Choosing the right business structure is a crucial decision for legal group practices in California. The choice of business entity determines how the legal group practice is taxed, the extent of personal liability protection and personal asset protection available to the attorney professionals, and the administrative requirements the attorneys will need to manage in operating the legal group practice.

A recent article titled “What are the Business Structure Options for Solo Attorneys in California?” discussed the business structure options available to solo attorneys starting a solo legal practice, however, for two or more attorneys starting a group legal practice together in California, there are different options available.

This article provides an overview of the various business structure options available to attorneys starting a group legal practice in California, helping attorneys to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Attorneys

Summary of Practicing Law as a General Partnership

The primary benefit of a California General Partnership for attorneys is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that attorney partners are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for attorney partners, meaning the debts, liabilities, and legal judgments for which attorney partners are liable are satisfied from the personal assets of those attorney partners.

Summary of Practicing Law with a California Limited Liability Partnership (LLP)

For attorneys, a California Limited Liability Partnership (LLP) is an option worth examining under certain circumstances. The complexities of California LLPs are equivalent to those of a California Professional Law Corporation, but the complexity of a California LLP may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. Like a California General Partnership, a California LLP is not a separate legal entity, so attorney partners of California Limited Liability Partnerships are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability). However, unlike California General Partnerships, attorney partners of a California LLP are not personally liable for the malpractice of other attorney partners.

Summary of Practicing with a California Professional Corporation

While slightly more complex than California General Partnerships and are equivalent in complexity to California LLPs, the complexity of a California Professional Law Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Law Corporations significantly reduce liability risks and are more tax efficient for most attorneys. For attorneys in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Law Corporations also means there is a distinction between personal and professional business assets for the attorney, meaning the debts, liabilities, and legal judgments against the legal practice are not generally satisfied from the personal assets of the attorney owners, and as with California LLPs owners are not personally liable for acts of malpractice by their co-owners, but they do remain personally liable for their own acts of malpractice.

Choosing Between a California General Partnership, a California LLP, and a California Professional Law Corporation

For most attorneys, the California Professional Law Corporation is the right choice because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing law as a California General Partnership or a California LLP.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Law Practice

Take the next step toward securing the ideal business structure for your law practice, whether that is a California Professional Law Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing Law as a California General Partnership

Practicing law as a California General Partnership is the simplest and most straightforward business structure for two or more attorneys practicing together in California. A California General Partnership requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the legal practice. However, along with these advantages come distinct disadvantages that attorneys must consider carefully before considering a California General Partnership as the business structure for their legal practice.

Administrative Requirements of Practicing Law as a California General Partnership

One of the primary benefits of a California General Partnership for practicing law is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.

California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Taxation of California General Partnerships for the Practice of Law

Tax considerations are a critical aspect to be examined when planning to practice law as a California General Partnership. California General Partnerships file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to legal practices is essential for attorneys when choosing a business structure in which to operate their legal practice.

Business Income Taxation When Practicing Law as a California General Partnership

California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Law as a California General Partnership

Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for attorney partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from their legal practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate at the time of this writing totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing Law as a California General Partnership

High earning attorney partners of California General Partnerships may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For attorney partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for attorney partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Partners of California General Partnerships must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning attorneys to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Attorney Partners of California General Partnerships

Understanding the tax implications of a California General Partnership is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Law as a California General Partnership

Practicing law as a California General Partnership also comes with challenges regarding personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the attorneys and the legal practice.

Personal Liability for Attorneys When Practicing Law as California General Partnerships

One of the primary risks faced by attorney partners of a California General Partnership is personal liability. The lack of distinction between the attorney partners and the legal California General Partnership professional practice means that each of the attorney partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the legal practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Attorneys When Practicing Law as California General Partnerships

The lack of distinction between the attorney and the legal practice that makes personal liability a primary risk to attorney partners of a California General Partnership also means that all assets of the attorney partners, be they strictly personal assets or assets used in the legal practice, are subject to claims by creditors and legal claimants against the personal assets of the attorneys (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Attorney Partners of California General Partnerships

The exposure to personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for attorneys choosing a business structure for their legal practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Law as a California General Partnership

When deciding whether to establish a group legal practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to attorney partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for practicing law.

Advantages of California General Partnerships for Attorneys

The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a group legal practice.

Disadvantages of California General Partnerships for Attorneys

While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most attorneys.

A California General Partnership is not a separate legal entity, which means that attorney partners are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For attorneys in high liability legal practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for attorney partners, meaning the debts, liabilities, and legal judgments for which an individual attorney partner of a California General Partnership is liable are satisfied from the personal assets of that attorney partner.

When is a California General Partnership the Right Business Structure for Practicing Law?

