Starting a Law Practice – Part 3: Choice of Entity

Blog
March 17, 2015

law-firm-series-lg-1A previous post in our blog series for entrepreneurial attorneys focused on the importance of a solid business plan, and a critical part of that process is determining the entity structure for your new company. A law practice can operate in a variety of forms: sole practitioner, partnership, professional corporation, or limited liability company. A new practice’s choice of entity is an important decision that will have significant consequences for many years.

  • Sole practitioner or partnership – Before the development of the limited liability company (LLC), many attorneys operated as sole practitioners or in general partnerships. Currently, these forms of practice are the least desirable and cannot be recommended, primarily due to the unlimited personal liability exposure to the owners.
  • Professional corporations address the problem of unlimited personal liability for the practitioner, but carry with them the potential for two levels of income tax (one at the corporate level and one at the individual stockholder level). While the potential for double taxation is eliminated by electing to be treated as a subchapter “S” corporation, the result is an inflexible operating form due to inherent limitations of the “S” corporation, the most notable of which are that: the corporation can have no more than 100 shareholders, can have only one class of stock, and any distributions must be done strictly based on percentage ownership.
  • The limited liability company (LLC), limited liability partnership (LLP), professional limited liability company (PLLC), and professional limited liability partnership (PLLP) are by far the most popular entity choices for a law practice. These entities offer the limited personal liability of a corporation with the flexibility and single-level tax found in a partnership or sole proprietorship. Easy to establish and operate, the LLC, LLP, PLLC, and PLLP are the smart choices for today’s lawyer.

Aronson LLC can help you consider which entity is right for your practice. Contact Larry Rubin, CPA at 301.231.6200 or LRubin@aronsonllc.com.