We are pleased to have the following excellent guest post, which has been drafted by Chiara Urbani LaPlume. Chiara has been kind enough to offer her thoughts on the question of choice of entity for the solo attorney . . . a question that we are frequently asked here at LOMAP.
Chiara is the principal of LaPlume Law, LLC, in Lexington, Massachusetts. She works with privately held companies on business creation, strengthening, transfer and dissolution, as well as on real estate matters. She can be reached at firstname.lastname@example.org.
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The changes in the economy over the last few years have brought with them many changes for attorneys: some have parted ways with old partners; others have been let go by their firms; and, still others are busy re-crafting their law practices, to maintain or increase profitability. If you have been planning to take the solo leap, or to strengthen your solo practice, you may have considered creating a legal entity for your law office.
Massachusetts Supreme Judicial Court Rule 3:06, at section 3(a), is clear about what entity creation will not do for you if you are a solo: it will not provide that much sought-after personal asset protection against legal malpractice claims. The rule reads, in pertinent part:
“Each owner of the entity shall be personally liable for damages which arise out of the performance of legal services on behalf of the entity and which are caused by his or her own negligent or wrongful act, error, or omission.”
It is my understanding that most state laws provide for similar protection limitations.
The reality is that many solos still choose to create a separate legal entity. Reasons cited include: assistance in separating work life from personal life; tax-related benefits; it being a prerequisite for obtaining bank financing; professional image, or meeting client expectations of what a law office should be; and, personal protection relating to liability claims, aside from malpractice claims.
Considerations for the Solo Practitioner
How does one decide whether to create a legal entity?
First, consult a certified public accountant. There may be valid reasons to create an entity solely for tax purposes. Also, you should obtain professional liability insurance coverage, whether you create an entity for liability protection or not.
Second, consider your practice area. Some areas of practice require substantial operating liabilities on a day-to-day basis, some of which you may be able to put in the entity name alone. Think about whether your firm might grow quickly. Contemplate the name you want to use for your business. Contemplate other formalities that will become necessities for your business if you do not create a separate legal entity, such as filing a “doing business as” certificate.
In entity creation, your main choices are between a corporation (usually a professional corporation, also referred to as a “P.C.”) and a limited liability company (an “LLC”). There are other options, of course, but they are not currently as popular for smaller practice groups. The differences could include, depending on the exact situation: entity flexibility; cost of creation; cost of annual returns with the Secretary of State; excise tax liability; and, income taxation treatment.
Both P.C.s and LLCs provide personal liability protection only to the extent that the law recognizes them as a separate entity. Therefore, after an entity has been created, you must: avoid commingling funds between the entity and the individual; maintain adequate insurance and operating funds; and, follow entity formalities (including the filing of annual returns to prevent the entity from being involuntarily dissolved by the Secretary of State).
How would your analysis be any different if your practice was a little larger than what could be called a true “solo” practice? What if you had an attorney that you referred to as “of counsel”, who worked with you on matters on a regular basis? What if you would like to have a part-time associate in the near future? These are all further reasons to create a separate legal entity for your business.
To limit your personal liability relative to the malpractice of another attorney at your firm, your first steps would be to obtain professional liability insurance and to create an entity. Make sure that the insurance is sufficient to allow the entity structure to provide personal liability protection from malpractice (see the formulas set forth in the aforementioned Supreme Judicial Court Rule 3:06).
When you choose to grow, it is also very important to enter into a written agreement with the attorneys you are partnering with and any “of counsel” attorneys. It is easier to discuss division of costs and profits while the parties involved do not feel personally slighted. There are also potential pitfalls, such as an of counsel attorney taking on a matter or doing work for another firm, thereby creating a conflict which disqualifies your firm from accepting a client.
In conclusion: treat your business as a business. Start by talking to your accountant.