July 23, 2020
The short answer: no. Lawyers in California, along with a set of other professionals, are prohibited from forming a California LLC, or LLC formation. In other states, professionals are required to start PLLCs, Professional Limited Liability Companies, instead. This isn’t the case in California, however, where lawyers can’t open those either.
So, as an attorney looking to start your own practice, what are your options? You have two: a Professional Corporation, or PC, or a Registered Limited Liability Partnership (RLLP). Although you may feel disadvantaged as other states do allow lawyers to own LLCs, you’re not alone. There are dozens of other types of professional services and types of business like legal services that California includes in the same category and prohibits from operating a limited liability company or PLLCs, including:
Nurses
Psychologists
Dentists
Physicians
Accountants
Architects
Pharmacists
Being an attorney, you may very well be equipped to draft the necessary documents and file the required paperwork with the California Secretary of State yourself, however, if corporate and business law isn’t your specialty, we recommend having an expert assist you along the way. Besides, starting your own business is hard enough as it is with building up a client base, hiring new paralegals, and coordinating the various other logistics that are required of any new business. Save yourself the additional paperwork and headache, and leave the setup of your new practice to a lawyer or team who live and breathe California business law.
In this guide, we’ll take you through what all you need in order to form a Professional Corporation and Registered Limited Liability general Partnership, what the differences are, and how to make the best decision for your new legal practice in the Golden State.
<h3>Forming a California PC</h3>
Founding a professional corporation is similar in many regards to starting any kind of corporation. However, there are some key differences that make it unique and thereby needing its own special class. In California, a Law Corporation needs to have its Certificate of Registration before it can start to operate. So once you’ve decided to start your practice and especially if you already have clients lined up, you will want to incorporate quickly.
The process to create a California PC for lawyers is as follows:
Choose a Business Name
You might already have one in mind, but California is a huge state with a lot of lawyers, so conduct a preliminary search on the Secretary of State website to see if your name is available. Make sure to include some designation of corporate existence, such as: Professional Corporation, Incorporated, Ltd, etc. If the name is free, you can reserve it for a period of sixty (60) days by filing a Name Reservation Request Form.
If you want to include “Law Offices” in your name, you are required to have at least a second address and at a minimum one other attorney at the primary registered address. Further, if you want to use the term “Group” in your name, you must have at least one other employee at your firm, although they do not need to be a lawyer. Similarly, if you want to use ”Associate” or “Associates” in your name, you need to have another employee or more, respectively, who are lawyers working for you.
Lastly, law firms are not allowed to use the phrase “Doing Business As” (DBA) in California.
Select a Registered Agent
In California, the Registered Agent cannot be the corporation itself, but it may be someone associated with the company. This person will act as the representative and contact person for the corporation in the case of any legal disputes with the corporation itself.
File the Articles of Incorporation with the State
The Articles must include the following: corporation’s name, corporation’s purpose, the total number of shares the corporation can issue, the street and mailing address, and the name and address of the registered agent.
Once these are filed, you will have 90 days to submit the Statement of Information. This is just a document that is updated or renewed every year to ensure the state has up-to-date contact information.
Set up Bylaws
All corporations are required to operate under a set of specific regulations and bylaws, and Lawyer PCs are no exception. What does make law corporations unique is that only those who are licensed and entitled to practice law can be shareholders. As soon as a lawyer is ineligible to practice law for whatever reason, they must sell or transfer their shares to another shareholder within 90 days. See Cal. Corp. Code § 13407. Similarly, should a shareholder pass away, there is a six month period in which their shares must be sold back to the corporation or another shareholder. See Cal. Corp. Code § 13407. Failure to abide by these requirements may result in suspension or revocation of the certificate of registration, in which case, the corporation must cease to render professional services.
Register with California State Bar
In order to operate, every Law Corporation needs to have a valid Certificate of Registration. You must apply to the California State Bar, pay the required fees, and submit the following:
Registration documentation from the California Secretary of State
Bylaws and sample share certificate
Application containing the information on all the attorneys in the corporation
Guarantee for Claims for the required amount
Declaration that you’re in compliance with Rule 1-400
The State Bar can rescind this certificate if your practice is found in violation of any of the regulations. Your corporation must always have a valid Certificate of Registration in order to operate.
