A law firm can be an LLC when the LLC business structure is chosen as the desired entity type of a law firm. 

How to Select a Law Firm Business Entity

Individuals desiring to start their own law firm are going to wrestle with the question of what type of business entity is right for the structure they want.

This choice will affect the business in many different ways, from taxation to state requirements. The type of business structure decided on will depend on the type of firm being formed. Non-profits will desire a very different operation than a for-profit business.

The size of the firm must also be considered. Will this be a single-lawyer practice or a partnership or maybe a practice with several associates?

Financial liability needs are also important. If the practice is going to be started with loans, the owners will want to choose a structure that protects them from massive debt if the lender will lend to the entity, rather than the individuals.

Certain structures require more records and reports than other. Solo-practices won't want to worry about more reporting than is necessary as they won't have the added manpower to keep up with these requirements. A larger practice can designate a person to handle the record-keeping throughout each year. 

The type of management structure desired is also important when choosing business structure. Firms with a larger number of associates will want a very clear management plan, while small partnerships may not need as much structure. 

Taxation is one of the most important issues to consider, because different types of entities are taxed differently.

Certain entity types are subject to less taxes than others, while some have more annuals costs.

Law firms in particular will want to consider these two issues when deciding on a business structure:

  • How much liability protection will the firm need?
  • Which types of entities does your state allow to form law firms?

These are the entity types available in most states for law firms:

  • LLC (limited liability company).
  • C (corporation).
  • SP (sole proprietorship).

What Is an LLC?

An LLC is a type of company structure that protects owners (or members) from any personal or financial liabilities if the business goes under or has any legal issues, like a corporation. Unlike a corporation, however, an LLC can be taxed as a pass-through entity like a sole proprietorship or partnership.

When thinking about forming an LLC, keep in mind:

  • Owners (or members) are not required to file articles of organization with the Secretary of State. 
  • The responsibilities and protections of the company members are laid out in and governed by the operating agreement.
  • LLC owners can decide how they would like the business to be taxed (from the entity types listed above).

LLCs can be a good choice as they offer the same protection as a corporation, but with less requirements, like meetings and other red tape, and different taxation. A possible downside of an LLC is that the company might be required to be dissolved upon the loss of an owner. 

The Advantages of LLC for a Law Firm

Any law firm can choose to become incorporated as an LLC for legal and financial protection. 

In most cases, if one member of an LLC has a lawsuit brought against them, the other members will be protected from liability, and only the one member will be affected. 

In some legal matters, other members of an LLC can be held liable in the case of an issue with one, single member. These types of issues and how they will be handled can be specified in the operating agreement. 

When any company decides to file as an LLC, it must:

  • Complete the articles of organization.
  • Build a board of directors.
  • Decide on a Registered Agent.

Because an LLC is a pass-through entity, all profits and losses by the business go directly to the company's members as income and are therefore subject to income taxes. The LLC itself is not taxed, so the profits are only taxed once, not twice as with a corporation. Profits for a corporation are taxed as business earnings and then again when dividends are collected as income by shareholders. 

If a law firm organizes as a single-owner LLC or sole proprietorship, the individual owner's company profits are taxed under self-employment taxes. 

If you need help with starting a law firm as an LLC, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.