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Anybody that has read this blog for any length of time knows how I feel about solo attorneys, or attorneys that can nonetheless operate as solos in a group environment, forming and operating as corporate-like entities.  I think it generally represents silliness that is more costly than it is good.  Yet, almost every day I get emails from, especially newly minted, attorneys showing off there brand spanking new partnership designations, Incs, LLCs, PLLC, PA, PC, and other fancy designations.  And, for what good reason?  It does not impress me.  It probably does not impress their clients, when and if they get clients, and it certainly does not impress their bankers or malpractice carriers.

I know, every time I write about this I get a degree of hate email especially from attorneys who specialize in business entities or recent law grads that took a liking to the subject in law school.  On an academic or practice level entity selection and creation is its own form of fun.  I read every word written to me in this regard and, admittedly, in rare circumstances there is a need for separate legal entities for solos other than a sole proprietorship in which you operate under your own name.  I have seen some solos start title agencies, for example, in which they need to be separate from their law firm, but mainly these entities are not needed.

I tend to think the entity infatuation is more of an ego trip, or a feeling or wanting to feel important and established, than anything else.  But, the truth of the matter is that nobody much cares except the attorney touting the entity.  For me, if you want to feel cool take the revenues you would otherwise lose and go buy a Porsche or something - on credit.  It has about the same feel and represent the same risk in my thinking, and at least you will have something others might actually swoon over and is fun to ride -- at least or until it is repossessed for non-payment.

David C. Winton on his blog Bay Area Real Estate recently wrote about this phenomena in a different context, but I think it applies here as well.  He writes:

"Why, if the proprietor has gone through the expense and trouble to create a corporation or a limited liability company ("LLC") do these things wind up being just so much superfluous window dressing right at the moment when you really need them to step up and do their job?  (Their job being to protect your assets when things go sour.)  Because the corporation or limited liability company formed for the needs of the of the small business owner usually doesn't have adequate assets or resources to give any comfort to creditors--bank lenders most commonly--and so the lender wants as much security for the loans as possible. Enter the concept of the personal guaranty.

"If ABC Corp. wants to borrow $1 million for an operating loan but only has assets of $50k of office furniture, computers, fixtures, etc., bank is going to want some other security. And if ABC Corp's sole shareholder has a few hundred thousand dollars in equity in his home, then lender is going to want a security interest in that. Plus whatever else the owner may own. So lender demands a personal guaranty from owner, and such guaranties are usually so broad in what they cover that it renders the entire concept of the LLC or the corporation almost completely useless. And it happens with such efficient thoroughness and with such frequency, that it's probably safe to say that if a personal guaranty is involved, then don't even bother with the corporation or LLC. (Except maybe for tax or accounting purposes but we won't go into that here.)"

In the context in which Mr. Winton writes, LLC and corporate-like structures or entities are (1) completely irrelevant, and (2) offer no protection at all to the owner.

Beyond Mr. Winton's context I have heard time and time again that the LLC or corporate entity can offer protection against malpractice.

Wrong.

Most malpractice lawsuits are against the attorney.  The corporate entity is usually thrown in to the suit for shits and giggles.  Whether there is one attorney or more in one of these entities, the malpractice suit is going to be filed against every lawyer that touched or glanced at that file.  If you were referred a case or you referred a case to someone else, you as the attorney will be brought into the mix - personally.  In short, the dollars might be better spent on malpractice coverage if what you are doing is legal work risky enought to warrant some kind of LLC or corporation.

I hear all of the time of tax protection.  There might be a little, but do not pay your company's 940 and 941 taxes and there will be a 100% penalty assessed against the attorney owner of the entity - personally.

There use to be a time back in the day when a corporate structure might have some benefits in the way of retirement plans and health insurance tax breaks, but this is not much true any longer.

Mr. Winton speaks to some extent about filing bankruptcy.  Here there is no protection for the reasons stated by him.  However, the detriment is probably greater than stated in a bankruptcy context by him.  Given the state of financial arrangements, if you were to put a LLC or corporation of this type in bankruptcy, you as the owner would also likely face various kinds of fraudulent conveyance and preference claims from the trustee and the bankruptcy estate.  These can arise for a lot of different reasons such as compensation issues at the point of insolvency, and the payment of loans by the LLC or corporation that were actually issued first or primarily in the attorneys' name.

Then, there is the little things that have always chapped me about holding yourself out overtly as a business, as apposed to John or Jill Smith, Lawyer.  LLCs and corporate-like structures just make any attorney at target for higher bank fees, telephone fees, insurance fees and the like than what you would have to pay as a consumer who is also happens to be a lawyer.

Given this, I have always felt that it is better as an attorney not to hold yourself out as something you are not.  And, is that not what the real purpose of an LLC or corporate-like entity is all about?  To make you or your firm look bigger, better and more established than you really are?

Sure, you might have plans in the distant future where something more complex might be needed.  But, that is in the distant future.  That is empire building in your mind.  By and large that is the myth of new lawyers and new law firms.  The problem with predictions is that they will likely not come to pass in the way imagined up front.  And, if they do, you can always change your business structure when and if that day ever comes.

As a solo just say no to LLCs and corporate-like structures.  They are a fiction for a reason.  The supposed benefits they offer to solos, and even people that might be loosely associated with other lawyers but can still operate as solos, represent fiction.  Be yourself and save the time and expense involved.

(The Wizard of Oz Pictured Above)

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