Once your corporation is founded, you need to submit an Annual Renewal along with the required fees in order to keep operating.
<h3>Founding a California RLLP </h3>
Just like starting a Professional Corporation, starting an RLLP will go through the California Secretary of State. Much of the process is quite similar to that of a PC, so we’ll go through it below quickly, while highlighting some of the differences.
Name your RLLP
In this case, you need to ensure your name includes “Registered Limited Liability Partnership,” “RLLP,” or “LLP” at the end, along with being unique in the State of California. As with the California PC, you can conduct a preliminary name search on the California Secretary of State website.
Register with the State
Similar to the Articles of Incorporation, but simpler, the registration process for your LLP involves providing basic business information (name, address, agent, statement of business, etc.) on the LLP-1 form.
File with the California State Bar
There is a Limited Liability Partnership program through the California State Bar. This program certifies professional partnerships and allows partnerships to operate with limited liability protection for the actions of others in the company.
Choose a Registered Agent
Just as with a corporation, you’ll need a registered agent to serve to receive and submit legal papers in the name of the company. This can be an individual or company (see Cal. Corp. Code § 16309), but they have to be resident and have a mailing address in California to qualify. For the requirements of a corporate agent, see Cal. Corp. Code § 1505.
Draft a Partnership Agreement
While it is not required by California law to draft this Agreement, it’s highly advisable to have one. This will help minimize the risk of dispute down the road and serve as the rule by which your partnership will operate. It will ensure all your partners are on the same page from the get go.
Sign up for an EIN
You need to request a Tax ID Number from the IRS for your company so you can file taxes, hire new employees, and a whole bunch of other things.
Register for Tax Purposes
As a lawyer giving legal advice you’ll likely have employees working with you like paralegals and secretaries, even if you’re the only attorney in the office. You’ll need to register with the California Employment Development Department for employer taxes. For more information on payroll taxes, please visit the Getting Started page of the Employment Development Department website. Further, you are required to pay $800 per year to the California Franchise Tax Board as an RLLP. The return is due the fifteenth day of the third month after the close of your taxable year. This is of course in addition to any local small business taxes and your own income taxes.
Obtain Licenses
Your city or county may have more requirements for licenses you need before you can open your doors. Because things are a bit different from place to place, we still recommend finding a lawyer or legal team who specializes in setting up new businesses to help you efficiently get all your paperwork filled and submitted.
<h3>What Option is Better for Lawyers: PC or RLLP?</h3>
There a few key differences to consider when weighing these two options:
PCs are taxed like corporations (burden of double taxation), while RLLPs are taxed as individuals with “pass through” tax
RLLPs offer a lot more independence in the day-to-day for the individual members, depending on which terms are included in the Partnership Agreement (which doesn’t have to exist, so state business codes apply in these cases) and partners are not responsible for the debts of other partners
RLLPs are a lot simpler to set up and maintain, due the high volume of paperwork and numerous procedures required for corporations (annual reports, shareholder meeting, minutes, etc.)
<h3>Summary</h3>
Since business owners like you can't be an LLC member in California, you have these two options available to you. Which one is better? Well, that’s up to you to decide depending on your own goals and situation. It is important to set up a business before you start to practice to shield you from any liability. However, do keep in mind that no level of corporate structure will protect you from malpractice exposure. Therefore, it is imperative to have insurance in the event that you are sued by a client at any point.
We hope this has provided an outline for the process to follow when setting up your new practice. Whichever option you go with, it will be an exciting experience going out on your own and creating your perfect law office.
Sources:
http://thetafirm.com/articles/how_to_form_professional_corporation.html
https://www.nolo.com/legal-encyclopedia/how-form-limited-liability-partnership-california.html
http://thetafirm.com/articles/how_to_form_professional_corporation.html
https://practice.findlaw.com/how-to-start-a-law-firm/growing-a-law-firm--llp-or-pc.html
