Last week’s, as usually stellar, guest contribution to the LOMAP blog, this time from Wellesley attorney Chiara LaPlume, covered main considerations for solo attorneys seeking to find the appropriate entity for their firm’s existing. Chiara makes some great points in her post; and, we are very appreciative of her taking the time to draft her coverage for us. The purpose of this present post (the one you’re reading, not the one under your tree), is not to restate what Chiara has already addressed, but, instead, is to provide further information, including discovered resources, that will make your choice of entity for your business an informed choice.
Certainly, of course, and despite the title of the last post on this topic (which was not at all meant to be exclusionary), it is clearly not the worry fiefdom of solo attorneys, solely, when it comes to the choosing of an entity. Small firms make the same choice (well, not the same choice, but you catch my meaning . . .). Large firms, too, at least at some point in their histories, have made the decision on a business entity. But, they don’t read our blog. Fortunately, you do. And for your reward? The following thoughts on choosing an entity, including resource materials:
There are, unfortunately, a paucity of resources as to choice of entity for an attorney/for a law firm. Whether in practice, in working at the Massachusetts Bar Association as its publications attorney or here at LOMAP, my conclusion has always run the same: I have never been able to locate a really good, general publication respecting choice of entity for lawyers. Why this is, I can’t exactly figure . . . Perhaps it’s because people think that lawyers, a number of whom establish entities for their own clients and/or provide tax advice, should probably know this stuff already. Perhaps it’s because people think that a law firm’s entity choice is likely very much similar to the entity choice of any other service industry provider, such that generic business entity choice publications would be suitable for attorneys, as well. (Although, I would like to think that that is not the case, given the special ethics requirements attached to the practice of law, and given some business limitations that attorneys face, e.g.–not being able to take paying referrals from other businesses, or from other attorneys, in certain states, and not being able to limit liability as widely as general companies are, in most states.) Perhaps it’s because people think lawyers don’t even really have to think about the choice of entity option because they’re rich enough to hire someone to do it all for them. (If someone knows of a place where this truth exists, kindly let me know the directions, because I want in.) Perhaps someone is writing a book on choice of entity for lawyers and law firms right now, even as we speak. (No. It’s not me.) The fact of the matter, however, is that such a text (an entity choice book built for lawyers) would be exceeding useful, because, let’s face it: lawyers are not the best of businesspeople. (Otherwise, our service wouldn’t exist.) Usually, lawyers will let their business affairs drag in search of other grails, or will hire others to manage various portions of their business affairs (marketing, finances, technology). This is likely true even for lawyers who specialize in helping others to make business decisions. To a large extent, poor business practices are endemic in the practice of law.
But, these are not meant for excuses. Rising above the lawyers-as-bad-businesspersons stereotype, even without tailored resources, is really just a matter of applying the appropriate amount of mental elbow-grease in conjunction with the discovery of appropriate-enough resources, like the ones about to be addressed below, which can be utilized by attorneys, even if not meant exactly for attorneys, and even if not covering all eventualities for attorneys.
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Section IV of LOMAP’s own “Start-Up Kit” covers the choosing of legal entities for attorneys. (The Start-Up Kit, Section IV, along with some other referenced material from this post, will be aggregated at this drop site; keep an eye out, as indicators come by, which they will.) The “Choosing a Legal Structure” section reviews options for the: sole proprietorship, professional association, partnership, professional corporation, limited liability company and limited liability partnership. As alluded to in both Chiara’s guest blog post, and in our own Start-Up Kit materials, any attorney, or firm, seeking to establish an entity with limitations on liability should take care to closely review the Supreme Judicial Court’s Rule 3:06. More generally, there are a number of practical considerations you should address before choosing an entity for your firm. These major considerations are addressed within the “Choosing a Legal Structure” section of our Start-Up Kit: How trustworthy are your potential partners? What are the tax consequences of your entity choice? What are the liability issues associated with your entity choice? What about transferability of interest? What limitations are imposed by statutes, regulations or rules? If you are entering into practice with another attorney, or other attorneys, be certain to memorialize your arrangement by executing a partnership agreement, or operating agreement. Be sure to address all issues of fees, fee sharing and fee splitting, as well as of profit sharing, before you enter into practice with your partner(s). Include all financial accords as part of your general agreement. Overall, treat your decision to enter into a professional relationship with other attorneys as you would treat your decision to enter into a romantic relationship with another person (or persons, if you swing that way). A number of the same stresses will apply, since you will be spending as much, if not more, time with the partners of your law firm as you do with your significant other.
But, Rodney and I and our little Start-Up Kit are really just a collection of posers as compared to the godfather, Jay Foonberg, and his classic treatise, “How to Start & Build a Law Practice”. What sayeth Foonberg on choice of entity? He recommends a sole proprietorship for those just starting out, unless there is some overriding reason to choose an alternate entity type. For those determined to start in a partnership, Foonberg recommends the professional corporation, the limited liability company or the limited liability partnership. He states that tax considerations will dictate the choice of a C or an S corporation. Where can you find this information for yourself?: the last two paragraphs of page 48, of the latest, 5th edition, of “How to Start & Build”. Of course, the “How to Start & Build a Law Practice” book is a classic of the law practice management genre, and is valuable for more than just tw
o paragraphs; but, if you don’t want the whole book, and want, rather, on the cheap, just the smaller portions instead of the full meal, you can buy full chapters at 99 cents a piece, here.
