Choice of Entity for New Lawyers

coffee-cup-and-docs-bought-at-ssChoosing a legal structure and entity type for your law firm seems like an easy decision. But is it? Consider the following scenarios:

New lawyer establishes law practice with the goal of becoming an associate

If this is you, being a straight-up sole proprietor may be the best choice, assuming you have no employees.

A sole proprietorship is the simplest and most common structure chosen to start a business:

  • No formal action is required to start your business
  • It’s inexpensive
  • No papers to file
  • Nothing to dissolve
  • Simple tax preparation

When you’re ready to make the move from running your own practice to becoming an associate, the transition couldn’t be any easier.

On the downside, sole proprietorship means you have unlimited contractual liability and potentially higher taxes.

But how significant is the liability exposure?

Lenders, property managers, and others with whom you do business will typically require a personal guarantee for loans, leases, or other business transactions.  A personal guarantee means YOU are on the hook, even if you form a professional corporation or single-member limited liability company. As a result, contractual liability protection doesn’t count for much in evaluating whether to form an entity.

The real choice between sole proprietorship and forming a PC or single-member LLC comes down to taxes and the trade-off between potentially saving money (with entity formation) and simplicity (going with the sole proprietorship model).  Talk to a CPA so you can make an informed decision.

What if I’m planning to practice business law or intellectual property?

Why would your area of practice make a difference?  And didn’t we just say entity choice is driven by risk aversion – wreaking whatever benefit you can from contractual liability protection – and saving money – courtesy of a lower tax burden?  So what difference could practicing business and IP law possibly make?

If your goal is to help clients form entities and protect intellectual property, it could look a little odd that you haven’t followed the usual formalities in establishing your own business.

Fair or not, client perception counts.  So does marketing.  And part of marketing is how you brand your law firm.  Appending a PC or LLC designation to your business name may actually be an important part of how you choose to present yourself to potential clients.

If you plan to have employees …

This is an entirely different ballgame.  Without a doubt, form an entity. If you are a solo, choose a PC or single-member limited liability company (LLC).

Both entity types offer liability protection for non-professional torts committed by your employees.  The contractual liability protection discussed above will also kick in.  Talk to a CPA, but the likelihood is that forming an entity will also result in a noticeable tax savings.

If you plan to practice with others …

This is another occasion when forming an entity is a no brainer.  Do it for the avoidance of liability discussed in the preceding paragraph and for the limitation on vicarious liability.  The ideal structure may be to form a sole owner PC or single-member LLC that belongs to the firm’s entity. This may allow you, as the individual lawyer, to completely escape personal vicarious liability.

Multi-tier entities are complex, administratively messy, and no longer have the tax benefits they once enjoyed.  BUT avoiding vicarious liability is a big plus.  To learn more about this strategy, read Choice of Entity for a Legal Practice and Lawyers as PCs, LLCs, & LLPs in Oregon, referenced below.

Being fully informed in the premises

This post skates over some pretty significant content that deserves more in-depth thought.  Do your homework.  Recommended reading includes:

  • Sole Proprietorship as a business structure choice, courtesy of the Small Business Administration.  While you’re on the SBA site, poke around.  There is a ton of great content here.  And don’t forget about the help and resources available from the Small Business Development Center.
  • Law Firm Choice of Entity, from the ABA Young Lawyers Division.
  • Choice of Entity for a Legal Practice in Oregon, available on the PLF website. Select Practice Management > Forms > Entity Formation for Lawyers.
  • Lawyers as PCs, LLCs, & LLPs in Oregon, available on the PLF website.  Select Practice Management > Forms > Entity Formation for Lawyers.
  • Tax Considerations for Choice of Business Entity, Chapter 3 of the OSB CLE Seminar Handbook Broadbrush Taxation: Tax Law for the Nonspecialist (2015). Available in BarBooks behind the member login on the OSB website.

Most importantly

Talk with a CPA.  I can’t say this enough.  This is one of the best investments you can make in getting your practice up and running.  A CPA can help you determine whether forming an entity will result in tax savings.  He or she can also help you select an entity type – which is highly driven by tax considerations.

