Law Firm Management Structures: Which Is Right for You?
To run a successful law firm– whether it’s a solo practice or a large firm– you’ll need to not only excel in the areas of law you’re practicing in but also in all matters of running the practice itself. Running a legal practice comes with its own unique set of challenges that even the most prepared lawyer setting out to start a new practice may find themselves overwhelmed with. I’m here to help make the job of running your law office just a little easier. Welcome back to Mike’s Office Management Tips.
— Mike Campbell
If you’re considering starting a law firm or you’d like to branch off from the law firm you currently work for, there are many things to consider. One of the most significant decisions you will make is which type of law firm management structure you plan to use.
The type of business structure you choose for your law firm will ultimately affect your business operations. Therefore, it’s essential to thoroughly research your options so you can make the best decision for your firm and your future. So let’s take a look at the different management structures you have to choose from.
Common Business Structures for Law Firms
A sole proprietorship is precisely what it sounds like—the business is structured and owned by one person who is liable for any and all of the law firm’s obligations. This is the simplest of the law firm management structures.
While you don’t need to file any forms with the state as a sole proprietorship, you may need to obtain specific licenses and permits per your state laws. Any revenue your law firm generates will be reported via your personal income tax return.
In terms of the advantages of a sole proprietorship, costs are typically lower, taxes are more manageable, and you have complete control of your law firm. However, it’s important to remember that you are liable for any debts incurred, and you also have to pay self-employment taxes.
With a partnership, a law firm has two or more people who own and run the business. The partnership can be general or limited, depending on the agreement between the partners in terms of responsibilities and obligations. Depending on the state your firm resides in, you could have the option of defining your business as a limited liability partnership (LLP).
In a partnership, taxes are paid through the partner’s individual tax returns, and partners owe fiduciary duties to each other. In terms of liability, partners are personally responsible for the partnership’s obligations.
Partnerships typically come with low formation costs, and employees are incentivized to become partners. Profit-sharing and potential disputes, however, are some of the downsides.
Limited Liability Company
A limited liability company (LLC) is a business where members are not liable for the acts and debts of the company; however, it can opt to be taxed as a partnership.
To become an LLC, a law firm needs to file organization papers with the state it resides in and develop an operating agreement on how the firm will be run. In regard to taxes, an LLC can choose to be taxed as a partnership or corporation.
Corporations are considered unique entities with limited liability. They are owned by shareholders. If you’re looking to incorporate your law firm, you need to file the proper paperwork with the state, prepare bylaws that govern the law firm, and observe certain corporate formalities.
In terms of taxes, corporations are taxed when they earn profits. In addition, any dividends are distributed to shareholders are also taxed.
Starting a law firm requires a lot of decisions, especially when you’re trying to determine which law firm management structure. With the information above, you’ll be able to figure out how best to proceed to get your business off the ground.