In the world of business formation, the term Law PLLC, or Law Professional Limited Liability Company, refers to a special legal business entity that is designed for licensed attorneys for rendering professional services. However, navigating the specifics of using a Law PLLC can be a challenge, particularly as business structure regulations vary from state to state. This article discusses the permissibility of utilizing Law PLLCs in California, and the alternatives for law practice owners.

Spoiler Alert: Law Cannot Be Practiced Using Any LLC in California

If you are already practicing law in California as a California LLC or an LLC or PLLC from a state other than California, you should also read this article which includes information about how to get into compliance with California law for your legal practice.

The California Revised Uniform Limited Liability Company Act of the California Corporations Code Prohibits the Use of LLCs for the Provision of Professional Legal Services by Licensed Attorneys in California

Use of a California LLC to Render Professional Legal Services in California

Neither a foreign nor a California limited liability company (LLC) may be used to render professional legal services in California. This comes as a surprise to many licensed attorneys, as Law Professional Limited Liability Companies are commonly used to render professional legal services in other states. However, California Corporations Code Section 17701.04(e) answers the question clearly regarding the use of a foreign or California LLC as a business entity for licensed attorneys in California:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

Thus, licensed attorneys may not use or form limited liability companies for the provision of professional legal services in California.

Use of a California PLLC to Render Professional Legal Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC to render professional legal services, because nothing in the California Corporations Code differentiates the idea of a California Law PLLC from the California LLC, there is nothing in California law regarding LLC formation for the provision of professional legal services, and nothing establishes a California Law PLLC as a business entity that may be formed under California law.

In short, there is no California Law PLLC as the law currently stands at the time of this writing in 2024, and thus licensed attorneys are unable to form a California Law PLLC for their professional legal services. This is a significant departure from the norm in many other states, where Law PLLCs are a commonly used business entities for licensed attorneys.

Use of a Foreign Law PLLC to Render Professional Legal Services in California

Based upon California Corporations Code Section 17701.04(e), which prohibits the use of a foreign or California LLC by licensed attorneys to render professional legal services, and because the California Corporations Code does not differentiate between a between a foreign LLC or foreign PLLC for purposes of California Corporations Code Section 17701.04(e), neither a foreign LLC nor a foreign PLLC may be used by licensed attorneys to render professional legal services in California.

Professional practices that are structured as Law PLLCs in other states need to exercise extreme caution when offering professional legal services in California. The prohibition set forth in California Corporations Code Section 17701.04(e) means that out-of-state legal practices operating as Law PLLCs in their home state may encounter legal restrictions if they wish to offer their professional legal services in California. Therefore, the licensed attorneys practicing under these Law PLLCs in their home states must not use their Law PLLCs when rendering professional legal services in California and must do so either as a California Sole Proprietorship or California General Partnership by default, or by establishing a California Professional Law Corporation or a California LLP, as will be discussed below.

What Business Structure Options Do Attorneys Have in California?

As California does not allow the use of California LLCs, foreign LLCs, or foreign Law PLLCs (and there is no such thing as a California PLLC!) for the provision of professional legal services in the State of California, California licensed attorneys seeking to practice law in California must explore choose one of the permissible business structures, as discussed below.

Selecting the best permissible business structure option will depend on the specific professional legal services to be offered and the regulations governing those legal services. In the following subsections, we will introduce the various business entities that are permitted to render professional legal services in California, including Limited Liability Partnerships, Sole Proprietorships, General Partnerships, and Professional Law Corporations, each of which comes with its own set of advantages and limitations.

Two or More California Licensed Attorneys May Practice Law as a California LLP

For attorneys who are seeking to practice together in California, a California Limited Liability Partnership (California LLP) can be an attractive business structure. A California LLP allows two or more licensed attorneys to join together in a partnership while also providing each partner with some forms of liability protection similar to that of a California Professional Law Corporation.

Liability Protection from a Limited Liability Partnership in California

In a California LLP, all attorney partners enjoy a level of liability protection. This means that each attorney partner is not personally responsible for the debts, obligations, or liabilities of the California LLP arising from errors, omissions, incompetence, or malfeasance committed by another attorney partner or an employee not under their direct control. Thus, the personal assets of an attorney partner, such as their home, personal savings, and vehicles, are safeguarded from the creditors of the California LLP. Unlike California General Partnerships, where each partner can be held liable for the actions of another attorney partner, a California LLP prevents such vicarious liability like a California Professional Law Corporation.

However, and as with a California Professional Law Corporation, it should be noted that this protection does not absolve individual attorney partners from the consequences of their own professional misconduct. Therefore, it is crucial for attorney partners in a California LLP to have adequate malpractice insurance coverage.

Taxation of Limited Liability Partnerships in California

California LLPs are taxed under the pass-through taxation system. This means the California LLP itself does not pay income taxes. Instead, the share of the profits or losses of the California LLP allocated to each attorney partner passes through to their personal income tax return. The individual attorney partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California LLP at their individual income tax rates.

