When attorneys are getting ready to start a new law firm, the choice of entity question is usually one of the top things on their minds. While this lesson should not be construed as either legal or tax advice, it does come from our experience advising and observing many lawyers go through this often times agonizing decision.
The first things that we should point out is that there are typically three main considerations when a new business selects which type of business entity to form as:
- The ease of corporate governance, including the admission of new members, investors, etc;
- The tax implications; and
- The liability implications.
In this lesson, we will concern ourselves only with numbers 2 and 3 above. This is because most lawyers that form new practices are either going solo or starting very small firms. There is rarely, if ever, a need to provide for outside investments.
In terms of tax implications, because most law firms are either solos or small partnerships with 10 or fewer lawyers, there is a lot of flexibility. The details of the tax implications are beyond the scope of this lesson. Suffice it to say that if you are starting a law practice, it is a good idea to have professional tax and accounting help right from the start. A competent CPA should be able to help you make the right call in this area with a minimum of time and effort. There is usually flexibility in changing the way the firm is taxed down the road as well.
In terms of liability, it is very important to make sure that each individual lawyer is covered by an adequate E & O policy. Regardless of the form of entity, professional liability is usually personal, so a lawyer will usually have difficulty hiding behind a corporate entity in the event of a grievance.
The most important things about choosing an entity to start your new law practice is to not get stuck choosing an entity. It’s very easy to get caught up in the minutia. Don’t give into that temptation, as you need to focus on more important things like how to attract and serve new clients.