Key Takeaways

  • Law firms may operate as sole proprietorships, partnerships, LLCs, or corporations depending on the state.
  • Most states require law firms to register as professional entities, such as a PLLC or PC.
  • California restricts law firms to professional corporations (PCs) only—LLCs and PLLCs are not permitted for law practice.
  • S corporation tax status can reduce self-employment taxes but only applies to eligible professional corporations or PLLCs.
  • Law firms cannot be structured as B Corporations in many jurisdictions due to ethical rules on profit versus client interest.
  • Nonlawyers cannot own shares in a law firm, which restricts the structure and growth options.

Can law firms incorporate? Yes, but the answer to what type of incorporation options are available will vary based on the state. For example, many states allow a solo attorney to form a PLLC, or a Professional LLC. However, this is not an option for attorneys in California. In this state, solo attorneys have two options ­— a sole proprietorship or a professional corporation.

Sole Proprietorships and Partnerships

A sole proprietorship is the simplest of business structures. It is straightforward in that the business is owned by one individual. There is no need to file special forms with the state, although you are required to have all necessary permits and licenses. The potential downside of a sole proprietorship is the fact that the owner is the one who remains personally liable for all debts. Income from a sole proprietorship is reported on personal income tax returns.

In addition to the downside of liability, you also have to pay your own self-employment taxes. Regular businesses have to pay payroll taxes for Medicare and Social Security funding. Self-employment taxes are the equivalent for a sole proprietor.

Partnerships are business structures that have two or more people as business owners. It may be a general or a limited partnership, both of which are typically governed by a partnership agreement that dictates each partner's obligations and responsibilities. Like sole proprietorships, partners are liable for the business's obligations in a general partnership.

Depending on what state you're located in, you may be able to form a limited liability partnership or LLP. Only some professions can qualify to be an LLP. This structure may offer some personal liability protection from the acts of another partner.

Restrictions on Law Firm Ownership

Law firms are subject to unique ownership rules not applicable to typical businesses. In all U.S. jurisdictions, only licensed attorneys may have an ownership interest in a law firm. This means that law firms cannot be owned or controlled by nonlawyers, including investors, which affects how law firms are capitalized and structured.

This restriction is enforced by state bar ethics rules that prioritize client protection, confidentiality, and avoidance of conflicts of interest. As a result:

  • Non-attorneys cannot serve as shareholders in professional corporations.
  • Management decisions must remain under attorney control.
  • Ethical compliance often overrides business efficiency or profit-maximization goals.

States like Arizona and Utah have introduced regulatory "sandboxes" to experiment with nonlawyer ownership models, but these remain exceptions and are closely monitored.

LLCs and Corporations

With an LLC, members are protected from personal liability for debts and acts of the business, much like a corporation. The difference is that an LLC has the option to be taxed either like a partnership or like a corporation. Operating agreements help set forth the rights and responsibilities of the LLC and how it will be operated. Depending on your state, it may not be allowed to operate a law firm as a limited liability company.

With a corporation, the business is treated as a separate entity with limited liability. A corporation is owned by shareholders and is designed for perpetual existence. It's mandatory to prepare bylaws that will govern how the corporation operates. A professional corporation, where allowed, will also provide some limited personal liability for shareholders. There is a drawback if you opt for a professional corporation in California, as the liability protection does not cover acts related to professional malpractice. The liability limitation is designed to protect from issues like a slip and fall at the office, for example.

For tax purposes, a corporation is taxed on its profits and then shareholders are taxed when dividends are distributed. If it meets certain criteria, a traditional corporation can elect to be taxed as an S corporation, which passes income and losses through to its shareholders.

There are more strict guidelines with a corporation, and the state tax board usually assesses an annual fee for maintaining one.

S Corporation Status for Law Firms

Many law firms opt to be taxed as an S corporation to gain potential tax benefits. An S corporation passes income and losses directly to its shareholders, avoiding the double taxation that applies to traditional C corporations. However, only certain law firms are eligible for S corp status.

To qualify as an S corporation, a law firm must:

  • Be a domestic entity (e.g., professional corporation or PLLC).
  • Have no more than 100 shareholders, all of whom must be U.S. citizens or residents.
  • Issue only one class of stock.
  • Not be owned by another business entity.

Advantages of electing S corp status:

  • Reduces self-employment tax by allowing some income to be paid as distributions rather than salary.
  • Still provides liability protection when structured as a professional corporation or PLLC.

Important: The IRS does not recognize professional corporations as a separate classification for tax purposes. A law firm must first incorporate as a PC or PLLC and then elect S corp status using IRS Form 2553.

Limitations on B Corporation Status

Although B Corporations (Benefit Corporations) are gaining popularity in sectors focused on social responsibility, they are generally not appropriate for law firms. This is primarily due to the ethical duties attorneys owe to their clients, which can conflict with the fiduciary duties owed to shareholders in a B Corp.

Why law firms typically cannot be B Corporations:

  • B Corps require a dual mission of profit and public benefit, which may conflict with an attorney's duty of undivided loyalty to a client.
  • The Model Rules of Professional Conduct discourage any business structure that places non-client interests ahead of client interests.
  • Most state bar rules prohibit law firms from being accountable to nonlawyer shareholders or external stakeholders.

While a few jurisdictions are exploring reforms, the prevailing standard is that law firms must prioritize client obligations over broader social goals or investor returns, making B Corp status ethically problematic.

Steps to Incorporate a Law Firm

  1. Pick a name.
  2. Prepare and file your Articles of Incorporation with the applicable secretary of state.
  3. Prepare a corporate records book where you will store important documents like meeting minutes, bylaws, and any additional stock certificates.
  4. Write your bylaws, which needs to include certain clauses for a law corporation that covers how to sell and transfer corporate stock. The reason for this is nonlawyers cannot own a corporation that engages in the practice of law.
  5. Appoint corporate directors. For a solo attorney, this individual would be the president, secretary, and treasurer. For two or more attorneys, the duties can be split.
  6. Hold your first board meeting and take minutes.
  7. Appoint officers, which is done at your initial board meeting.
  8. File a notice of stock transaction form, which must be filed by a new corporation within 15 days after the initial sale of securities.
  9. Issue stock. Remember that attorneys cannot be partners with non-attorneys, so it must contain a transfer restriction.
  10. Register with the state bar.

You must also maintain your corporation by holding regular meetings. Additionally, you must keep ongoing financial records. If you fail to adhere to the rules for a corporation, you will not be able to take advantage of the benefits and liability protections afforded by a corporate structure.

Frequently Asked Questions

  1. Can a law firm be a corporation in any state?
    Yes, but only in the form of a professional corporation (PC) or PLLC, and not all states allow both options for law firms.
  2. What is the best business structure for a solo law practitioner?
    Often a sole proprietorship, PLLC, or PC depending on the state. In California, for example, only sole proprietorships or PCs are allowed for solo lawyers.
  3. Can a law firm elect S corporation status?
    Yes, if it is structured as a PC or PLLC and meets IRS criteria. This status can reduce self-employment tax obligations.
  4. Are law firms allowed to be B Corporations?
    Generally no. Ethical restrictions and the duty of loyalty to clients conflict with the B Corporation model.
  5. Why can't nonlawyers own law firms?
    State bar rules prohibit nonlawyer ownership to ensure legal ethics, client confidentiality, and avoidance of conflicts of interest.

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