A California General Partnership can be an ideal option for two or more attorneys joining together to organize a small-scale legal practice with the expectation of low net profit and low liability risks. However, before choosing to practice law as a California General Partnership, it is essential for the attorney partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the legal practice. Attorney partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing law as a California General Partnership in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between California General Partnerships and California Professional Law Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Law Corporation” and “What are the Disadvantages of General Partnerships in California?” for more information.

Practicing Law as a California LLP

Like a California Professional Law Corporation, practicing law as a California LLP is a relatively complex business structure available to two or more attorneys practicing together in California. A California LLP offers flexibility in managing the legal practice and flexibility in distributing net profits to legal partners. In addition, attorney partners of a California LLP are not liable for acts of malpractice committed by other attorney partners, but the attorney partner remains liable for their own acts of malpractice. Along with these advantages come distinct disadvantages that attorneys must consider carefully before considering a California LLP as the business structure for their legal practice.

Administrative Requirements of Practicing Law as a California LLP

California LLPs are about equivalent to California Professional Law Corporation with respect to initial formation, however California LLPs are usually simpler to operate in subsequent years as compared to California Professional Law Corporation. Typically, the initial steps of setting up a California LLP include the mandatory filing a Certificate of Limited Liability Partnership with the California Secretary of State, entering into a Limited Liability Partnership Agreement between all attorney partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the legal practice will operate.

Taxation of California LLPs

Tax considerations are a critical aspect to be examined when planning to practice law as a California LLP. California LLPs file informational tax returns and attorney partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to legal practices is essential for attorneys when choosing a business structure in which to operate their legal practice.

Business Income Taxation When Practicing Law as a California LLP

California LLPs report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California LLP does not pay California or federal income tax on its own net profit. Instead, each attorney partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California LLP, and each attorney partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California LLP on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing Law as a California LLP

Taxation of the attorney partners of a California LLP is not tax efficient. One significant consideration for attorney partners of a California LLP is self-employment tax. Since attorney partners of a California LLP do not receive a salary from the legal practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California LLP can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing as a California LLP

High-earning partners of California LLPs may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For attorney partners of a California LLP filing as single, the threshold is $200,000, while it is $250,000 for attorney partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Attorney partners of California LLPs must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earning attorneys to account for this additional tax in their financial planning to avoid unexpected liabilities.

Annual Franchise Tax for California LLPs

California LLPs must pay an annual franchise tax of $800 per year.

Conclusions About Taxation of a California LLP

Understanding the tax implications of a California LLP is integral when deciding which of the available business entities will be the most tax efficient for a group legal practice, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing Law as a California LLP

Practicing law as a California LLP also comes with challenges regarding personal liability protection and asset protection for attorney partners because a California LLP is not a separate legal entity, and thus does not offer a legal distinction between the attorney partners and the legal practice.

Personal Liability for Attorneys When Practicing as a California LLP

One of the primary risks faced by attorney partners of a California LLP is personal liability. The lack of distinction between the attorney partners and the California General LLP legal practice means that each of the attorney partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the legal practice personally, including claims for professional negligence for their own actions or inactions, better known as malpractice, for errors and omissions. However, unlike a California General Partnership, attorney partners of a California LLP do not have liability for the malpractice of other attorney partners, just their own malpractice.

Personal Asset Protection for Attorneys When Practicing Law as a California LLP

The lack of distinction between the attorney partners and the legal practice that makes personal liability a primary risk to partners of a California LLP also means that all assets of the attorneys partners, be they strictly personal assets or assets used in the legal practice, are subject to claims by creditors and legal claimants against the personal assets of the attorneys partners (such as their homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Attorney Partners of a California LLP

While the exclusion of liability for the malpractice of other attorney partners of a California LLP is a step up in protection from a California General Partnership, the exposure to personal liability for debts, liabilities, obligations, and all other legal judgments coupled with the inability to separate personal assets from professional business assets underscores the importance for attorneys choosing a business structure for their legal practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing Law as a California LLP

When deciding whether to practice law as a California LLP, it is essential to weigh the benefits and drawbacks of this business structure. While California LLPs offer freedom from liability for the malpractice of other attorney partners, California LLPs still come with significant liability risks and limitations. The advantages and disadvantages of operating a California LLP are compared below together with a recommendation for when a California LLP is the best legal structure for practicing law.

Advantages of California LLP

The primary benefit of a California LLP over a California General Partnership is liability protection from malpractice claims alleged against other attorney partners. The primary benefit of a California LLP over a California Professional Corporation is flexibility of management and flexibility on how profits may be distributed to attorney partners of a California LLP.

Disadvantages of California LLP

California LLPs carry significant risks and are not tax efficient for most attorneys.

