Law Firm Business Ownership In California: Is It Allowed?

California has specific rules and requirements for starting a law firm, and one of the most important considerations is the type of business entity to form. The State Bar allows only two entity types for law firms: the law corporation (or Professional Corporation/PC) and the limited liability partnership (LLP). Lawyers can operate as a sole proprietorship, general partnership, or limited liability partnership without forming a professional corporation, but a PC is a good option for limiting liability. To form a corporation in California, Articles of Incorporation must be filed with the California Secretary of State, and the law corporation must be registered with the State Bar of California. The corporation's name must comply with the California Rules of Professional Conduct.

Law firm business structures

When it comes to law firm business structures, there are several options to choose from, each with its own advantages and disadvantages. The choice of structure will depend on the specific needs and circumstances of the firm and its owners. Here are some of the most common structures for law firms:

• Sole Proprietorship: This is often the most straightforward option, where the business is owned and controlled by a single lawyer. It is characterized by low costs, simplicity, and owner control. However, the owner faces unlimited liability, making their personal assets vulnerable in case of lawsuits or debts.
• Partnerships: Partnerships can be general or limited liability partnerships (LLP). In a partnership, two or more people own and run the business together, sharing profits and decision-making responsibilities. Partnerships offer low formation costs and incentives for employees to become partners. However, they also come with joint liability, profit-sharing challenges, and the potential for disputes between partners.
• Professional Corporation (PC): A PC is a separate legal entity from its owners, providing limited liability and potential tax benefits. It protects personal assets from business debts and malpractice claims. However, incorporating as a PC can introduce complexities in terms of regulations and administrative requirements.
• Limited Liability Company (LLC): An LLC is a hybrid structure, offering the limited liability benefits of a corporation and the tax advantages of a partnership. It provides protection from personal liability for the company's debts and legal judgments. While forming an LLC can be more complex than a partnership, it avoids some of the burdensome corporate formalities.
• Multi-Disciplinary Partnerships: These structures allow lawyers to collaborate with professionals from other fields, enhancing their service offerings and expanding their client base.

It is important to note that the State Bar of California only allows two entity types for law firms: the law corporation (PC) and the limited liability partnership (LLP). Additionally, California prohibits PCs from having non-lawyer shareholders, and LLPs from having non-lawyer partners. Therefore, when choosing a business structure for a law firm in California, it is crucial to carefully consider the applicable laws, regulations, and the specific needs of the firm.

Naming a law firm

Traditional vs. Trade Names

There are two main approaches to naming a law firm: traditional names and trade names. Traditional names typically use the real names of the partners, such as a combination of partners' names (e.g., "Brought and Lane"), an individual partner's name, or a retired or deceased partner's name. This approach is common when there are fewer partners, a desire to associate the firm with an established lawyer's reputation, or when a lawyer has a unique or memorable name.

On the other hand, trade names, or brand names, use more descriptive language. For example, "Gold Standard Family Law" would be considered a trade name. Trade names can be useful when there are multiple partners, a minimal firm reputation, or a common partner name. However, it's important to note that some jurisdictions prohibit innovative trade names, so it's essential to check the rules in your state.

Compliance with Rules and Regulations

When naming a law firm in California, it is crucial to comply with the California Rules of Professional Conduct and the State Bar Rules. The law firm name must include wording that denotes corporate existence and cannot be fictitious or misleading. Additionally, the name should not imply a connection with a government agency or a public or charitable legal services organization, as per Rule 7.5 of the American Bar Association.

Memorable and Professional

Creating a professional and memorable name for your law firm is essential. Consider using positive language and words that convey success, such as "thrive," "victory," or "advance." You want your firm name to capture potential clients' attention and showcase your expertise and professionalism.

Domain Availability and Trademarking

Before finalizing your law firm's name, check the website domain availability to ensure you can secure an appropriate web presence. Additionally, consider trademarking your firm's name to protect your brand and avoid potential legal issues.

Other Considerations

Keep in mind that the name of your law firm can impact your search engine optimization (SEO). A unique and memorable name can help you stand out, but it may also be more challenging to find an available domain and avoid competition with other firms. Consider the type of clients you want to attract, as unusual trade names may be associated with aggressive advertising, while traditional names may be associated with more low-key marketing strategies.

In conclusion, naming a law firm requires careful thought and consideration of various factors. By following the steps outlined above, you can choose a name that complies with regulations, reflects your brand, and makes a strong first impression on potential clients.

