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Business Structures Available to Solo and Small Firm Practitioners

Solo practitioners and small firms have several business structures available to them.

Sole Proprietor

A solo practitioner can practice as a sole proprietor.  The sole proprietor form provides no liability protection: as a sole proprietor, you are personally responsible for claims arising from your business, and your personal assets are at risk.

Insurance is your best friend.  Make sure you have a good liability coverage for your premises to cover “slip and fall” claims and professional liability insurance for claims arising from your practice. Umbrella insurance is a good idea; it provides broad coverage for claims of personal liability. For income tax purposes, your income as a sole practitioner is reported on your individual income tax return. California does not impose a business or entity-level tax on the sole proprietor.

Limited Liability Company

The limited liability company is not available to lawyers. California Corporations Code section 17375 prohibits limited liability companies from rendering professional services, including legal services.

Limited Liability Partnership

The limited liability partnership is available to multiple-attorney practices. The limited liability partnership form allows partners to limit their vicarious liability for their partners’ and employees’ acts, provided that the LLP is registered and maintained in accordance with statutes and the State Bar’s Limited Liability Partnership Rules and Regulations. The LLP does not protect you (or your personal assets) from claims arising from your own actions or from errors or omissions in your own legal practice. Again, professional liability insurance provides protection in the event of a claim arising from your legal practice, and umbrella insurance provides protection for other claims of personal liability.

For tax purposes, there is no federal income tax at the entity level. LLPs are taxed as partnerships, which means business income flows through to the partners and is taxed on their personal income tax returns. California does impose an $800 annual tax on the LLP but not an entity-level income tax (www.ftb.ca.gov/businesses/bus_structures/LLpartner.shtml). In addition, the State Bar imposes fees and requirements on the LLP (www.calbar.ca.gov/Attorneys/MemberServices/LimitedLiabilityPartnership.aspx; rules.calbar.ca.gov/Rules/Title3ProgramsandServices.aspx).

Professional Corporation

The professional corporation form is available to solo and to multiple-attorney practices.  Like the LLP, this liability shield can serve to protect the personal assets of the practice owner from certain claims. The professional corporation does NOT provide a liability shield for malpractice or for actions that the individual attorney personally takes. For the solo practitioner who performs most tasks personally, the professional corporation provides precious little liability protection. It may protect against “slip and fall” claims, but not if you were responsible for the premises.

For tax purposes, the corporate form imposes an entity-level tax at the state and federal level, though the owners may elect to be taxed as an S-Corporation (www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporations). California imposes an $800 per year, minimum franchise tax and an entity-level tax on the net income of the corporation (www.ftb.ca.gov/businesses/bus_structures/cCorp.shtml). California also imposes a tax on the net income of S-Corporations (www.ftb.ca.gov/businesses/bus_structures/sCorp.shtml).  As with the LLP, the State Bar imposes fees and requirements on the professional corporation (www.calbar.ca.gov/Attorneys/MemberServices/LawCorporations.aspx;rules.calbar.ca.gov/Rules/Title3ProgramsandServices.aspx).