You’ll also learn about property tax, business income tax, business licensing, and other obligations you may not be familiar with – all of which are determined by where your business is located.

All Rights Reserved 2017 Beverly Michaelis

Rural Law Practice – An Essential Need

The day after Christmas the following headline caught my eye on Twitter: Lawyer Shortage In Some Rural Areas Reaches Epic Proportions.

neighborhood

As it turns out, the tweet was about a report on NPR that profiled a lawyer in Nebraska who travels 500+ miles a week visiting clients.

But this isn’t just a Nebraska problem, and it didn’t begin in 2016.

The lack of rural lawyers has been highlighted right here in the Pacific Northwest:

How are states addressing this unmet need?

The lack of rural lawyers has real access to justice implications, as reported in April of last year.  (Legal Aid holds Oregon’s first virtual legal aid clinic to help address the disproportionate ratio between legal aid needs and available legal aid attorneys in the state’s rural areas.)

The NPR piece points out that some states, like North Dakota, Iowa and others, send law students to rural firms for summer internships. South Dakota gives a stipend to lawyers working in under-served areas. Nebraska (the home state of the lawyer featured in the piece) is recruiting high school kids to become rural lawyers.  Each year, 15 high schoolers get a tuition scholarship and future admission to the University of Nebraska Law School.  Utah, Colorado, Texas, Vermont, and Wisconsin are trying to tackle the problem too.

Back here in Oregon

Oregon is working to draw attention to this need and offers the Rural Opportunities Fellowship Program through the OSB Diversity and Inclusion Department.  The fellowship allows continuing law students to explore summer legal opportunities with public employers and non-profit organizations in rural Oregon (defined as anywhere along the Oregon coast, anywhere east of the Cascade Mountains, or anywhere south of Roseburg. Other areas of Oregon are considered on a case-by-case basis).

Ask Any Practice Management Expert

And ask any (aged? experienced?) practice management expert – we have been telling young lawyers to consider rural law practices for over 20 years.  The suggestion began with my excellent colleague, Carol Wilson, and was carried forward by myself and Dee Crocker.  If you don’t want to listen to us, then consider this: legal marketing trends show that 71% of people looking for a lawyer think it is important to have a local attorney.  If you want clients, put the Tim Brouillette’s of the world out of business.  (Tim is the Nebraska lawyer who travels 500+ miles each week to visit clients.  No offense Tim, but if we can get lawyers to set up shop closer to where the need is you won’t need to travel so much.)

Something tells me Tim won’t mind….

All Rights Reserved Beverly Michaelis 2017

Use Strikingly to Enhance Your Job Search

Looking for a job?  Stand out from other candidates by creating your own personal Web site with Strikingly.  Simply create a login, then choose from one of six templates under the Personal tab or scroll to the bottom of the page and select “One Click Online Resume” to convert your LinkedIn profile to a personal Web site.  It’s that easy and it’s free!

To give you an idea of how Strikingly uses LinkedIn, let’s do a comparison of the two.

Here is a partial screen grab of my LinkedIn Profile:

Here is a partial screen grab of my Strikingly Web site:

Click edit to change the background image, upload your own image, change the template style, add content or edit content.  Save at any time to avoid losing your edits and use Preview to test drive your site before making it live. When you’re done, click Publish.

To navigate your site, use the slide bar or simply scroll down the page.  (Note:  recommendations follow experience, but don’t have their own navigation.)

What did I appreciate about Strikingly?

  • It is incredibly easy to use.  Hard to beat a “one click and you’re done” Web site.
  • If you build one personal site and don’t mind the strikingly.com domain name, there is no charge.
  • Sites are available instantly – about 10 seconds and I was off and running.
  • Editing is easy and intuitive.  I was pleasantly surprised to learn I could upload my own background images and change the template style.
  • Stock iconography and logos are used advantageously to enhance content.
  • A key recommendation was showcased in an appealing way.
  • Publicize your new site on Twitter or Facebook when done!

If you are looking for a more engaging, interesting way to present your qualifications, please give Strikingly a try.  Take the time to edit and personalize your site by uploading your own background image and tweaking the template.  For custom domains and other features, check out the Limited or Pro pricing plans.

All Rights Reserved [2014] Beverly Michaelis