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Starting a Law Firm: LLP vs. PC

updated
October 24, 2022
4 min
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Starting a law firm is a major business decision that needs much forethought. One of the most important questions to answer is this: Which law firm partnership structure will you decide on? There are many options to choose from, with LLP (limited liability partnership), PC (professional corporation), and LLC (limited liability company) structuring being three of the most common. If you are still asking yourself, "What does LLP mean?" or "What is the difference between PC and LLC law firms?" then you should prepare to do some extensive research. The information detailed below will help you gain a strong understanding of your formation options, the liability protection each offers, and their implications for your future law firm.

What Does LLP Mean? 

LLP stands for limited liability partnership. It is a structuring option that creates a type of partnership and results in limited liability protection for one or more partners in most cases. LLP liability protection differs from state to state. In some jurisdictions, LLP protection is more extensive for partners than in others. Additionally, some states only allow certain professionals to form LLPs, such as attorneys and physicians.

Law Firm LLP vs. LLC: A Comparison

An LLC is a limited liability company, which means it has members, whereas an LLP has partners. Both structuring options limit partners' or members' liability related to the business. However, the structuring of limited liability companies is the most comprehensive of the two, generally speaking.
Liability Protection LLC and LLP: Taxation LLP vs. LLC: Management Structure
Between the two, LLCs offer more protection than LLPs in more jurisdictions. Points to keep in mind when deciding between the two include:

- LLCs usually protect members from business obligations and business negligence.
- LLP attorney protection varies from state to state.
- Some states require one member of the LLP to have unlimited liability.
- Some states do not protect LLP partners from liability stemming from business obligations — only from liability arising from negligence.
When it comes to taxation, LLCs give you more options than LLPs. With an LLC, you have multiple taxation options, including:

- Sole proprietorship

- A partnership
- S-corporation
- C-corporation
As an LLP attorney, your only option for taxation is as a partnership.

LLCs and LLPs are considered pass-through entities, which means the revenue and expences of the LLC or LLP will wind up on the personal income taxesof the partners or members.
LLCs have the most flexibility when it comes to management structure. Management structure considerations include:

- LLPs must have at least two partners.
- LLCs do not need more than one member.
- LLCs can be structured as management LLCs with passive owners.
- LLP structuring is determined by a partnership agreement.

What Is a PC Company?

A professional corporation (PC) is a business entity that is established to provide professional services to others. PCs are governed by state law, which makes it important to know the rules of your jurisdiction when forming one. The laws can vary wildly from state to state; so can the tax consequences.

Professional corporations are more formal entities than other formations. They must have bylaws and typically require the approval of a board of directors and or shareholders to make decisions for the company. The bylaws of the professional corporation will dictate the decision-making process, among other things, as well as the scope of the activities the corporation will be engaged in.

Pros

  • Higher allowed 401(k) contributions
  • Tax-free employee benefits
  • Potential tax benefits for shareholders
  • Easy-to-transfer ownership
  • Potential to continue in perpetuity after owner's death
  • Easy addition or removal of shareholders

Cons

  • No personal liability protection for individual malpractice
  • Double-taxation risk
  • Not all professionals can form a professional corporation
  • No professional corporation ownership for shareholders of differing professions

Only certain professionals can form a professional corporation. Each state maintains a list of qualified professionals who are permitted to form these types of business structures, but these lists typically include the following:

  • Engineers
  • Lawyers
  • Medical doctors
  • Veterinarians
  • Accountants

Law Firm PC vs. LLC: A Comparison

Eligibility State Rules and Regulations Tax Considerations
Any individual can form an LLC. However, the formation of a PC requires the filer(s) to possess a professional license, such as a license to practice law or medicine. State laws govern LLCs and PCs, which means it is important to understand the rules of the jurisdiction you wish to form them in. In some jurisdictions, you may be barred from forming a law firm in one manner but permitted to do so in another jurisdiction.

For example, Massachusetts does not allow one-owner companies to be formed.

In some states, the PC, LLP, or LLC status of a particular business might not be recognized. As such, the entity will have to register as an out-of-state business.

All structures allow members of these entities to limit their liability for business debts owed by the company.
Tax advantages and disadvantages exist for both PCs and LLCs, depending on which state you will be operating in. PC law firm taxation is based on the net profits of the corporation. Owners may be subject to double taxation if they receive after-tax net profits.

LLCs are exempt from state taxes in most jurisdictions, although there are a few states that require taxation. Additionally, many states have an annual registration requirement and fee.

What Is a PLLC? 

A PLLC is a professional limited liability company. This business structure is reserved specifically for licensed professionals. Not every state recognizes this type of limited liability protection, but more do than don't. One of the principal benefits for licensed professionals operating under a professional limited liability company is the financial liability protection they enjoy from other members' actions. However, they are on the hook for their own actions when they cause harm.

Pros

  • Owners and members are shielded from business debts but may face personal liability
  • Option of pass-through or corporate taxation when it's time to pay income taxes
  • Simple to set up
  • Costs less than a corporation
  • Fewer compliance regulations

Cons

  • Not valid in some states
  • Only professionals can form this type of business entity
  • Self-employment federal and state taxes may come into play

Forming and operating a PLLC is similar to running and operating an LLC and typically provides members with the same tax benefits. Liability protections include protection from business liability and from other members of the business entity, but not from liability due to your own actions.

PLLC and Other Business Types

PLLC vs. LLP PLLC vs. PC PLLC vs. LLC
PLLCs and LLPs are similar in that they allow professionals to avoid liability created by other members or partners of the entity.

Not all states allow LLP attorneys, and they may exclude other professions from forming LLPs. But some do allow attorneys to form their law offices as PLLCs, rather than LLP law firms. Neither is recognized by the IRS for the purpose of taxation. As such, forming a law firm under either of these designations will require you to designate a tax status.
PLLCs and PCs differ in many ways. For example, the management of a PC law firm is controlled by bylaws, boards of directors, and shareholders. Additionally, PCs are taxed differently than PLLCs. PLLCs can opt for pass-through taxation. They may also choose S-corps taxation, which offers a form of pass-through taxation but includes some corporate taxation done at the level of the business. PCs are taxed like regular corporations.

One of the major differences between PLLCs and PC law firms is the amount of compliance work involved with PCs vs. PLLCs. PCs must maintain stock and stock ledgers, along with a host of other corporate requirements. PLLCs only have an annual filing requirement.
A PLLC is a specialized type of LLC. While anyone can form an LLC, only certain professionals are able to legally form a PLLC. Additionally, not every state offers PLLC formation.

Essentially, PLLCs are LLCs for professionals. With a PLLC, professionals can avoid liability for the actions of others; however, they may face liability for their own actions.

Choosing the Right Entity for Your Law Firm: LLC vs. PC

So what's right for your law firm, PC vs. LLC? Starting off on the right foot is important. As you have just read, you have multiple options for structuring your venture and should take the time to understand each one and investigate all relevant tax considerations. Doing so will help greatly in the management of your new firm and help you effectively reduce your personal liability. It will also help you avoid double taxation and other potentially negative effects of state and federal tax law.

If you are considering forming your own law firm, contact Grow Law Firm for more details on entity formation, law firm management, and growth. We are a professional law firm digital marketing agency with a passion for taking law firms to the next level of growth and profitability.

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