Can Lawyers Form an LLC in California?
As the owner of Holt Law, I often field questions from fellow attorneys about the legal structure options available to them when starting their own practice. One of the most common questions I receive is whether lawyers can form a limited liability company (LLC) in the state of California. The short answer is no – California prohibits lawyers, along with various other licensed professionals, from forming a standard California LLC.
However, that doesn’t mean lawyers in the Golden State are completely without options. As an attorney myself, I understand the desire to operate under a legal entity that provides liability protection, flexible management structures, and tax advantages. Fortunately, California does offer two viable alternatives for lawyers looking to establish their own practice: the Professional Corporation (PC) and the Registered Limited Liability Partnership (RLLP).
In this comprehensive guide, I’ll walk you through the process of forming a PC and RLLP in California, highlight the key differences between the two, and help you determine which structure may be the better fit for your new law firm.
Forming a California PC
When it comes to starting a professional corporation in California, the process is similar in many ways to forming a standard corporation. However, there are some distinct requirements and regulations that make the PC structure unique.
The first step is choosing an available business name. California is home to a vast number of lawyers, so be sure to conduct a thorough name search on the Secretary of State website to ensure your desired name is not already in use. You’ll need to include a designation of corporate existence, such as “Professional Corporation” or “Inc.,” in your name. If the name is available, you can reserve it for 60 days by filing a Name Reservation Request Form.
Next, you’ll need to select a registered agent. In California, the registered agent cannot be the corporation itself, but rather an individual associated with the company who will serve as the point of contact for legal matters.
With those preliminaries out of the way, you can proceed to file the Articles of Incorporation with the state. The Articles must include key details like the corporation’s name, purpose, number of authorized shares, and the registered agent’s information.
Within 90 days of filing the Articles, you’ll also need to submit the Statement of Information, which provides the state with up-to-date contact details for your law corporation.
One of the most unique aspects of a California law PC is the requirement that all shareholders be licensed to practice law. If a shareholder becomes ineligible to practice for any reason, their shares must be sold or transferred to another shareholder within 90 days. Similarly, upon the death of a shareholder, their shares must be sold back to the corporation or another shareholder within six months.
Lastly, you’ll need to register your new PC with the California State Bar and obtain a valid Certificate of Registration before you can begin operations. This certificate can be rescinded if your practice is found in violation of the state’s regulations.
Founding a California RLLP
The process of establishing a Registered Limited Liability Partnership (RLLP) in California shares many similarities with the PC formation process, but with some key distinctions.
As with the PC, you’ll need to choose a unique business name that includes the designation “Registered Limited Liability Partnership,” “RLLP,” or “LLP” at the end. You can check name availability on the Secretary of State website.
The registration paperwork is simpler than the Articles of Incorporation required for a PC. You’ll file the LLP-1 form, which gathers basic business information like your name, address, agent, and statement of purpose.
While not required by California law, it’s highly advisable to draft a comprehensive Partnership Agreement. This document will help minimize the risk of future disputes and establish the operational rules for your law firm.
Other crucial steps include obtaining a federal Employer Identification Number (EIN), registering for applicable state and local tax purposes, and securing any necessary business licenses.
One notable advantage of the RLLP structure is the simplified management and decision-making process compared to the more formal corporate requirements of a PC. Partners enjoy greater independence in the day-to-day operations of the firm.
PC or RLLP – Which is Better for Lawyers?
When weighing the PC and RLLP options, a few key differences are worth considering:
- Taxation: PCs are taxed as corporations, potentially leading to the burden of double taxation. RLLPs, on the other hand, are taxed as pass-through entities, with profits and losses passing through to the individual partners.
- Management Flexibility: RLLPs generally offer partners more autonomy in the firm’s operations, depending on the terms outlined in the Partnership Agreement. PCs have more formal corporate governance requirements.
- Simplicity: The RLLP structure tends to be simpler to establish and maintain, with fewer ongoing formalities like annual reports, shareholder meetings, and detailed minutes.
Ultimately, the decision between a PC or RLLP will come down to your specific goals, preferences, and circumstances. Both structures can provide the liability protection and professional legitimacy that lawyers seek when starting their own practice.
Whichever route you choose, it’s critical to have the proper insurance coverage in place. Even the most robust corporate structure won’t shield you from potential malpractice claims. Work with an experienced insurance broker to ensure you’re adequately protected.
As you embark on this exciting journey of launching your own law firm, I hope this guide has provided you with a solid understanding of the options available to you in California. Whether you decide on a PC or an RLLP, be sure to consult with legal and tax professionals who can help ensure a smooth and compliant setup process. Here’s to your success!