Thank you for sharing!

Your article was successfully shared with the contacts you provided.
DALLAS — So you’ve decided to start a firm. As you think about the thousands of details that go into starting any business, don’t forget the most basic, and in many ways most important, foundational decision you have to make: What form of business should you use? Each has advantages, but take the time to weigh them carefully before you start signing on the many dotted lines that will cross your desk. The first form is no form. Put another way, when you use this approach, you simply practice as an individual without ties to any other entity. It is easy to overlook this approach because of its obvious disadvantages: An individual who practices as such is individually liable for debts and for whatever goes wrong. Personal assets can be tapped to satisfy a business liability. By the same token, not creating a corporate or other entity for your practice is undeniably simple. You have no agreements to write or papers to file with any governmental entity, no franchise taxes to pay, and nothing more than your usual income taxes to file. Groups of lawyers can do this in the form of an office-sharing relationship. In such a situation, each attorney maintains his or her own practice, and there is an agreement between the various individuals or entities as to how expenses will be shared. This can enable a group of lawyers to have access to better space, equipment and services than they could afford themselves, but it is not without its pitfalls. The first pitfall echoes the days when you tried to divide the long distance bill with your college roommate: What if he or she doesn’t pay? Entering into this kind of relationship requires a written agreement, and it will require some measure of enforcement, which can negate the benefits of entering into the arrangement in the first place. The other trap lies in the area of apparent authority. Those who share space can be viewed by outsiders as partners, even if they are not. If you create a situation with your suite mates in which you appear to give them authority to act on your behalf, their actions may bind you. Each participant in such an agreement must use caution to avoid leaving a client or potential client with this impression. If properly managed and worked out in advance, office-sharing arrangements can be an effective way to cut costs. For most small groups, there really are two choices — the limited liability partnership or some form of corporation. Each has advantages and disadvantages. A limited liability partnership (LLP) is a relatively new subset of the larger classification of partnerships. Unlike a general partnership, partners in an LLP are not liable for the obligations of the enterprise and are personally responsible only for their own wrongful acts or obligations — thereby providing a significant advantage over former forms of business. Unlike a general partnership, there must be a written document creating an LLP. In all other respects, an LLP is like a partnership. Unless the partners agree otherwise, each partner in an LLP has an equal vote, and each can speak for the partnership. General partnerships and LLPs do not pay income taxes themselves, and all income is considered to pass through and be the income of the individual partners in proportion to each partner’s share in the partnership. This concept seems easy enough, but it contains several hidden traps. The first trap is the concept of “phantom income.” Every dollar of income received by the firm is attributed and taxable to its partners in proportion to their ownership interest, even if the firm decides to retain funds to operate in the following year. Phantom income can result in a significant increase to a partner’s tax liability in a given year. Opportunities to pay deferred compensation to partners (e.g., a 401(k) plan) may be significantly limited compared with other forms of business, so when you set up your LLP, make sure you’ve obtained tax advice and structured your partnership agreement to take maximum advantage of favorable tax positions. Finally, there is the time-honored alternative to partnership, the professional corporation (PC). A PC is a corporation, so its employees are not personally responsible for corporate debts or other liability, so long as the business is properly operated. As a corporation, a PC requires a corporate charter, at least one officer or director, minutes and annual meetings. Like any other corporation, a PC must itself pay federal income taxes on its income. Corporate employees must pay income taxes on their income from the PC, creating double taxation, a factor of importance to some. A real plus emanating from this business form is the ability to provide enhanced forms of benefits and deferred compensation. For licensed professionals like attorneys, it may be possible to use a subchapter S corporation or a professional limited liability corporation (PLLC), each of which allows corporate income to be passed through to shareholders. There are restrictions on how many shareholders there can be in a subchapter S corporation and issues unique to PLLCs. These forms should be done in conjunction with a tax professional. Tom Alleman is a shareholder in the environmental practice group at Winstead Sechrest & Minick in Dallas. This article originally appeared in Texas Lawyer , a Recorder affiliate based in Houston.

This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.

To view this content, please continue to their sites.

Not a Lexis Advance® Subscriber?
Subscribe Now

Not a Bloomberg Law Subscriber?
Subscribe Now

Why am I seeing this?

LexisNexis® and Bloomberg Law are third party online distributors of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® and Bloomberg Law customers are able to access and use ALM's content, including content from the National Law Journal, The American Lawyer, Legaltech News, The New York Law Journal, and Corporate Counsel, as well as other sources of legal information.

For questions call 1-877-256-2472 or contact us at [email protected]

Reprints & Licensing
Mentioned in a Law.com story?

License our industry-leading legal content to extend your thought leadership and build your brand.


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2021 ALM Media Properties, LLC. All Rights Reserved.