A California LLP is not a separate legal entity, which means that attorney partners are personally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability, but not liability for acts of malpractice by other attorney partners). For attorneys in high-liability practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for attorney partners, meaning the debts, liabilities, and legal judgments for which the attorney partners of a California LLP are liable are satisfied from the personal assets of the attorney partners.

When is a California LLP the Right Business Structure for Practicing Law in California?

A California LLP can be an ideal option for two or more attorneys joining together to organize a small-scale practice with the expectation of low net profit and low liability risks without liability for the malpractice of the other attorney partners. Before choosing to practice as a California LLP, it is essential for the professional partners to weigh the benefits of simplicity against the risks of personal liability and the future growth of the legal practice.

For attorneys in high-risk legal practice areas or those who anticipate rapid growth in their legal practice may want to avoid practicing law as a California LLP in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For attorneys who desire the flexibility a California LLP provides but are in high-risk practice areas and/or high net profit legal practices, each attorney partner may form their own California Professional Law Corporation and these California Professional Law Corporations may partner in a California LLP instead of the attorneys partnering individually. While this combination of a California LLP with California Professional Law Corporation partners is complex to establish and combines the administrative requirements of both the California LLP and the California Professional Law Corporations, this is the structure of choice for attorneys in group legal practices.

Practicing Law with a California Professional Law Corporation

Practicing law with a California Professional Law Corporation is not as simple or straightforward as practicing law as a California General Partnership, and is about equivalent in complexity to a California LLP, however, a California Professional Law Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the attorney from the professional business assets of the legal practice that California General Partnerships and California LLPs lack.

Administrative Requirements of Practicing Law with a California Professional Law Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Law Corporation provides, attorneys are faced with the complexity of establishing a California Professional Law Corporation. While this formation process is complex, attorneys may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Law Corporation, leaving attorneys with essentially the same tasks they would undertake to establish a California General Partnership or California LLP. It is also worth noting that legal fees and costs of forming a California Professional Law Corporation are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Law Corporation, and every year after the initial formation of a California Professional Law Corporation, a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Law Corporation, the experienced attorneys at San Diego Corporate Law can assist in the annual requirements of practicing law with a California Professional Law Corporation.

Despite the additional administrative requirements of practicing law with a California Professional Law Corporation compared to practicing law as a California General Partnership or California LLP, the right corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Law Corporation” for more information.

Taxation of California Professional Law Corporations

As with attorney California General Partnerships and California LLPs, tax considerations are a critical aspect to be examined when planning to practice law with a California Professional Law Corporation. While attorneys practicing law with a California Professional Law Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, attorneys practicing law with a California Professional Law Corporation are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to legal practices is essential for attorneys choosing a business structure in which to operate their legal practices.

Business Income Taxation When Practicing Law with a California Professional Law Corporation

A California Professional Law Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again at the shareholder level (referred to as “double taxation”). However, a California Professional Law Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed, so this article will focus on S Corporation taxation of California Professional Law Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Law Corporation after payment of a reasonable salary to the attorney are passed directly to the attorney shareholders who report those profits on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Law Corporation to pay personal income tax of the net profits of the legal practice.

For more information about the election of S Corporation status for a California Professional Law Corporation, see “Can a California Professional Law Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing Law with a California Professional Law Corporation

Unlike attorney California General Partnerships and California LLPs, which require the attorney partners to pay self-employment tax on their distributive share of the net profit of the professional practice, the attorney-shareholders of a California Professional Law Corporation are not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the legal practice, with a California Professional Law Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the attorneys. While the sum of the employee and employer contributions total 15.3% (the same percentage as self-employment tax), the calculation of the tax is based upon the reasonable salaries of the attorneys only and not the net profit of the California Professional Law Corporation, which may result in significant annual tax savings.

Additional Medicare Tax When Practicing Law with a California Professional Law Corporation

As discussed above for attorney California General Partnerships and California LLPs, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Law Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to attorneys practicing law with a California Professional Law Corporation if the reasonable salary of the attorneys exceed those thresholds, meaning for all intents and purposes, practicing law with a California Professional Law Corporation does not subject attorneys to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Law Corporations

California Professional Law Corporations must pay an annual franchise tax similar to that paid by a California LLP, but California General Partnerships do not pay an annual franchise tax. The franchise tax paid by a California Professional Law Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by attorney partners of a California General Partnership, a similar annual franchise tax is paid by California LLPs, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by attorney partners in California General Partnerships and California LLPs.

Conclusions About Taxation of California Professional Law Corporations

Understanding the tax benefits of a California Professional Law Corporation is integral when deciding which of the available business entities for two or more professional to practice together will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Law Corporations, see “What Tax Benefits Does a California Professional Law Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing Law with a California Professional Law Corporation

Practicing law with a California Professional Law Corporation, while more complex than practicing law as a California General Partnership, overcomes many of the personal liability protection and asset protection shortcomings of attorney California General Partnerships or California LLPs. A California Professional Law Corporation is a separate legal entity distinct from the attorneys, thus offering a legal distinction between the attorneys and the legal practice as well as personal and business assets of the attorneys.

