How to choose the right leal structure for your law firm.

1. PROFESSIONAL SERVICE ENTITIES
Roger Royse
Royse Law Firm, PC
1717 Embarcadero Road
Palo Alto, CA 94303
rroyse@rroyselaw.com
www.rroyselaw.com
www.rogerroyse.com
Skype: roger.royse
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,
including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties
under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. What is the Right
Legal Structure For
Your Law Firm?
Law Corporation Rules
Fee and State Bar Registration
Certificate from SoS
Each Shareholder is active
Member of the Bar
Death, disability or disbarment
Name
Insurance or Undertaking
($50k per claim/$100k
aggregate per lawyer)
Legended stock certificates
Bylaw restrictions
Circular 230

3. Ethical Issues
IRS Circular 230 restricts
the firm‟s practice before
the IRS if any partners
violate certain rules.
The entity name is a
“communication,” subject
to Rule 1-400.
The duties set forth in
Rule 3-110 include the
duty to supervise the work
of subordinate attorney
and non-attorney
employees or agents.

4. Legal Requirements
Sole
PC
State bar and Rule
1-400 compliance
• Each partner must be
an active bar
member or an eligible
law corporation
• State bar and Rule
1-400 compliance
• “RLLP” or “LLP”
• Certification
• Security
• Moscone-Knox PC Act
• Licensed shareholders
• State bar and Rule
1-400 compliance
• Generally joint and
several liability
• Registration
• Security
LLP

5. Liability Protection
Sole
PC
Protection not
provided.
Protection
provided, exce
pt for personal
negligence.
Protection
provided, except for
the professional
(and employees)‟s
malpractice and
payroll tax claims.
LLP

6. Income Tax
C
Corp.
S
Corp.
• Corporate level tax.
Maximum rate of 35%
plus 9.3% California
• Tax free formation,
taxable distribution
• Excludible benefits
• Deduction for
Compensation
• Pass-through
• Tax free
contributions and
distributions
• $800 annual
minimum tax
• 39% Individual rate
• Pass-through, subject
to excess net passive
income tax rules
• 100 or less US-person
individuals or trusts
• Single class of stock
• Certain benefits for
< 2% shareholders
• Tax free
formation, taxable
distribution
LLP

7. Self-
Employment
and Payroll
Taxes
LLP
Self-
Employment
Tax
PC
Payroll
Tax
Self Employment Taxes (SET):
Partner: 12.4%
Medicare tax: (no max base)
Partner: 2.9%
> $200k (single) or $250k (MFJ):
Earned income: 0.9%
(Passive income: 3.8% NIT)
Social security (max base $113,700).
Employee: 6.2% / Employer: 6.2%
No SET / Limited NIT
Reasonable Compensation
Medicare (no max base)
Employee:1.45% / Employer 1.45%
> $200k (single) or $250k (MFJ):
Earned income: 0.9%
(Passive income: 3.8%)

8. Employee Benefits
C
Corp.
S
Corp.
Deductible by
corporation—not
included in income of
employee
Cash value of
fringe benefits not
excludable from
partner‟s income
or deductible by
the partnership
(guaranteed
payment)
Cash value of fringe
benefits generally not
excludable from > 2%
owner-employee‟s
income or deductible
by S corporation (W-2
wages)
LLP

9. Methods of
Accounting
C
Corp.
S
Corp.
Generally accrual
method if the C
corporation‟s annual
gross receipts
exceed $5 million.
Must use accrual
method if a C
Corporation is a
partner, unless
the partnership
has less than $5
million gross
receipts per year.
Must use accrual
method if the S
corporation maintains
inventory.
LLP

10. Compensation /
Distribution Policies
Gross Split
Net Split
Salaried
Subjective
C
Corp.
S
Corp.
Deductible expenses
Compensatory bonuses
Special allocation /
distributions based
on gross or net
revenues or a
custom formula
allowed; substantial
economic effect
required
Second class of stock rule
Compensatory
bonuses
LLP

11. Other Policies and Provisions
Write Offs
Expenses
CLE
Firm Name
Titles
Staff & Associates
Non–Equity Partners
Practice Areas
Office Locations

12. Liquidation and
Dissolution
C
Corp.
S
Corp.
Amounts distributed in
complete liquidation
are treated as full
payment in exchange
for the stock
Shareholder level tax
on liquidation
Jewel v. Boxer:
“unfinished business”
doctrine / “no
compensation rule”—
profits earned by
former firm partners at
their successor firms
are „old LLP‟ assets
One level of tax
Amounts distributed in
complete liquidation are
treated as full payment in
exchange for the stock
Generally capital gain on
stock sale
LLP

13. The Future of Law Practice
Jacoby & Meyers case
OnLine Solutions (RoyseLaw Incorporator)
Crowdsourced solutions (Rocket Lawyer)
Pooled resources (Lexis-Nexis,
Lawyers.com)
Legal Force model

14. RoyseLaw Legal Wizard
RoyseLaw Incorporator
32

15. www.rroyselaw.com
@RoyseLaw
PALO ALTO
1717 Embarcadero Road
Palo Alto, CA 94303
LOS ANGELES
1150 Santa Monica Blvd.
Suite 1200
Los Angeles, CA 90025
SAN FRANCISCO
135 Main Street
12th Floor
San Francisco, CA 94105
Palo Alto Office: 650-813-9700
Contact Us

16. The discussion of tax consideration was not intended or written to be used, and cannot
be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed
by the Internal Revenue Service. Each party should seek advice based on the party‟s
particular circumstances from an independent tax advisor.
In accordance with Section 6694 of the Internal Revenue Code of 1986, as amended
(the “Code”), we hereby advise you that the positions set forth herein may lack
substantial authority and, therefore, may be subject to penalty under Code section
6662(d) unless adequately disclosed on IRS Form 8275.
Circular 230 Disclosure