Once you actually start a law practice you will have to decide how to operate. What type of tax classification will you choose? Will you be an LLC, a corporation, or a sole proprietorship? When choosing how to operate, people generally have two things in mind – taxes and liability. As a tax lawyer, I deal with these issues quite often. And I have a simple rule of thumb. Simpler is better.
First, let’s discuss liability. People often believe that if they form a corporation or an LLC or LLP, people will no longer be able to sue them. This is false. If only it were so easy!
Unfortunately, anyone can be sued for their own negligence, regardless of whether they were working for a corporation or entity at the time. For instance, if you form David the Lawyer, Inc., your clients can still sue you personally, even for mistakes that you made while working for the business. This is because any conceivable mistake could be attributed to you personally. So your clients could sue you for your own negligence and then seize your personal assets like any other judgment creditor. The same would be true even if your paralegal or assistant had made the mistake. Similarly, the client could sue you personally, for being negligent in hiring or supervising this person.
So what is the solution? In a word, insurance. As a solo attorney, insurance—not an LLC or corporation—is what provides you with real liability protection. This is why I encourage many small business owners to forgo forming a complicated entity and simply act a sole proprietor. It’s a much simpler way of doing business and it is much more cost-effective. Entities require administrative work, incur complicated state taxes and fees and often require you to file additional tax returns, which you may need to hire someone to prepare. While an S-corporation, LLC and sole proprietorship are all treated the same for federal income tax purposes, forming an S-corporation or LLC may require you to make additional filings with the IRS and prepare additional tax returns. There are state tax pitfalls too. Here in California, corporations and LLCs are charged $800 per year, even if they never make a dime. Pennsylvania has a complicated regime of its own, which includes a capital stock and franchise tax (among others).
Trust me, when you are just starting out, you will have enough problems to deal with. Keep your business simple. Save the time and money, form a sole proprietorship and buy some good insurance. To make things even easier, include your full name in the business. This way you don’t even have to file a fictitious business name statement with the county. For instance, I operate as the “Law Office of Douglas Greenberg.” As the Law Office of Douglas Greenberg, I never had to file a fictitious business name statement (there’s nothing fictitious about it). I just went to the bank, got a business account, got some good malpractice insurance, and went on my way.
All opinions, advice, and experiences of guest bloggers/columnists are those of the author and do not necessarily reflect the opinions, practices or experiences of Solo Practice University®.