If you’re solo-practitioner looking to structure your law firm differently or an attorney hoping to open your own firm for the first time, understanding business structures is important. Many law firms chose LLCs, PLLCs or LLPs because they have many advantages. Let’s take a closer look at LLCs, PLLCs and LLPs.
What Is an LLC, PLLC and LLP?
An LLC is a limited liability company that can include as little as one member. A PLLC is a professional limited liability company which can only be formed by certain professionals such as accountants, engineers, and lawyers. Since some states don’t allow attorneys to form LLCs so many law firms use the PLLC structure. And finally, an LLP is a limited liability partnership. It’s similar to a general partnership except that each partner has limited liability for the other partners’ debts while a general partnership burdens both partners with full liability.
Law Firm Partnership Taxes
The main advantage of LLCs, PLLCs, and LLPs is that they significantly reduce tax liability by avoiding the double taxation that corporations face. Partners who work under an LLP can pass through their profits to their personal income so that those earnings are taxed at the personal taxation rate. A matter of fact, each partner will only be taxed on their percentage of the profits. So if a partner only owns 20% of the law firm, 20% of the profit will be passed on to their income and be taxed. LLCs and PLLCs can also pass through their profits to their personal income but only if there is no more than one member.
Small law firms and solo-practices are best suited for forming as LLCs, PLLCs or LLPs because paperwork and taxation are much simpler than filing as a corporation. In the case of LLPs, some states may only require you to fill out a single form in addition to general partnership paperwork. However, research the law of your state before you decide which business structure you want.
Challenges of Forming an LLC, PLLC or LLP
The biggest challenges of forming an LLC, PLLC or LLP is not so much filing the paperwork or doing taxes, it’s deciding who you will do business with and protecting yourself in that relationship. Let’s take a look at some things you need to consider before you join up others to form a new law firm:
- Reputation. Before you go into business with someone in an LLC, PLLC or LLP, make sure you verify their background. Are they trustworthy? Do they have excessive debt? Consider running a credit check or even a criminal background check. You want to know who you are doing business with because even though you have limited liability, problems with your partner can sink your law firm.
- Clear agreements. Picking the right business structure is only half the battle. You must have clear agreements with any partner you’re doing business with. Make clear what responsibilities and what percentage of the profits each partner will receive. Put everything in writing.
- Have an exit plan. Sometimes things don’t work out no matter how hard you’ve tried. Always have an agreement on how you will dissolve the relationship if things go south. And as always put that exit plan in writing.
If you’re considering what type of business structure you want for your law firm, do your research and understand the rules in your state before filing any paperwork.