A common question the attorneys at San Diego Corporate Law are asked is whether or not an attorney may practice law as a California Limited Liability Company (LLC).

Whether you are an attorney, or someone advising legal professionals and other licensed professionals, you may have the same questions and concerns regarding the legality of using California LLCs for the practice of law, and hopefully, this writing will answer many of your questions about California LLCs with respect to legal professionals and other licensed professionals.

What California Laws Regulate the Entities an Attorney May Use for the Practice of Law in California?

The State Bar of California regulates and enforces the applicable laws to uphold the standards of law practice within the State of California. While many areas of California law touch the highly regulated practice of law, we need only review two such bodies of California law for this discussion.

California Business and Professions Code for Law Practices

The California Business and Professions Code primarily governs the practice of law in California. Specifically, California Business and Professions Code Sections 6000-6243 comprises the State Bar Act.

Within the State Bar Act, California Business and Professions Code Sections 6160-6172 address the entities in which duly licensed attorneys may practice law in California.

California Corporations Code for Law Practices

The California Corporations Code also governs the entities in which duly licensed attorneys may practice law in California. Specifically, California Corporations Code Sections 13400-13410 comprises the Moscone-Knox Professional Corporation Act.

The Moscone-Knox Professional Corporation Act provides guidance for professional corporations, but the rest of the California Corporations Code applies to professional corporations, including California Professional Law Corporations, when Sections 13400-13410 of the California Corporations Code is silent on a subject.

An Attorney MAY NOT Practice Law Using a California LLC

In reading the pertinent parts of both the California Business and Professions Code and the California Corporations Code, an attorney is prohibited from practicing law using a California LLC (or any other limited liability company, for that matter!).

The Moscone-Knox Professional Corporation Act on Practicing Law in a California LLC

The Moscone-Knox Professional Corporation Act itself does not explicitly state that an attorney cannot practice law using a California LLC. Instead, it outlines the structure and rules for professional corporations. The prohibition for practicing law in a California LLC comes from the State Bar Act, specifically California Business and Professions Code Section 6160-6172.

The State Bar Act on Practicing Law in a California LLC

The specific prohibition against practicing law in the State Bar Act as a California LLC is stated in the California Business and Professions Code Section 6160. This section explicitly prohibits attorneys from practicing law under any form of business organization that does not meet the requirements of the Moscone-Knox Professional Corporation Act.

Referring Back to the Moscone-Knox Professional Corporation Act on Practicing Law in a California LLC

Referring back to the Moscone-Knox Professional Corporation Act from the State Bar Act, California LLCs may not be used for law practice because California LLCs (or LLCs from any other state!) do not meet the specific requirements set forth within the Moscone-Knox Professional Corporation Act, thus they are prohibited from being used by attorneys to practice law.

What are the Possible Consequences of Practicing Law as a California LLC?

The potential legal ramifications for an attorney practicing law as a California LLC are severe and wide-ranging.

Disciplinary Action from the State Bar of California

An attorney could face disciplinary actions from the State Bar of California, including fines, license suspension, or even revocation of their law license.

Loss of Liability Protection and Malpractice Insurance Coverage

Operating as a California LLC could void the protection from personal liability that the LLC structure typically provides, making the attorney personally liable for debts and legal liabilities of the business. This can have considerable financial implications.

It is also a foreseeable possibility that a malpractice insurance carrier might refuse to pay a malpractice claim against an attorney, other legal professionals, or other licensed professionals employed by an attorney, if the legal entity used to practice law was illegal. The malpractice insurance carrier could claim that the attorney was operating outside the scope of the coverage, which could be considered a violation of the policy terms, leading to the denial of insurance claims.

Civil Liability and Tax Consequences

It is also possible that an attorney might face civil penalties, including lawsuits from clients, or potential tax consequences, as the IRS may not recognize the LLC for the practice of law, leading to potential fines and penalties.

What Are My Options If I Am Already Practicing Law as a California LLC?

If you are currently practicing law as a California LLC, you should address the situation immediately to avoid the significant legal consequences highlighted above. You have two primary options to remedy the situation.

Firstly, you can choose to dissolve the California LLC and simultaneously or subsequently form a new California Professional Law Corporation compliant with the Moscone-Knox Professional Corporation Act. This approach would involve complete dissolution of the existing California LLC and its operations, and the establishment of a new, legally compliant California Professional Law Corporation.

Secondly, you could opt to convert the existing California LLC into a California Professional Law Corporation. This process would involve a legal conversion process whereby the LLC would be transformed into a Professional Law Corporation under the Moscone-Knox Professional Corporation Act. This method might be more suitable for those seeking to maintain the continuity of their existing business operations during the transition.

Dissolving a California LLC and Forming a California Professional Law Corporation

The process of dissolving a California LLC and forming a California Professional Law Corporation is one of the viable solutions to rectify the situation of an incorrectly structured Law practice.

This process involves legally terminating the operations of the existing LLC and establishing a new entity that complies with the provisions of the Moscone-Knox Professional Corporation Act. This transition requires careful planning, proper execution, and might entail certain costs. The following sections will delve into the specifics of this process.

