Business Formation

Structuring Your Startup Law Firm and Ownership

When choosing the best form of structure for your startup law firm, many factors must be considered, including taxes, liability, ownership transfer, and others. The various structures include the following:

    Sole Proprietorship
    Partnership
    Limited Liability Partnership (LLP)
    Limited Liability Company (LLC)
    Corporation

Sole Proprietorship

A sole proprietorship is owned by one person, who owns all the assets of the business as well as all the profits generated by it. They are also solely responsible for any of its liabilities or debts. Some advantages of a sole proprietorship is that is is the simplest and least expensive ownership structure to organize. The sole proprietor maintains complete control of the firm and receives all income generated by the firm. Disadvantages include unlimited liability and personal responsibility for all debts against the firm; as such, the sole proprietor’s business and personal assets can be at risk.

Partnership

Two or more partners split ownership of a single firm in the partnership structure. Like in a sole proprietorship, the law does not distinguish between the partnership and its owners. How joint decisions will be made, profits and debts will be shared, disputes will be resolved and so on should be set forth in a legal agreement between the partners. In a partnership, the responsibility for management as well as the assets, profits, debts and liabilities are divided between the partners. Similar to a sole proprietorship, a partnership is relatively easy and inexpensive to establish. With more than one owner, the ability to raise startup capital may be increased. Disadvantages of a partnership include the potential for disputes over creative and financial control over the firm as well as sharing the firm’s profits, losses, and personal liability for the firm’s debts.

Limited Liability Partnership (LLP)

Forming a limited liability partnership is more complex and formal than forming a general partnership or sole proprietorship. Most of the parts in an LLP have limited liability as well as limited input on management decisions and the firm’s operational and business responsibilities. LLPs are designed to protect limited partners from personal liability for the business debts of the firm as well as from legal responsibility for the negligent acts of any other partners or firm employees. Advantages of the LLP include protection from liability, while the complex nature and higher startup expenses are among the disadvantages.

Limited Liability Company (LLC)

A limited liability company is designed to combine the limited liability features of a corporation with the tax advantages and the operational flexibility of a partnership. The members of the LLC can choose to pass the profits and losses through the company to its members (as done in a partnership and sole proprietorship), or the LLC can choose to be taxed as a corporation. The LLC is advantageous for law firms because it has the power to combine the limited liability with the tax and operational benefits of a partnership. Disadvantages include the higher expenses and formality of forming the LLC and less share in the profits of the firm for the owners.

Corporation

A corporation is considered a unique entity separate from those who own it (unlike a sole proprietorship or partnership). Corporations may be taxed, sued, and enter into contractual agreements independent from the individual owners, or shareholders. To oversee the major firm decisions and manage firm policies and responsibilities, the shareholders elect a board of directors. Advantages of a corporation include extended limited liability as well as raising additional funds through the sale of stock in the corporation. Disadvantages include the high complexity, formality and expenses that are required to incorporate, as well the federal, state and local regulations that a corporation must adhere to.