Personal Liability Protection for Attorneys When Practicing Law with a California Professional Law Corporation

Practicing law with a California Professional Law Corporation resolves most of the risks faced by attorney partners of California General Partnerships and California LLPs for personal liability. California Professional Law Corporations provide a separate legal entity distinct from the attorney owners, meaning the attorneys are generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the legal practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of attorneys are personal to those attorneys committing acts of malpractice and liability is not shielded by the existence of the California Professional Law Corporation. Similar to California LLPs, California Professional Corporations do shield attorneys from the malpractice liabilities created by the other attorneys in their legal practice; attorneys are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the attorney from this risk of their own acts of malpractice.

Personal Asset Protection for Attorneys When Practicing Law with a California Professional Law Corporation

The separate legal entity and distinction between attorneys and the legal practice provided by a California Professional Law Corporation means that, unlike California General Partnerships and California LLPs, a California Professional Law Corporation separates the personal assets of the attorneys from professional business assets of the legal practice. Therefore, claims by creditors and legal claimants against the California Professional Law Corporation are generally limited to the professional business assets of the California Professional Law Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the attorneys.

Conclusions About Personal Liability and Asset Protection When Practicing Law with a California Professional Law Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against a California Professional Law Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Law Corporation the choice for attorneys who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their legal practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Law Corporations, see “What Liability Protection Does a California Professional Law Corporation Provide?” for more information.

Conclusions About Practicing Law with a California Professional Law Corporation

When deciding if practicing law as a California Professional Law Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Law Corporations are more complex, California Professional Law Corporations resolve many of the significant risks and limitations inherent to practicing law as a California General Partnership or California LLP. The advantages and disadvantages of operating with a California Professional Law Corporation are compared below together with a recommendation for when a California Professional Law Corporation is the best legal structure for practicing law in a group legal practice.

Advantages of California Professional Law Corporations

While practicing law as a California General Partnerships is simple to establish, doing so carries significant risks and is not tax efficient for most attorneys. California LLPs reduce liability for partners from the malpractice of other partners, they otherwise still carry significant risks and are not tax efficient for most professionals. California Professional Law Corporations significantly reduce liability risks and are more tax efficient for most attorneys.

A California Professional Law Corporation is a separate legal entity, which means the attorneys are generally shielded from personally liable for debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each of the attorneys for their own, individual acts of malpractice). For attorneys in high liability legal practices, this reduction in risk can be substantial.

The separate legal entity status also means there is a distinction between personal and professional business assets for attorneys, meaning the debts, liabilities, and legal judgments against their legal practice are not generally satisfied from the personal assets of the attorneys (other than for their own acts of malpractice).

Disadvantages of California Professional Law Corporations

The primary disadvantage of a California Professional Law Corporation is the relative complexity of formation and operation. However, attorneys may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Law Corporation, leaving these attorneys with essentially the same tasks they would undertake to establish and maintain a California General Partnership or California LLP.

When is a California Professional Law Corporation the Right Business Structure for Practicing Law?

A California Professional Law Corporation can be an ideal option for attorneys starting group legal practices based upon factors such as tax efficiency, limited liability protection, and separation of personal assets from professional business assets that California Professional Law Corporations provide. Small-scale legal practices with the expectation of revenue growth can benefit from starting as a California Professional Law Corporation to avoid the future need to reestablish the legal practice as revenue grows. Similarly, small-scale legal practices in high-risk practice areas may benefit from the limited liability protection, separation of personal assets from professional business assets of a California Professional Law Corporation, and for attorneys to avoid malpractice liability for the errors and omissions of the other attorneys in their group legal practice regardless of revenue or profitability.

For a more detailed understanding of the differences between attorney California General Partnerships and California LLPS and California Professional Law Corporations, and when a California Professional Law Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Law Corporation” for more information.

Attorneys in California May Not Practice Law as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this will be briefly discussed here.

California law explicitly prohibits attorneys from operating their law practice or providing legal services as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“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.”

This restriction applies to all licensed professionals for which a California Professional Corporation may be formed. Instead, California requires attorneys who wish to operate in corporate form to utilize other types of business entities, such as California Professional Law Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for legal practices in California, see “Can an Attorney Practice Law Using a California LLC?” and “Can I Use a PLLC to Practice Law in California?” and for more information.

If an LLC or PLLC is currently being used for a group legal practice in California, see “10 Steps to Convert LLC to Professional Law Corporation in California” and “Four Reasons Not to Convert LLC to Professional Law Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Law Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Law Corporation” for more information about bringing the professional practice into compliance with California law.