Each attorney partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California LLP earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California LLP income allocated to each attorney partner and passed through to their personal tax returns.

A California LLP is also subject to an annual franchise tax of $800 payable to the California Franchise Tax Board.

When Should California Licensed Attorneys Practice Using a Limited Liability Partnership in California?

California licensed attorneys should consider practicing under a California LLP if there is a compelling reason to not choose a California Professional Law Corporation. For example, if attorneys wish to separate equity ownership from allocation of profits, a California LLP would allow this whereas allocations of profits from a California Professional Law Corporation must be done on a pro rata basis based on share ownership. Another example would be where attorneys want to limit their liability but do not qualify for S Corporation status and the partnership taxation of a California LLP would be more tax efficient than taxation of a California Professional Law Corporation taxed as a personal services corporation subject to double taxation. Otherwise, a California Professional Law Corporation is likely to be a better business structure than a California LLP for most California licensed attorneys.

A California Licensed Attorney May Practice as a Sole Proprietorship in California

A Sole Proprietorship is a straightforward and uncomplicated business structure that may be utilized by licensed attorneys in California. In a Sole Proprietorship, the individual attorney is the sole owner and operator of the legal practice.

Liability Protection for Licensed Attorney Sole Proprietors in California

Sole Proprietorships do not provide their owners with liability protection in California. In this type of business structure, the licensed attorney is personally responsible for all business debts, liabilities, obligations, and all legal judgments against the legal practice. This means that if the legal practice incurs a debt or is sued, the personal assets of the licensed attorney, such as their home, car, and personal bank accounts, can be used to settle these obligations.

The lack of liability protection is a significant disadvantage of operating a legal practice as a Sole Proprietorship and is a critical factor that a licensed attorney should consider when deciding on the most appropriate business structure for their legal practice in California.

Taxation of Licensed Attorney Sole Proprietors in California

In California, Attorney Sole Proprietorships are subject to pass-through taxation, meaning the business itself is not separately taxed. Instead, the income or loss of the business is passed through to the licensed attorney. The licensed attorney reports business income and expenses on Schedule C of their personal federal income tax return (Form 1040). The net profit or loss is then reported on the personal tax return of the licensed attorney and taxed at individual income tax rates.

In addition to income taxes, a licensed attorney practicing as a Sole Proprietorship in California is also subject to self-employment taxes, which cover Social Security and Medicare taxes. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

At the state level, California has one of the highest state income tax rates in the country, and these rates apply to business income that passes through to the personal tax returns of the licensed attorney practicing as a Sole Proprietorship.

When Should a California Licensed Attorney Practice as a Sole Proprietorship in California?

A California licensed attorney should only consider practicing as a Sole Proprietorship in California when they are starting their legal practice and have limited financial resources, will not have employees, do not expect to grow their practice beyond just a few clients, and have substantial insurance coverage for the liabilities and risks associated with their legal practice.

However, as the legal practice grows, the licensed attorney should reconsider the use of a Sole Proprietorship for their legal practice as revenue increases, before hiring employees, or as professional liabilities increase. Upon the first to occur of increasing revenue, hiring employees, or increases in professional liability, it will be advantageous for the licensed attorney to explore other business structures that offer tax benefits and liability protection.

Two or More California Licensed Attorneys May Practice as a General Partnership in California

A California General Partnership used for a legal practice is a business entity in which two or more licensed attorneys join together to provide professional legal services in California. In such a setup, all attorney partners share equal rights and responsibilities in managing the business of the legal practice.

Liability Protection for Attorney General Partners in a California General Partnership

General Partnerships in California do not provide attorney partners with liability protection. This means each attorney partner has joint and several personal liability for all business debts, liabilities, obligations, and all legal judgments against the legal practice, including those incurred by other attorney partners which includes acts of malpractice by the other attorney partners. If the California General Partnership providing professional legal services is sued or incurs debt, the personal assets of each attorney partner, such as their home, vehicles, and personal savings, could be at risk, even if they are not found personally at fault for incurring the debt or committing the act of malpractice.

This lack of liability protection is a considerable drawback for California General Partnerships rendering professional legal services and something California licensed attorneys should seriously factor into their decision when considering a California General Partnership for their legal practice in California.

Taxation of General Partnership Law Practices in California

In California, legal practices structured as General Partnerships are taxed under the pass-through taxation system. This means the California General Partnership itself does not pay income taxes. Instead, the share of the profits or losses of the California General Partnership allocated to each attorney partner passes through to their personal income tax return. The individual attorney partners are responsible for paying federal and state income taxes on their allocated share of the profits of the California General Partnership at their individual income tax rates.

Each attorney partner is also required to pay self-employment taxes, which are Social Security and Medicare taxes for self-employed individuals. At the time of this writing in 2024, this is calculated on Schedule SE of the federal tax return at a rate of 15.3% on the first $168,600 of net income and 2.9% on all net profit in excess of the first $168,600.

California General Partnership earnings are also subject to the California state income tax. The state has a progressive income tax system with rates ranging from 1% to 13.3%, depending on the income of the taxpayer. These rates apply to the allocated share of the California General Partnership income allocated to each attorney partner and passed through to their personal tax returns.