Dissolving a California LLC

Dissolving a California LLC is the formal process of closing the business entity. This entails fulfilling several legal requirements to ensure that the LLC is properly wound up. Key steps include settling any outstanding debts or liabilities, distributing remaining assets among members, filing a dissolution form with the California Secretary of State, and notifying relevant parties including creditors and the California Franchise Tax Board. It’s crucial to understand that this process is more than just ceasing operations—it requires several steps to legally and effectively dissolve the LLC and avoid potential legal and tax implications.

Forming a California Professional Law Corporation

A California Professional Law Corporation is a specific type of business structure designed for licensed attorneys to practice law in California and is a legal entity compliant with the Moscone-Knox Professional Corporation Act.

The process involves drafting Articles of Incorporation specifically drafted in compliance with the Moscone-Knox Professional Corporation Act and filing those compliant Articles of Incorporation with the California Secretary of State, drafting bylaws which include specific provisions required by the Moscone-Knox Professional Corporation Act, issuing shares, and obtaining an Employer Identification Number (EIN) from the IRS, among other steps.

This structure not only allows attorneys to practice law in California legally, but also provides benefits such as limited liability protection, potential tax advantages, and more.

Converting a California LLC into a California Professional Law Corporation

The conversion of a California LLC into a California Professional Law Corporation is an alternative route for attorneys seeking to rectify an incorrectly structured law practice without completely dissolving their existing business.

This process involves a legal transformation of the LLC into a professional corporation compliant with the Moscone-Knox Professional Corporation Act. It allows attorneys to continue their practice within the same business structure, albeit now legally recognized and offering suitable liability protection. This method is beneficial for those aiming to maintain operational continuity during the transition. The following sections will provide detailed insight into this process.

The conversion of a California LLC into a California Professional Law Corporation involves a series of steps, which are designed to ensure legal compliance and continuity of the business structure.

Draft and Adopt a Plan of Conversion for Converting a California LLC into a California Professional Law Corporation

The first step in the process of converting a California LLC into a California Professional Law Corporation is to adopt a plan of conversion.

A Plan of Conversion is a comprehensive document that details the procedural roadmap for transitioning a California LLC into a California Professional Law Corporation. It highlights the terms and conditions of the conversion, including the legal name changes, the transformation of membership interests into shares, the proposed operational structure post-conversion, and the required filings with the California Secretary of State and other relevant entities.

Draft and File Articles of Incorporation Conversion for Converting a California LLC into a California Professional Law Corporation

After drafting the Plan of Conversion, the next step is to draft and file the Articles of Incorporation Conversion. This document marks the legal transition of the LLC into a California Professional Law Corporation. It must be drafted in accordance with the provisions of the Moscone-Knox Professional Corporation Act, and include details about the converted business entity, such as the new name, the number of shares being authorized, and a statement that the entity is a professional corporation for the practice of law.

Draft Moscone-Knox Professional Corporation Act Compliant Bylaws for Converting a California LLC into a California Professional Law Corporation

Bylaws are a crucial legal document that outlines the operational rules and procedures of the corporation. Not only do they provide guidance on how the business entity is to be managed and governed, but they also lay the foundation for dispute resolution and decision-making processes.

It is a legal requirement for every California Professional Law Corporation to adopt bylaws compliant with both the California Corporations Code (especially the Moscone-Knox Professional Corporation Act!), the California Business and Professions Code, and the State Bar Act, respectively.

Completing All Other Requirements for the Formation of a California Professional Law Corporation

After the compliant Articles of Incorporation Conversion have been drafted and filed and Bylaws have been drafted and adopted by the newly converted California Professional Law Corporation, there are additional steps to be taken to fully establish a California Law Corporation.

The California Law Corporation must hold an initial meeting of its board of directors, must issue shares to its shareholder(s), and must file a Statement of Information with the Secretary of State within 90 days of filing the Articles of Incorporation Conversion.

Additionally, following the conversion of a California LLC into a California Law Corporation, the new California Law Corporation is required to file a notice in accordance with the California Corporations Code Section 25103(h) with the California Department of Financial Protection & Innovation to maintain compliance with California securities laws.

All California Professional Law Corporations must register with the State Bar of California prior to commencing operations, and annually thereafter, providing details of all attorneys licensed in California who are shareholders of those California Professional Law Corporations. This step ensures that the State Bar of California is aware of the practicing attorneys associated with the corporation.

There are other steps not mentioned here that are applicable to all California Law Corporations, but these are too numerous to mention here.

Let San Diego Corporate Law Get Your California Professional Law Corporation Done for You

Regardless of the path chosen, it is highly advisable to seek the advice and counsel of a corporate attorney experienced with converting a California LLC into a Law Corporation in California to professionally navigate the process and ensure compliance with all California laws and regulations pertaining to the practice of law and the formation of a California Professional Law Corporation.

At San Diego Corporate Law, our team of experienced attorneys is well-versed in navigating the complexities of both dissolving a California LLC and forming a California Professional Law Corporation. Given the significant legal implications involved, it is crucial to have expert legal guidance.

We urge you to get in touch with us right away to schedule a consultation with our corporate attorneys if you are currently practicing law as a California LLC or otherwise need assistance with the formation of a California Professional Law Corporation. We will ensure your transition to a compliant business structure is handled meticulously, safeguarding your rights and interests. Don’t delay—contact us now to schedule a consultation and start the process of securing the future of your law practice and protecting your law license today.