As Foonberg says, and as we say, perhaps the major consideration for choice of entity respecting lawyers and law firms surrounds tax issues. And for a goodly number of solo and small firm attorneys, especially those starting out, tax concerns for entity choice are not especially relevant, as major tax implications do not usually come into play until a company takes in $250,000 in gross receipts for a given year.
With respect to the taxation question, attorney and CPA Morris Robinson, of M. Robinson & Company, has been kind enough to provide some information, and some access points, for our clients. His Powerpoint: “Solo Law Offices and the Underground Economy: Minimizing Liabilities and Taxes” covers law firm entity choice at Slides 28 through 32, which Powerpoint segment has been included at the above-referenced drop site. Advice in the slides is offered on the following entities: sole proprietorships, single member LLCs, C corporations and S corporations. Keep in mind, however, that this Powerpoint was drafted before changes to the Massachusetts business tax law were enacted on July 3, 2008. The changes became effective January 1, 2009. Under the new rules, the tax choice of the entity for United States tax purposes also governs the Massachusetts taxation of the entity. This is known in the jargon of the trade as “check-the-box” conformity, since the owners of an entity literally check the box on Form 8832 to determine how a limited liability company will be classified for tax purposes.
Attorney Robinson is always willing to give a few minutes of his time, without charge, to speak to lawyers who have taxation issues. His direct dial line is (617) 428-0055.
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Beyond the information points listed above, there are a number of other useful resources that are available for attorneys. While there is no overarching textbook covering choice of entity for lawyers yet, you can, in the meantime, access several resources for cobbling together your own guide for choosing a business form, until such time as that hoped-for fulsome guide is released. The list we have compiled follows; bolded resources represent titles available through the LOMAP Lending Library:
–Law Firm Partnership Agreements
–Law in a Nutshell: Law Practice Management
–Limited Liability Corporations vs. Business Corporations: Legal, Tax and Accounting Considerations
–The Essential Formbook, Volume I: Partnership and Organization Agreements/Client Intake and Fee Agreements
–The Lawyer’s Guide to Governing Your Firm
(Chapter 4, on “Partner Relations” addresses some choice of entity options)
–Hillman on Lawyer Mobility: The Law and Ethics of Partner Withdrawals and Law Firm Breakups
(Chapter 4, “Law Firms as Partnerships”, and Chapter 6, “Alternatives to Partnership: Professional Corporations and LLCs”, address choice of entity options)
–Law Partnership: Its Rights and Responsibilities
–Law Partnership Revisited
(Updates “Law Partnership: Its Rights and Responsibilities”)
-“An Accountant’s View: Financial Trends that Affect Law Firms” by Janet Ellen Raasch
“GPSSF Session I: The Mechanics of Setting Up Your Firm”
(Video segment from 2010 Massachusetts Bar Association CLE, “How to Start & Run a Successful Solo or Small-Firm Practice”)
(Corresponding book chapter is also available)
(2006 version of the publication available through the LOMAP Lending Library)
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Last month, during the great New England rains of March 2010, I provided a list of sunshine songs, to lift our collective spirits. It rained for, like, a week, before I completed that list. When I published it, it was sunny. Now, it’s rained again all this past weekend. And, it’s cold again. In the hope, then, of working more of my reverse magic, here is a comprehensive list of what would be my favorite rain songs, if I didn’t hate the rain:
“Rain, Please Go Away” by Alison Krauss and Union Station
“Raindrops Keep Falling on My Head” by B.J. Thomas
“Rain” by The Beatles
“No Rain” by Blind Melon
“Rainy Day Women # 12 and 35” by Bob Dylan
“Mandolin Rain” by Bruce Hornsby & The Range
“The Rain, The Park and Other Things” by The Cowsills
“Have You Ever Seen the Rain?” by Creedence Clearwater Revival
“Just Like Strange Rain” by Elton John
“Let It Rain” by Eric Clapton featuring Duane Allman
“Rainy Day People” by Gordon Lightfoot
“Box of Rain” by the Grateful Dead
“Fire and Rain” by James Taylor
“Rainy Day Man” by James Taylor and the Original Flying Machine
“Save It for a Rainy Day” by The Jayhawks
“Fool in the Rain” by Led Zeppelin
“Laughter in the Rain” by Neil Sedaka
“It’s Always Raining Somewhere” by Robbie Fulks
“Heavy Cloud No Rain” by Sting
“It’s Raining Again” by Supertramp
“Louisiana Rain” by Tom Petty & The Heartbreakers
“It Never Rains in Southern California” by Tony! Toni! Toné!
“Fistful of Rain” by Warren Zevon
“It’s Rainin’ Men” by The Weather Girls (Hallelujah!)
Why are these in alphabetical order by artist? Because I have my iTunes back on my computer!! Yes, I finally transferred my 7,000+ music files to my new computer. I know you’re all very excited because you were waiting for me to do that. I hope your lives still have meaning now that I have done so.