabilities are limited to the amount they put into the business.

LLPs are governed by state law and, as such, often cannot operate across state lines. The cost of forming an LLP can vary based on the specific situation, plans, and state of formation. Flat fees for LLP formation for Priori lawyers start at around $600 and can range significantly higher.

Compared to PCs, RLLPs generally offer partners more autonomy in the firm's operations, depending on the terms outlined in the Partnership Agreement. PCs have more formal corporate governance requirements. The RLLP structure tends to be simpler to establish and maintain, with fewer ongoing formalities like annual reports, shareholder meetings, and detailed minutes.

Professional Corporations have more corporate governance requirements

While lawyers can choose to form an LLC in some states, California prohibits lawyers and other licensed professionals from forming a standard LLC. This is because practicing law is considered a "professional service" under California law, and no LLC can be used to provide professional services. The State Bar of California does not certify LLCs for the purpose of practicing law.

California-based lawyers who want to form their own practice have two alternatives: the Professional Corporation (PC) and the Registered Limited Liability Partnership (RLLP). While both structures can provide liability protection and professional legitimacy, PCs have more formal corporate governance requirements. For example, PCs must meet various formalities like annual reports, shareholder meetings, and detailed minutes, whereas RLLPs offer partners more autonomy in the firm's operations.

To form a PC in California, the articles of incorporation must clearly state that the corporation is a professional corporation. All shareholders, directors, and officers must be licensed professionals in California, although the corporation may employ non-licensed professionals. The name of the law corporation should also comply with the California Rules of Professional Conduct and the California Business and Professions Code, including wording or abbreviations that denote corporate existence. For example, "Professional Corporation", "Professional Law Corporation", "A Professional Legal Corporation", "Incorporated", "Corporation", "L.C. Ltd.", and "Professional Association".

Ultimately, the decision between a PC or RLLP will depend on the specific goals, preferences, and circumstances of the law firm.

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