When Should California Licensed Attorneys Practice as a General Partnership in California?

Based upon the unlimited liability and tax structure of a California General Partnership, a California General Partnership should probably not be considered by licensed attorneys practicing legal in California, as there are superior options for a professional practice in California that provide more personal liability protection than a California General Partnership for legal practices.

One or More California Licensed Attorneys May Practice Law as a California Professional Law Corporation in California

California Professional Law Corporations are a California professional corporation designed specifically for licensed attorneys who seek personal liability protection and tax benefits for their legal practice. A California Professional Law Corporation is a separate legal entity distinct from its licensed attorneys who are the licensed professionals permitted to be shareholders, referred to as licensed shareholders, which distinguishes it from a California Sole Proprietorship (which is an individual licensed attorney personally practicing law) or a California General Partnership or California LLP (which is a group of licensed attorneys practicing law together).

Liability Protection from a Professional Law Corporation in California

In a California Professional Law Corporation, the personal assets of the licensed shareholders are generally protected from business debts, liabilities, obligations, and legal judgments against the California Professional Law Corporation. This means that in most instances, if the California Professional Law Corporation is sued or incurs debt, the personal assets of the licensed attorney owner(s) (such as their home, vehicles, and personal savings) are shielded from creditors.

It is essential to note that this liability protection does not extend to professional malpractice claims against a licensed attorney. The personal asset protection applies only to debts and obligations incurred by the California Professional Law Corporation, not to the individual actions of a licensed attorney. However, when two or more licensed attorneys are practicing law in a California Professional Law Corporation, a malpractice claim against one licensed attorney is not a malpractice claim against all the other licensed attorneys, which is a significant increase in personal liability protection for professional malpractice compared to a California General Partnership.

While the use of a California Professional Law Corporation provides liability protection, it does not eliminate the requirement for individual professionals to maintain adequate malpractice insurance coverage or for the California Professional Law Corporation to otherwise secure liability insurance for indemnification of its liabilities.

Taxation of Professional Law Corporations in California

Professional Law Corporations in California can opt to be taxed as personal service corporations subject to double taxation or S Corporations, which alters the tax landscape for these entities. As the vast majority of California Professional Law Corporations elect S Corporation taxation, this article will focus on S Corporation taxation of California Professional Law Corporations.

With S Corporation status, the California Professional Law Corporation itself does not pay income tax. Instead, the income and losses of the California Professional Law Corporation pass through to the personal income tax returns of the licensed shareholders.

To qualify for S Corporation status, the California Professional Law Corporation must meet certain requirements including having no more than 100 shareholders, all of whom must be U.S. citizens or residents, and having only one class of stock.

One of the key advantages of S Corporation status for a California Professional Law Corporation lies in the area of self-employment taxes. Salaries and wages paid to licensed shareholder-employees are subject to payroll taxes (Social Security and Medicare). However, any additional profits distributed to licensed shareholders are not subject to either payroll taxes or self-employment taxes. This can result in significant tax savings.

In terms of state taxes, California taxes S Corporations at a rate of 1.5% of their net income, with a minimum tax of $800 paid annually to the California Franchise Tax Board. Licensed shareholders in a California Professional Law Corporation taxed as an S Corporation are also required to pay state income tax on their allocated share of the income of the California Professional Law Corporation.

When Should California Licensed Attorneys Practice Using a Professional Law Corporation in California?

A California licensed attorney should consider practicing as a Professional Law Corporation in California when seeking personal liability protection and tax benefits for their legal practice. This structure is particularly advantageous if the attorney wishes to shield their personal assets from business debts, liabilities, and obligations while also shielding themselves from legal judgments against the California Professional Law Corporation, with the exception of individual professional malpractice claims against the licensed attorney personally.

If the licensed attorney can meet the requirements necessary to qualify for S Corporation status, they can enjoy significant tax advantages. This includes the potential for tax savings through the having no self-employment tax liability on profits distributed to licensed shareholders, and only payroll tax liabilities on a reasonable salary paid to them as an employee of the California Professional Law Corporation.

Based upon the availability of both limited liability and tax benefits for the licensed attorney, the California Professional Law Corporation should be the go-to business entity for California licensed attorneys.

Secure Your Future with Legal Services from Experts in California Professional Business Structures: Let San Diego Corporate Law Guide Your Business Structure Selection

Choosing the right business structure for your legal practice in California is a critical step for every California licensed attorney. It can significantly influence your tax obligations, personal liability, and the overall success of your legal practice. At San Diego Corporate Law, our experienced legal team is well-versed in California business laws and can help you navigate the complexities of the California Corporations Code, California Business and Professions Code, California Secretary of State filings, and documents for professional corporations and other business entities. Whether you are considering a California Professional Law Corporation or other structure for your legal practice, we can provide the guidance necessary to make an informed decision. Contact us today to schedule a consultation and ensure your legal practice starts in California on solid legal footing.