Advertising and solicitation rules

California has specific rules and regulations regarding advertising and solicitation for law firms. While the California Rules of Professional Conduct do not specifically mention website marketing, the State Bar Formal Ethics Opinion 2001-155 addressed online advertising. According to the Formal Opinion, an attorney's website is not considered a solicitation but is instead a form of communication.

Lawyer websites are subject to the same rules as print advertising in California. Rules 7.1 through 7.5 contain important considerations for lawyer advertising, including compliance issues, and apply to lawyers with websites and those engaging in law firm digital marketing tactics.

Some key rules and guidelines regarding advertising and solicitation for law firms in California include:

• All advertisements must include the name and address of at least one attorney responsible for the advertisement.
• Certain written advertisements must include the words "advertisement" or "solicitation" or similar words.
• If an advertisement or solicitation guarantees a result, it is deemed a "false or misleading communication."
• A lawyer or law firm cannot solicit professional employment through recorded, electronic, or written communication if the person being contacted has made it known that they do not wish to be contacted.
• Law firms may participate in prepaid or group legal service plans operated by organizations that are not owned or directed by them.
• Lawyers cannot offer compensation for recommendations outside of reasonable advertising costs but can pay the usual charges associated with legal services plans.
• The law firm's name must comply with the California Rules of Professional Conduct and include wording denoting corporate existence.

Tax and liability issues

California has specific rules regarding the business structure of law firms. The State Bar allows only two entity types for law firms: the law corporation (or Professional Corporation, "PC") and the limited liability partnership (LLP). While a lawyer can operate as a sole proprietorship, a general partnership, a limited liability partnership, or a professional law corporation, the latter is a great option to separate out liability when accepting payment.

The tax and accounting rules for law firms are technical and unique to the industry. Law firms must be aware of specific tax rules, as ignorance can lead to substantial tax liabilities, penalties, and interest. For instance, the IRS considers costs paid on behalf of clients to be loans to clients, not operating expenses of the business, and hence, these costs are not deductible by the law firm unless they are not reimbursed by the client and are written off as bad debts.

When a partner or shareholder leaves a firm, the firm must structure the payments to be as tax-efficient as possible. Buying a partner's interest or a shareholder's stock upon withdrawal could cost much more in aggregate taxes paid if the payment is structured poorly.

In California, a law firm can be structured as an LLC, which protects its members against personal liabilities. LLCs must have the same classification for California and federal tax purposes. Every LLC doing business or organized in California must pay an annual tax of $800, even if it is not conducting business, until the LLC is canceled. However, for tax years between January 1, 2021, and January 1, 2024, LLCs are not subject to the annual tax of $800 for their first tax year. If an LLC makes more than $250,000, it must pay a fee by the 15th day of the 6th month of the current tax year.

California has adopted the concept of "economic nexus," under which a physical presence is not required for a firm to have a sufficient connection with the state as long as the firm has an economic connection. For example, a California-based law firm providing $1,100,000 in legal services to a New York client would likely be required to file a New York franchise tax return, even if all the services were performed in California.

Compliance with state and federal laws

As a business owner in California, you are responsible for both federal and state taxes. This includes income tax, payroll taxes, sales tax (if applicable), and any other relevant taxes and fees. It is important to keep accurate records and file your taxes on time to avoid penalties. In addition to federal taxes, California also has various state taxes that businesses must pay, including corporate income tax, franchise tax, and personal property tax. Some industries may have additional taxes or fees specific to their business activities, so it is important to research and understand these requirements before starting your business.

Another important aspect of compliance is protecting your intellectual property and trademarks. This includes registering for patents, copyrights, and trademarks to safeguard your unique ideas, products, and services. It is also important to research any existing trademarks or intellectual property that may conflict with your own. Contracts and agreements are essential for establishing clear terms and conditions with customers, vendors, partners, and employees, and they can also protect your business from potential legal disputes or misunderstandings.

When it comes to law firms specifically, the State Bar of California has very specific rules that must be followed. Law firms can only operate as either a law corporation (also known as a Professional Corporation or "PC") or a limited liability partnership ("LLP"). The law corporation's name must comply with the California Rules of Professional Conduct and include wording denoting corporate existence. The usage of the firm's name should also be in accordance with the requirements of the Rules of Professional Conduct, and it is prohibited to use a fictitious name or a "DBA". Law corporations are required to register with the State Bar of California and the California Secretary of State.

Frequently asked questions