When starting your own law practice in California, one of your first decisions is what business form to use—should your practice be a sole proprietorship, a partnership, or a corporation? Don’t underestimate the importance of this choice!
The form of business you choose for your law practice can make a big difference. Each form provides varying levels of personal asset protection, tax advantages and disadvantages, and complexity or simplicity of business operation.
Here are some of your choices, along with their pros and cons:
Sole proprietorship. Going solo, by using the sole proprietorship form of enterprise for your practice, offers the most freedom to an attorney but has potential drawbacks. As a sole proprietor, you’ll bear all risks of loss, thereby subjecting both business and personal assets to potential liability—which can be mitigated largely by appropriate insurance. Also, if you don’t employ support staff, you’ll have to devote time to the administrative tasks associated with operating your practice (e.g., bookkeeping, photocopying, and mailing documents).
Limited liability partnership (LLP). If you choose to enter into a partnership, you should consider forming a limited liability partnership (LLP). The main advantage of operating as an LLP is that partners don’t have joint and several liability for all partnership obligations; rather, the partners in an LLP are protected from vicarious liability (as long as they have a currently effective certificate of registration from the State Bar of California and maintain minimum security for the benefit of injured parties). See Corp C §16306(c). The State Bar website has information about how to receive a certificate of registration and the applicable rules. Make sure not to confuse an LLP with a Limited Liability Company (LLC); generally, an LLC can’t render professional services, as defined in Corp C §§13401(a), 13401.3, 17375.
Professional corporation. If you decide not to practice as a sole proprietor or in a partnership form, perhaps you’ll want to conduct your practice as a professional corporation. See generally CC §§13400-13410. The primary advantage of a professional corporation is the amount of money that can be put into qualified retirement plans from pre-tax dollars from the net profits of the practice and from the excess left over after meeting operating expenses. Also, you’ll be able to adopt medical plans that allow increased deductions and contribution limits. You’ll need to consult with a tax advisor on threshold income or distribution levels for these benefits to be realized. If you’re just starting out and won’t yet reach these thresholds, incorporating probably isn’t a good choice because of the start-up expenses, the added taxes and accounting fees that accompany incorporation, and the administrative requirements that go with practicing as an employee-shareholder.