Llc Or Not: Law Firm Structures In California

California is a huge state with a lot of lawyers, and many of them wonder if they can form a limited liability company (LLC). The short answer is no, they cannot. 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 is a professional corporation. However, California does allow some licensed professionals, including lawyers, to practice through a limited liability partnership.

Why California law firms can't be LLCs

California is a huge state with a lot of lawyers, and many of them ask whether they can form a limited liability company or LLC. The short answer is no. The State Bar of California does not certify LLCs for the purposes of practicing law. This is based on the underlying Corporate Code concerning Professional Corporations.

The Corporations Code section 17375 prohibits those licensed by state agencies from using LLCs for licensed activities. Specifically, California Corporations Code §17375 does not allow any person who holds a license, certification, or registration issued by a state agency to engage in a business, trade, or profession regulated by that agency from using an LLC for that licensed activity.

Practicing law or being a lawyer is a "professional service" under California law because you have to have a state license to do it, and no LLC can be used to provide professional services. The California Corporations Code, specifically Section 17701.04, states that an LLC can be used for a wide variety of purposes, assuming it is lawful, with the exception of a few purposes that are explicitly prohibited. For example, section 17701.04(b) says: "A limited liability company may have any lawful purpose, regardless of whether for profit, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business."

The only entity choice for law firms is a professional corporation or a registered limited liability partnership (RLLP). A professional law corporation is the entity of choice for law firms in California. To properly form a professional corporation 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.

Law firms' entity options in California

Law Firms Entity Options in California

California is a popular state for lawyers, with many legal professionals in the state. However, the state has some unique regulations for law firms, and lawyers are prohibited from practising law through a limited liability company (LLC). This is due to the California Corporations Code §17375, which does not allow any person with a state license to use an LLC for their licensed activities.

Professional Corporation

The only entity choice for law firms intending to practice and provide professional services in California is a corporation. The State Bar of California requires all law firms to be registered and formed as a Professional Law Corporation before they can engage in business. The name of the law corporation should include wording or abbreviations that denote corporate existence, such as "Professional Corporation", "Incorporated", "Ltd.", etc. The name must also comply with the California Rules of Professional Conduct and the California Business and Professions Code.

Limited Liability Partnership

Lawyers in California can also practice through a Registered Limited Liability Partnership (RLLP). RLLPs are taxed as individuals, and offer more independence in day-to-day operations for individual members. They are also simpler to set up and maintain, due to the lower volume of paperwork and procedures required for corporations.

Considerations

When forming a law firm entity in California, it is important to seek the help of a corporate lawyer or expert to ensure all necessary documents and requirements are met. Any mistakes or missing documents can cause legal issues and be costly in the future. It is also important to check that the desired name for the firm has not already been registered and complies with state regulations.

Steps to form a professional law corporation

In California, a law firm cannot be a limited liability company (LLC) or professional LLC (PLLC). Instead, it must be a professional corporation. Here is a step-by-step guide to forming a professional law corporation in California:

Step 1: Check Name Availability

Before registering with the Secretary of State, check with the State Bar to ensure that your desired name has not already been registered. The name of your law firm, as it will appear in the State Bar records and with the Secretary of State, is the only name under which it may practice law. The name should also comply with the California Rules of Professional Conduct and the California Business and Professions Code. It should include wording or abbreviations that denote corporate existence, such as "Professional Corporation", "Professional Law Corporation", or "Incorporated".

Step 2: File Articles of Incorporation

The next step is to file the Articles of Incorporation with the California Secretary of State. This document should include the name of the law corporation, the business address, the agent of service of process' name and address, the number of shares authorized, and the corporation's purpose. It should also include indemnification provisions, and it is advisable to prepare organizational corporate minutes to confirm the information in the Articles of Incorporation.

Step 3: Obtain a Certificate of Registration

Every law corporation in California must have a Certificate of Registration from the State Bar of California before it can be considered a Professional Law Corporation and before it can engage in business. This involves submitting an application, paying the necessary fees, and providing proof of security for claims.

Step 4: Choose a Tax Classification

California professional law corporations can be taxed in two ways. The default option is to be taxed as a "C" corporation, which is a separate entity for tax purposes. The other option is to be taxed as an "S" corporation, which is treated as a small business corporation. To elect this option, you must file Form 2553 with the IRS and California Form 100S.

Step 5: Issue Stock

Issuing stock is a necessary step in forming a professional corporation. A stock certificate shows the ownership of a professional corporation's shares, which are typically issued in return for cash, property, or services. The board of directors establishes the price of each share. After issuing stock, you can hold your first shareholders' meeting.

Step 6: Obtain Local Business License and Comply with Local Laws

Different localities in California have unique rules that apply to businesses within their jurisdiction. Make sure to obtain the necessary local business licenses and comply with all applicable laws.

Naming a California law firm

The name of the law firm must be registered with the State Bar of California and the California Secretary of State. The name chosen for the law firm can be used only if it is registered with the State Bar and the Secretary of State. The name should also include wording or abbreviations that denote corporate existence, such as "Professional Corporation", "Professional Law Corporation", "Incorporated", or "Corporation".

If the word "Group" is used in the name, Rule 1-400 of the California Rules of Professional Conduct requires that at least one other employee, who need not be an attorney, be named. The term "Law Offices" can be used if the firm has multiple addresses and attorneys, including shareholders, per address. If the firm has only one office address, the term "Law Office" should be used. The term "Associates" requires at least two more attorneys employed by the firm, in addition to the shareholder. The term "Associate" can be used to indicate a fellow lawyer employed by the firm.

Additionally, the use of the term "Law Offices" is regulated by California law. The term implies that the practice has either one attorney and a shareholder at the address for the corporation or that the law practice and corporation have more than one location or address. The term "APC", "A.P.C.", "PC", "P.C.", or "Prof. Corp." can be used as ending designations if a professional law corporation has been set up. The terms "PLC" or "APLC" cannot be used as ending designations under California law as they may mislead the public by suggesting terms such as "Professional Legal Consultant" or "Public Liability Company".

It is important to note that California does not permit attorneys to set up a law firm as an LLC or limited liability company. Instead, law firms in California must be structured as professional corporations or limited liability partnerships.

Alternatives to LLCs for California law firms

California law prohibits attorneys from using LLCs for the practice of law. This is based on the Corporations Code section 17375, which states that the State Bar of California does not certify LLCs for this purpose. As such, law firms in California must be set up as professional corporations or PCs.

To form a professional corporation in California, the articles of incorporation must state clearly that the entity 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 must also comply with the California Rules of Professional Conduct and the California Business and Professions Code, and include wording or abbreviations that denote corporate existence, such as "Professional Corporation", "Professional Law Corporation", "Incorporated", or "Corporation".

Professional corporations do not shield lawyers from malpractice liability, but they can provide liability protection in other circumstances, such as breach of contract, employee lawsuits, or accidental injuries in the office. PCs can also provide tax advantages.

Other business entity types that can be used to receive payment for legal services in California include sole proprietorship, limited liability partnership, and general stock corporation.

Frequently asked questions