California Law Firms: Associations Of Corporations?

California law firms can be set up as professional corporations, which is the only entity choice for law firms in the state. This is a great option for lawyers to separate liability and save on taxes. To be lawfully recognised as a law corporation in California, a law firm must be registered with the State Bar of California. The State Bar's Law Corporations Program certifies professional corporations that wish to practice law in accordance with applicable statutes and court rules. The name of the law corporation should 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.

Registration with the State Bar

The State Bar of California has a Law Corporations Program that certifies professional corporations that wish to practice law in accordance with applicable statutes and court rules. If a law firm is an association of corporations, it will need to register with the State Bar to be able to practice law.

The State Bar's Law Corporations Program is responsible for certifying these professional corporations. This program ensures that law firms wishing to practice in California are compliant with the necessary statutes and court rules.

The State Bar of California has a mandate to protect the public and enhance the administration of justice. Its role extends beyond the certification of law firms and includes upholding the integrity of the legal profession and ensuring that lawyers practicing in California abide by the rules of professional conduct.

Through its various programs and initiatives, the State Bar sets and maintains the standards for the legal profession in California. It provides guidance, resources, and support to law firms and legal practitioners to ensure they can effectively serve their clients while upholding the integrity of the justice system.

By undergoing registration with the State Bar, law firms in California not only gain legal authorization to practice but also become part of a community dedicated to the highest standards of professionalism and ethical conduct. This registration process is, therefore, an essential step in establishing a law firm's credibility and ability to serve its clients effectively within the state.

Tax implications

When it comes to the tax implications of a California law firm being an association of corporations, there are a few key points to consider. Firstly, under California law, a law firm must be structured as a professional corporation, and this structure offers certain tax advantages. Lawyers providing legal services through a professional law corporation are considered employees of the corporation, and the corporation is responsible for taxes and other legal obligations related to the services provided.

One of the benefits of a professional law corporation is the ability to separate liability when accepting payment. This can be advantageous for tax planning purposes. Additionally, a professional law corporation can elect to be taxed as either an S-Corp or Personal Service Corporation, each with distinct tax implications.

If taxed as an S-Corp, the corporation passes corporate income, losses, deductions, and credits to shareholders, who report this information on their personal tax returns. This avoids double taxation on corporate income and is generally beneficial for the corporation and its shareholders.

On the other hand, a Personal Service Corporation is defined by the Internal Revenue Service as a corporation where more than 50% of its stock is owned by employees providing personal services, and these services are the principal activity of the corporation. The IRS levies a flat tax rate of 35% on the taxable income of a Personal Service Corporation, which differs from the progressive tax system of other corporations. Additionally, Personal Service Corporations are subject to the Accumulated Earnings Tax if earnings exceed the reasonable needs of the business. It's worth noting that California has unique provisions for Personal Service Corporations that don't conform to federal tax law, so expert advice is crucial.

In conclusion, the tax implications of a California law firm being an association of corporations depend on various factors, including the choice between an S-Corp or Personal Service Corporation tax structure. The specific circumstances and requirements of the law firm will determine the optimal tax strategy, and consulting with tax advisors well-versed in California law is highly recommended.

Compliance with Rules of Professional Conduct

Compliance with the Rules of Professional Conduct is essential for law firms in California. The State Bar of California plays a crucial role in regulating the conduct of attorneys and law firms in the state. According to the California Rules of Professional Conduct, Rule 1-100, "Rules of Professional Conduct in General", the use of certain terms in a law firm's name is subject to specific requirements. For example, including the word "Associate" in the firm name requires that at least one employee be employed as a lawyer, while the word "Associates" necessitates a minimum of two lawyers employed by the firm. Additionally, the use of the term "Group" in the firm name must be accompanied by the naming of at least one other individual employed by the corporation.

The State Bar's Law Corporations Program is responsible for certifying professional corporations that wish to practice law within the state. To be lawfully recognised as a law corporation in California, a law firm must be registered with the State Bar. This registration process involves submitting an application with the necessary documents and information, including the firm's plan of operation. The name chosen for the law corporation should also comply with the California Rules of Professional Conduct and the California Business and Professions Code. It is important to ensure that the desired name has not already been registered with the State Bar and the Secretary of State.

Furthermore, the California Rules of Professional Conduct regulate the professional conduct of attorneys licensed by the State Bar through discipline. For instance, Rule 7.5(b) states that a lawyer in private practice should not use a firm name or trade name that implies a relationship with a government agency or a public or charitable legal services organisation. This rule aims to prevent misleading associations, as seen in the example of a firm name suggesting an affiliation with the United States Marines Corps.

