Practice Management

My initial reaction to this question is usually -- NONE.

I get these questions from time to time, and usually more around the first of a year when lawyers are changing law firms and going out on their own.

Certainly there are times to partner up or incorporate out, but I much prefer the KISS principal -- KEEP IT SIMPLE STUPID.  Fancy legal structures often do not help you, serve any type of reasonable purpose, result in undue expense, and unduly complicate your life.  Instead of helping, they can be a ball and chair slowing you down.

Talk to lawyers and CPAs in the business and they will tell you it is a complex decision with a lot of pros and cons.  True legal structure needs to be tailored to each lawyers situation, but the advice is often just bunk.  I run into lawyers every day that are incorporated or have an LLC or some professional structure.  I ask them why, and most cannot answer you clearly on the subject.  Sometimes I think lawyers incorporate because they are lawyers and think legal structure is cool.  Wow, now I am Joe Blow, P.C..  How impressive is that?

And, it can cost you a lot if you are not careful.  In another life I had a law practice with my wife.  We had no formal partnership.  As the firm grew into multiple offices and other lawyers, my advisers convinced me that I should incorporate.  Looking back on it they could never really give me a great reason.  But, I did it.  We folded our operation into a brand spanking new professional corporation in Texas.  Then I proceeded, with advice from a lawyer and CPA, to transfer all my operations into the corporation.  With all of my operations folded into the corporation there was, of course, no income to pay for all of the loans, equipment leases, office leases, car loans, etc. we had.  Before we paid these out of our practice account.  Since they were now being used by the corporation, we allowed the corporation to pay these these expenses.  Since we were on a cash basis we turned over all of our receivables and future business to the corporation.  The mistake, according to the IRS years later, was that a corporation paid the personal debts (even if they were intended for business) of my wife and I.  Therefore, all of that money over a several year period spent on these necessary business expenses was taxable to us.  The back taxes, penalties and interest on that little mistake (missed by the professionals) was almost $65,000.00.  That became a very expensive professional corporation.  Oh, and the money spent by the corporation to maintain our law licenses?  That was income too.

My point in telling you this is that no matter how clever you think you are, or how many professionals you have advising you, these legal structures are very tricky.  They will sneak up and bite you later if you are not careful.  So be damn well certain that you need a formal legal structure for reasons other than prestige.  Because, I can tell you right now, your clients do not give a darn if you are incorporated or not.

Formal legal structures are driven by two things.  These are tax issues and liability issues.  All of the rest of it is folly.

Tax issues, as described above are tricky.  However, I can think of no structure that actually saves you in the way of tax dollars off the money you actually bring home other than a sole proprietorship.  All of the rest will at least cost you more in tax preparation.

Also, worrying about liability is most often futile.  First, a lawyer is personally responsible for any malpractice issue.  The firm is personally labile.  I see all of these LLC and limited liability instrumentalities flying up because lawyers are scared of what their partners might be doing.  Well good, but I can tell you that every lawyer that touches a file, regardless of an LLC, is likely personally and professionally liable for whatever happens.  A limited liability corporation and partnership is not going to protect you if you have touched that file in any way.

Now, there are probably those that disagree with me on this point, but I will ask you to think about all of the that it is going to cost you for this issue to be tested in the event a lawsuit is filed.  There is nothing like winning such an argument after you have had to spend many thousands of dollars to prove it.  That is what you and your advisers will be doing.

Further, most lawyers and small law firms do not have significant liability concerns starting off as a sole proprietor.  And, if you do not have employees driving around on the job, or undertaking inherently dangerous task, the liability issues for you personally are very small if you have no formal legal structure.

If you are concerned about liability I would suggest that you need to bulk up on malpractice and other liability insurances.  Just because you incorporate does not mean you do not need these insurance coverages.  So, they are an expense regardless of your formal legal structure.



So, be careful, be smart and be practical when deciding to undertake some formal legal structure.  Ask yourself what practical benefit is actually in it for you if you do decide to take on a formal structure?