Entity selection is one of your first, foundational decisions as a law practice startup, and you want to get it right.
Entity selection is always one of the first considerations in starting a law practice, and it’s worth your time to think it through. There are a number of considerations to weigh when determining whether and what legal entity to form. Sole proprietorship is the most common and easiest form of ownership structure for solo practitioners. You do not need to register with the state or file any special papers to set up a sole proprietorship with one exception. If you do business under a name other than your own name, you must file a doing business as “d/b/a” certificate with your town for a nominal fee.
Other forms include general partnership, limited liability partnership, limited liability corporation, or professional corporation. Establishing a legal entity may require certain formalities, such as annual reporting and payment of fees to the state. Further, certain forms such as the LLP and LLC are subject to the Supreme Judicial Court’s Rule 3:06, which sets limits on the extent to which lawyers can reduce their malpractice liability through a legal entity.
Before selecting a form, you should review the entity requirements, consider liability limitations, and obtain advice from a tax professional. Entity selection will depend upon your unique circumstances.
How are you going to practice? As a solo, in an association of attorneys, as a professional corporation, or as a professional limited liability partnership? A number of issues impact this question, but enter into a professional relationship with the same care as if you were entering into a long-term romantic relationship. Such relationships are easy to start, but often difficult to end. To make this decision you must consider the following points.
- Trustworthy partner(s)
- Tax consequences
- Liability issues
- Transferability of interest
- Limitations imposed by statute
Below is a listing of different legal entities and respective advantages/disadvantages for your practice. It is always wise to seek counsel from an accountant to determine individual tax consequences.
A sole proprietorship has no separate existence from its Individual owner. Hence, the limitations of liability enjoyed by limited liability entities do not apply to sole proprietors. The debts of the entity are the debts of the individual. A sole proprietorship’s income is taxed as the personal income taxes of the individual and the income is taxed on the profits made, making accounting much simpler. A sole proprietorship need not worry about double taxation like a corporate entity. You may also use a trade name or “Doing Business As”. See Mass. R. Prof. Conduct 7.5. This allows the proprietor to do business with a name other than his or her legal name and also allows the proprietor to open a business account with banking institutions. However, under G.L. c. 110, §5, any person doing business under a name other than his own must file a business certificate with the town or city hall where he maintains an office.
This is a business entity in which partners share with each other the profits or losses of the business undertaking in which all have invested. See G.L. c. 108A. A partnership agreement should be used to define critical issues about how profits and losses will be divided, firm management undertaken, and how the partnership will be dissolved. Partners are jointly and severally liable.
A professional corporation is comprised on “[o]ne or more individuals, each of whom is licensed to perform a professional service. . . .” G.L. c. 156A, §7. Corporation formation is governed by G.L. c. 156A. The shareholder’s individual liability is limited as set forth in G.L. c. 156A, §6(a) and SJC Rule 3:06: Use of Limited Liability Entities. Again, a shareholder agreement shall be used to define the shareholders’ investment, duties, obligations, means of departure, and how capital investment and division of corporate assets will be handled.
THE LIMITED LIABILITY COMPANY (LLC)
The formation of this legal entity is governed by G.L. c. 156C and provides certain advantages of limited liability and flow through taxation. But, liability is again also governed by SJC Rule 3:06. The governance, investment, duties, obligations, shareholder rights upon exit are all governed by the shareholder agreement. Formation of this entity requires annual filings and payment of a fee to the Secretary of the Commonwealth of Massachusetts.
THE LIMITED LIABILITY PARTNERSHIP (LLP)
The formation of an LLP is governed by G.L. c. 108A. All partners are jointly liable for debts and obligations of the partnership, subject to certain limitations under G.L. c. 108A, § 15. See also SJC Rule 3:06. Best practices suggest a comprehensive partnership agreement to govern essential issues of the partnership. Formation of this entity requires annual filings and payment of a fee to the Secretary of the Commonwealth of Massachusetts.
FURTHER READING FROM OUR LENDING LIBRARY
The Essential Formbook (Anthony Davis, American Bar Association)
How to Start & Build a Law Practice (Jay Foonberg, American Bar Association)
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