Compliance with these rules is crucial, as failure to register as a law corporation with the State Bar can result in disciplinary action and exposure to legal consequences. It is important to note that the State Bar has the authority to enforce rules for corporations practising law in California, and law firms must adhere to these rules to maintain their legal standing and avoid any penalties.

Choice of name

When choosing a name for a law firm in California, there are several rules and requirements that must be followed. Firstly, the name must comply with the California Rules of Professional Conduct and the California Business and Professions Code. This includes the requirement that the name must not be false or misleading, and it must include wording or abbreviations that denote corporate existence. Examples of such wording include "Incorporated", "Inc.", "Corporation", "Professional Corporation", "PC", and "Professional Association".

The name of the law firm as registered with the State Bar and the Secretary of State is the only name under which the firm may practice law. This means that the firm cannot use a fictitious name or a "DBA". The usage of the firm's name should always be in accordance with the Rules of Professional Conduct.

When including specific terms in the name, there are certain requirements that must be met. For example, if using the term "associate", there must be at least one other employee in addition to the shareholder. If using the term "associates", there must be two other employees in addition to the shareholder. The term "Law Offices" can only be used if the practice has either one attorney and a shareholder at the address for the corporation, or if the practice has multiple locations or addresses.

The name of the law firm cannot imply a governmental connection, as this can mislead the public. Additionally, the name cannot include a deceased attorney or a lawyer who was not a member of the practice or a predecessor firm. The name also cannot contain the name of a non-lawyer. If using the word "Group" in the name, Rule 1-400 of the California Rules of Professional Conduct requires that at least one other individual employed by the corporation be named, who does not need to be an attorney.

It is important to note that California business law does not permit attorneys to set up a law firm, but other options include a sole proprietorship, partnership, or a professional law corporation.

Application requirements

California requires certain professionals, including lawyers, to create a professional corporation. A professional corporation is a corporation formed to provide services in a single profession. In California, you must form a professional corporation if you want to register a business providing professional services that require a license, certification, or registration.

Registration and Licensing

• Register with the State Bar of California: Before submitting an application, law firms must be registered with the State Bar of California, which plays a crucial role in the formation of a law corporation.
• Comply with Naming Requirements: The chosen name should 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 "Incorporated," "Inc.," or "Corporation." The name cannot imply a relationship with a government agency or charitable organization.
• Check Name Availability: Ensure that the desired name is not already registered with the State Bar and the California Secretary of State.
• Obtain Necessary Licenses and Permits: Determine the required licenses and permits for your entity using the CAlGold website. Obtain a business license, also known as a Tax Registration Certificate, if operating in the City of Los Angeles.

Documentation and Compliance

• Prepare Articles of Incorporation: File the Articles of Incorporation with the California Secretary of State.
• Provide Proof of Registration: Submit proof of registration with the Secretary of State as part of the application process.
• Submit Bylaws and Share Certificates: Include bylaws, which outline the rules of operation, and a sample share certificate with restrictions on share ownership.
• List Associated Attorneys: Report all attorneys associated with the corporation in the application.
• Guarantee for Claims: Provide a Guarantee for Claims in the appropriate amount.
• Declaration of Compliance: Submit a Declaration of Compliance with Rule 1-400.
• Annual Reporting: File an annual report covering the previous calendar year. Report any changes to the law corporation's address, shareholders, directors, officers, employees, etc., within thirty days.
• Corporate Minutes and Information Statement: Prepare corporate minutes and file the California Statement of Information annually.
• Corporate Transparency Act (CTA): Comply with the CTA, which requires the disclosure of "beneficial ownership" to the Department of Treasury Financial Crimes Enforcement Unit (FinCEN).
• Separate Business and Personal Funds: Maintain separate accounts and avoid commingling funds to prevent issues in potential lawsuits.
• Agent of Service of Process: Appoint an agent of service of process, or a registered agent, available during business hours at a California physical address.
• Corporate Directors: Appoint initial corporate directors, ensuring they are licensed to conduct the professional activity. Prepare the Incorporator's Statement form with their names and addresses.

It is important to note that California's laws regarding professional corporations can be complex, and specific professions may have unique requirements. It is advisable to consult with a California business attorney and an accountant to ensure compliance with all applicable rules and regulations.

Frequently asked questions