How to Start a Law Firm: Organizational Structure
In case you are wondering about the ways to structure a law firm, there are several options. But, despite the variety, choosing a law firm structure will largely depend on the jurisdiction in which you practice and the realities of your circumstances. Naturally, whatever type of structure you choose for your law practice, there will be some advantages and disadvantages. The key, as with most business decisions, is to carefully weigh your options and make the best decision in light of all the relevant information.
Regardless of the type of law firm structure you end up selecting, your decision process leading up to that choice should be guided by two, sometimes conflicting, interests: flexibility and security. Flexibility in the sense that the law firm structure you choose should not encumber the growth and mobility of your practice; security in the sense that the legal structure of your law practice should expose you to the least amount of liability. Think of these interests as spectrum with each interest on opposite, extreme ends. A good law firm structure will find the right balance between the two ends.
There are, however, common law firm structures that you should spend some time weighing to see if they are compatible with your flexibility vs. security profile.
A sole proprietorship represents the ultimate in flexibility. Most solo practitioners are organized as sole proprietorships. A sole proprietorship is a type of unincorporated business entity where the business is owned and managed by a single individual. Legally, a sole proprietorship is not separate from its owner. Therefore, management flexibility is the most significant advantage to a sole proprietorship. As a sole proprietor, you are free to set your hours, pick the type of practice you want, determine earnings, and decide which clients to take and which ones, if any, to turn away. A sole proprietorship, however, has its challenges. Some of these challenges may include a limitation on sources of funding for your practice, carrying the administrative burden of your practice alone, and an exponential increase in work just to generate sufficient client base to sustain your practice. As a sole proprietor you will also assume the liabilities of your practice, since a sole proprietorship does not have the benefit of a corporate shield.
Trade or Fictitious Business Names
An ancillary issue often associated with the choice of a sole proprietorship structure for a legal practice is the issue of trade or fictitious business names . This issue usually arises in the context of a sole proprietorship because, and although generally, the legal name of a sole proprietorship is the person who owns or operates the proprietorship, you may want to give your law practice a name that is different from your name -- i.e., a trade or fictitious name. The question then becomes whether under the canons of legal ethics, trade names are permissible, and if they are, whether there are any special filling requirements.
As to the first question, the issue of whether a lawyer can ethically practice law under a trade name is best directed to your State Bar. But generally, most jurisdictions on First Amendment grounds permit lawyers to use a trade name as long as the name is not deceptive or misleading.
On the issue of special filing requirements, again, the rules of your jurisdiction controls. Some states require a special registration filing and fees prior to using a fictitious business name. So, check with the Business or Corporations office of the Secretary of State of the state you intent to set up shop in, to find out whether you are required to register a trade name in addition to the customary incorporation filings.
If it turns out that as a solo practitioner, you are disturbed by the absence of a corporation shield with a sole proprietorship, then a professional corporation may be an option depending on the jurisdiction in which you practice. There are various permutations of the professional corporation, but generally a professional corporation is a type of corporate entity formed to engage in a business, the practice of which requires a professional license. Therefore, the professional corporation has a distinct legal existence from its owners or shareholders.
Because of this characteristic, a professional corporation may be an ideal choice if you are a solo practitioner but want the security provided by the corporate shield. The corporate shield advantage, however, requires strict adherence to corporate formalities, and this may be onerous on a small practice. Depending on the arrangement, a professional corporation may also provide the capital advantages of a partnership without some of the management and liability disadvantages of a partnership. Also, and again depending on how the professional corporation is structured, there might be some tax advantages. You should discuss the matter with your accountant and tax adviser.
A general partnership is another structural option, especially if you are considering starting your law practice with another attorney. A general partnership is a business owned by two or more persons, all of whom share equally in the profits and liabilities of the partnership. In theory, any member of a general partnership can manage the affairs of the partnership. This feature of a general partnership may make the choice disadvantageous if the partnership does not take care to identify the various managerial roles of the partners. Also, keep in mind that any partner in a general partnership can bind the partnership to a legal obligation without express authority from the other partners. The possibility of dual taxation also raises issues to consider and address.
Limited Liability Partnership
Staying within the confines of a partnership structure, a limited liability partnership is also another common structure for a law practice. A limited liability partnership differs from a general partnership in one major respect: unlike a general partnership, liability for the partnership's debt in a limited liability is not borne equally by all the partners. Therefore, the share of profits is also uneven. But, for several legal and practical reasons, a limited partnership may be ideal for your law practice, particularly if you are starting the practice with several attorneys. Dual taxation is also a concern with a limited liability partnership. You should consider how best to address this problem with your accountant or a business lawyer.
Limited Liability Company
Recently, limited liability companies have become the preferred corporate structure in many industries. This is so because a limited liability company is a hybrid entity that provides the organizational flexibility of a sole proprietorship coupled the liability shield of a corporation. Think of a limited liability company as the best location to perch on the flexibility v. security spectrum. Despite its advantages, however, many jurisdictions do not allow the practice of law under a limited liability company structure. It may save you time to inquire at the outset, whether your state bar and corporation rules allow you to structure your law practice as a limited liability company. In any event, you should note that some states will require you to announce the formation of a limited liability company through a newspaper publication, which may add some cost to your startup budget.
The bottom line is that the choice of the type of law firm structure you pick is an important one. The type of law firm structure you select will determine, for instance, how much tax you pay and whether others can sue you for the actions or inactions of your law practice. You should therefore spend an appreciable amount of time thinking about your options, and talking to your account and business lawyer to determine the right choice for you.