Starting a Law Firm: LLP vs. PC

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.

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

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

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 SEO agency with a passion for taking law firms to the next level of growth and profitability.