Attorney Practice Structures

Updated: Mar 11, 2020

For attorneys, the choice of operating as a sole proprietorship, general partnership or corporation is informed by many factors.

For attorneys, the choice of operating as a sole proprietorship, general partnership or corporation is informed by many factors. Historical precedent, tax effectiveness, the ability to sell the business and limitation of liability all feature as primary issues in addition to a number of other concerns. When choosing a structure, attorneys need to be mindful that registration is state-based and not all options are allowable in every region. This article discusses the common structures and relative advantages available to attorney firms in most areas of the United States.

When choosing a structure, attorneys need to be mindful that registration is state-based as not all options are allowed in every region.

Sole Proprietorship

The vast majority of US attorneys commence as sole proprietorships and in fact remain that way for good reason – this is the simplest business structure to maintain. The principal individual in the business is the business - there is no separate distinct entity. Of course good accounting practice requires the activities of an owner to be separated from business activity at a bookkeeping level, however from a regulatory perspective they are one and the same.

Common to other structures if the business has employees it will be required to apply for an Employer Identification Number (EIN). If operating under a business name there will be a requirement to register with the county-clerk and it must be clearly distinguishable from other business names already on record. An attorney’s professional services do not attract sales tax however federal income tax will need to be paid on income as for any other taxpayer.

Sole proprietorships have the advantage of ease of creation, full decision-making authority residing with principal, simple taxes and no requirement to file a balance sheet with the IRS. Disadvantages include the risk to personal assets, personal liability, difficulty in raising capital and potential difficulty selling the business to another interested party.


When two or more individuals form an unincorporated entity, it is described as a partnership. Ideally it will operate by well-drafted agreement covering what each individual is responsible for, obligated to do, how decisions will be made and disputes mediated, the basis on which individuals may join or leave and how it might be dissolved at business cessation. Essentially, there must be an agreement on the ratio of shared profits or losses. No formal written agreement is actually required at law, which often could have otherwise solved subsequent disputes.

The partnership itself files an annual return however does not pay tax. Rather, income is ‘passed through’ and partners taxed as individuals.

A key issue facing partnerships as distinct from corporations is the notion of the ‘continuing entity’. A corporation is very distinctly an entity that has member shareholders with a mechanism of divesting themselves of ownership and offering new parties the ability to invest. A partnership dissolves whenever a partner departs. The Uniform Partnership Act 1997 introduced the concept of ‘disassociation’ for partnerships. If remaining partners do not dissolve a partnership within 90 days of departure, the entity will survive the resignation of one or more individuals provided at least two remain.

Clearly sharing the load has many advantages over sole proprietorship, however general partnerships suffer from the unlimited and shared liability the actions of other partners and for debts of the entity. Given that any sole partner is an agent for the entire partnership and may bind them to adverse decisions, there is far greater individual risk. Dilution of this risk may be dealt with by operating as an LLC.

Limited Partnership (LP)

LPs are formed by at least one general partner who takes an active role in a business and at least one limited partner who does not – their role is as passive investor. The limited partner enjoys a reduction in liability and a return on their investment but must accept less or no ability to manage day-to-day operations. The LP is a pass-through entity for tax.

Limited Liability Corporation (LLC)

LLCs introduce the ability to choose from three different tax treatments: pass-through as for a general partnership; an S-Corp election or a C-Corp election (more on those later, however note that attorneys cannot use them as structures). Essentially a hybrid version of a partnership and corporation, an LLC is simple to set up however has the ongoing commitment of holding an annual meeting, keeping minutes and filing a report. Liability is limited within the LLC itself shielding the owner(s), except in the case of fraud or where personal guarantees have been provided.

Limited Liability Partnership (LLP)

Prior to the ability for lawyers to incorporate, the LLP was the primary vehicle allowing attorneys to limit their liability. There is not a great deal of difference between an LLC and LLP. Both have advantages over a PC: the advantages of operating to partnership agreement versus an article of association with required meetings, minutes and voting are obvious.

Professional Corporation (PC)

A PC is organized according to state laws of where it was formed. Each director, shareholder and officer must be practicing in the same profession and can only provide services in that field (lawyer, doctor, accountant etc). The PC will need a set of by-laws and agreements dictating responsibilities and conduct. The PC itself is the taxable entity, however the possibility of electing S-Corp taxation is available. Generally, ongoing management of a PC has a higher level of administrative burden and complexity than an LLC or LLP.

Unlike in Australia and the United Kingdom, US attorneys are unable to incorporate their legal practices. For completeness, we can consider other available business types for non-attorneys:

Corporation (C-Corp)

A corporation is owned by its stockholders, managed by an elected board of directors with operational control handed to the officers of the company. A C-Corp files a tax return and may distribute a dividend to stockholders. While it is possible for a single individual to serve as sole stockholder, director and officer it would be expected that primarily large publicly-traded businesses would organize as C-Corps.

S Corporation (S-Corp)

A corporation may elect to be taxed as a partnership by seeking S-Corporation status. If enacted, profits and losses pass directly to stockholders in the ratio of their holding. Stockholders continue to benefit from the limitation of liability enjoyed by a C-Corp. The S-Corp structure is suited to smaller entities and family companies where the majority of stockholders work within the business.

In conclusion, choice of business structure is informed by many factors with limitation of liability perhaps at the forefront. While sole proprietorship may dominate the raw numbers, many attorney firms aspire to grow their size. The ability to easily restructure may provide the flexibility for that growth.

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