You've finally lined up some long-term clients and chalked up some big wins. Your small firm is growing and now it's time to take your practice to the next level. Should you choose a limited liability company (LLC); a limited liability partnership (LLP) or a professional corporation PC? Each of these business structures provides some protection from liability caused by employees and colleagues in your business, but that's just one factor, among many, to consider. Read on to learn more about law firm business structures and which is best suited for your growing practice.
Growing a Law Firm: Professional Corporations
A professional corporation is organized under the laws of the state in which it is formed. Unlike a regular corporation, a PC for lawyers requires that each director, shareholder and officer be licensed to practice law. Further the legal PC may only provide services in its field. A PC is a popular form of organization for a solo practitioner, as it provides some liability protection, while still allowing you to keep your solo operation.
Governing a Professional Corporation
A professional corporation is a product of state laws which provide detailed provisions on what the corporation can and cannot do. A corporation should have its own set of by-laws and agreements that dictate the responsibilities and conduct of the corporation, its directors, and shareholders. A PC is much more formal, as operating decisions often require director approval and votes of shareholders.
As with any corporation, you must hold shareholder and director meetings, keep records and minute books. If you fail to abide by the rules and regulations for a corporation you run the risk of losing your liability protection and open yourself up to veil piercing.
Forming a PC
The formation of a PC requires articles of incorporation be filed along with the applicable fees with your secretary of state. There are also annual filings as dictated by state law. The articles should state:
- the intention to operate as a corporation;
- a definition of the corporation's purpose;
- the names of the officers and shareholders; and
- the agent for the service of process.
Each Secretary of State office has applicable forms, but some states allow you to create your own as long as you provide the required information.
Growing a Law Firm: LLPs and LLCs
Unlike other states, California does not allow lawyers to form a limited liability company. Instead, California allows for the use of a professional limited liability partnership (LLP). Every other state allows for the formation of an LLC or a professional limited liability company (PLLC) for law firms. Ultimately, there's not that much difference between an LLP and an LLC.
Governing an LLP or LLC
One of the key benefits of a LLP or an LLC compared to a PC is flexibility. Each partner has the right to manage the business entity and make decisions about daily business operations. The basic governing structure is a partnership agreement, which doesn't even have to be written. However, individual states have statutes which will address certain aspects of the business, if there is no written agreement in place. So, if there is no written agreement or the agreement doesn't address particular issues, the LLP or LLC will be subject to the gap-filling provisions in their states' business code.
Forming an LLP or LLC
It's easy to form an LLP or LLC; typically all that's necessary is completing a registration form and filing it with the Secretary of State. Some states, such as California, require registration with the State Bar to allow for the limitation of vicarious liability for the tortious acts of partners or employees.
Tax Considerations and Limitation of Liability
The key reasons to have a formal business structure is for liability protection and tax considerations. None of the business organization structures will protect an attorney from personal liability for professional malpractice, personal loan guarantees, or intentional torts. However, an LLP, LLC or a PC will protect against liability for the malpractice of other partners or shareholders and business-related liabilities, such as a slip and fall near the watercooler.
There's a huge tax difference between a PC and a LLP or an LLC. A professional corporation is a business entity that must pay income taxes for the corporation itself, which may result in double taxation. However, with an LLP or LLC, the member pays individual taxes, not the entity itself.
By-laws and Partnership Agreements
No matter which organizational structure you choose, there must be operating rules regarding the formation and continued operation of the business. A good source of information as to what provisions should be included is the Uniform Partnership Act which has been enacted in all states except Louisiana. At the very least your law firm agreement or by-laws should address the following:
- What is the compensation agreement?
- Who owns the business assets?
- What happens when a partner or member wants to leave the firm?
- What happens when a new partner or member is brought on?
- What are the performance expectations?
- Can you fire a partner or member?
- What's the process for dissolution of the firm?
The idea behind partnership agreements or by-laws is to prevent conflict down the road when a new situation arises. The more thought that goes into the initial agreements on the front end will prevent or minimize any business interruptions when unexpected events happen down the road.
Get the Right Clients for Your Growing Practice
It's an exciting time when you're growing your law firm. Once you've decided on your business structure and prepared your operating rules, you'll need an effective strategy to ensure that the right clients show up at your door. Let FindLaw's Legal Marketing Solutions help you find the clients best suited for your growing practice.