Examples:

• • A lawsuit against a legal PC over an office lease default typically can’t be satisfied by seizing the attorneys’ personal residences or bank accounts.
  • The PC absorbed the liability when a paralegal caused a data breach, demonstrating the importance of proper oversight by the firm’s attorneys.
  • Despite a PC’s six-figure judgment in a premises liability case, the creditor could not access the attorneys’ personal savings to collect.

How to Proceed:

• • Consult an experienced business attorney and CPA to assess the potential liability protection benefits and limits of a PC for your practice.
  • Follow corporate formalities and maintain distinct PC records and finances to preserve liability protection and prevent veil-piercing.
  • Evaluate business risks like leases and loans, and aim to avoid personal guarantees that can erode PC liability protections.
  • Implement clear hiring, supervision, and conduct policies, and offer regular employee training programs to further minimize liability risks.
  • Work with a malpractice insurance provider to ensure comprehensive coverage for all practicing attorneys, as the PC offers only limited liability protection for malpractice.

FAQs:

• • Will a PC protect me from personal liability for my own malpractice? No, you are still personally liable for your own professional negligence, and a PC will not fully shield you from vicarious liability if you supervise or control other attorneys.
  • What debts and liabilities can a PC shield my personal assets from? Generally, a PC can protect your personal property from the entity’s business debts, contracts, loans, and many civil liabilities, but not your own malpractice.
  • How can I lose my PC’s liability protections? Failing to follow corporate formalities, commingling personal and PC assets, undercapitalizing the PC, or personally guaranteeing debts can all erode the corporate shield.
  • Is a PC the only entity that can limit my personal liability? While a PC offers many benefits, California LLPs are also a popular choice for law practices (with multiple owners), providing liability protection with added flexibility.
  • Do I still need malpractice insurance if I form a PC? Absolutely, as a PC will not protect you from personal liability for your own professional negligence. Sufficient malpractice coverage is essential for all attorneys.

Examples:

• • An attorney who incorporated saved over $10,000 in self-employment taxes in her first year by electing S-corp status and paying herself a reasonable salary that complied with IRS guidelines.
  • By shifting his salary and distributions between two tax years strategically, an incorporated lawyer reduced his effective tax rate by 8%.
  • An attorney optimized the deduction of his $800/month health insurance premiums after incorporating, as corporate structures can offer enhanced tax benefits compared to sole proprietorships.
  • Thanks to her professional corporation’s qualified pension plan, an attorney was able to sock away over $100,000 tax-deferred in a single year.
  • The tax-free fringe benefits that his professional corporation provided him, like an HSA, disability insurance, and child care FSA, saved thousands annually.

How to Proceed:

• • Meet with a knowledgeable CPA or tax attorney to map out potential tax savings and structuring opportunities for your law practice as a PC.
  • Understand the differences between S-corporation and C-corporation status: S-corps allow profits and losses to pass through to your personal tax return, potentially reducing double taxation, while C-corps are taxed separately from their owners but may offer other benefits. Consult your CPA to determine which is most advantageous for your practice.
  • Determine reasonable compensation by considering factors such as industry standards, your experience level, and what similar professionals earn, to satisfy IRS requirements when electing S-corp status.
  • Work with an experienced attorney to properly form your entity, elect optimal tax treatment, and establish a tax and accounting system.
  • Consult pension experts to design and implement the most beneficial qualified retirement plan for your professional corporation.
  • Coordinate with insurance professionals and benefits consultants to maximize tax-favored fringe benefits, insurance, and HSA/FSA programs.

FAQs:

• • Can I still use a Schedule C as a professional corporation? No, professional corporations must file separate tax returns. C-corps file Form 1120, and S-corps file Form 1120-S. Additionally, if you elect S-corp status, you must issue yourself a reasonable salary reported on a W-2. Schedule C is reserved for sole proprietorships and cannot be used.
    
  • How much can I really save in taxes by incorporating my practice? It varies, but solo attorneys often save thousands to tens of thousands annually from reduced SE taxes alone.
  • Are there any downsides to electing S-corporation status? Yes, S-corporations face ownership limits—no more than 100 shareholders, all of whom must be individuals, U.S. residents, or qualifying trusts/estates. Additionally, they can only issue one class of stock.
    
  • Do I have to use a calendar year as a professional corporation? C-corporations can select either a fiscal year or a calendar year. S-corporations, however, must use a calendar year unless they obtain IRS approval or show a legitimate business reason for a fiscal year (e.g., seasonal income cycles).

Examples:

• • When a solo attorney passed away unexpectedly, his unincorporated practice quickly lost most of its value and clients, devastating his family financially.
  • An attorney became disabled in an accident, but her professional corporation allowed for a smooth transition to the successor she had named, preserving the firm’s viability.
  • A lawyer’s spouse had to go through an expensive and lengthy court process to gain conservatorship over his practice when he became incapacitated without a succession plan.
  • By implementing estate planning strategies within his PC, such as establishing trusts and utilizing life insurance, an attorney substantially reduced the estate tax burden on his practice when he passed, while complying with California laws prohibiting non-lawyers from owning shares in a law practice.
  • When an attorney retired on short notice due to health issues, her incorporated firm was able to maintain its value and client base for a profitable sale to another lawyer.

How to Proceed:

• • Incorporate specific provisions in your PC’s bylaws and other documents laying out what happens to ownership and control if you exit.
  • Work with an estate planning attorney to integrate your professional corporation into a comprehensive plan to protect and pass on your assets.
  • Consider using a living trust to hold your PC shares, designating what happens to them if you become incapacitated or pass away.
  • Discuss your succession plan in depth with your named successors so they’re prepared to step in and maintain continuity if needed.
  • Review and update your PC’s succession plan, valuation, and estate tax strategies regularly with your professional advisors to optimize outcomes.

FAQs:

• • If I incorporate my practice, do I have to let someone else take over? No, you can name yourself as the sole initial shareholder, director, and officer and decide on future succession.
  • What happens to my practice if I don’t incorporate and become incapacitated? A court will likely have to appoint a conservator to manage or wind down the practice.
  • Can I name my spouse as my successor even if they’re not a lawyer? In California, non-lawyers cannot be shareholders, directors, or most officers of a law firm’s professional corporation. While your non-lawyer spouse cannot take over legal practice responsibilities, they may assist with certain administrative tasks. However, you should plan for licensed attorney successors to ensure compliance and continuity.
  • How can a professional corporation reduce estate taxes on my practice? You may be able to gift or sell shares over time, utilize dynasty trusts, claim discounts, and use other estate tax mitigation strategies.
  • Will my practice still have value to sell or pass on if I’m not there? A well-structured PC with clear succession plans makes your practice much more likely to retain value without you.

Examples:

• • When a solo attorney decided to expand, having a PC in place made bringing in two new partners fast and simple by issuing shares and updating bylaws.
  • An incorporated law firm was able to attract and retain a superstar associate by offering her a clear path to equity partnership backed by shares in the PC.
  • By issuing a 10% equity stake, an attorney raised $150,000 to invest in technology upgrades and a strategic marketing campaign.
  • When two small incorporated law firms wanted to join forces, the PC structure allowed them to merge and combine ownership interests relatively easily.
  • A larger firm acquired a solo attorney’s practice for a premium, as her professional corporation held valuable business assets and goodwill beyond just her skills.

How to Proceed:

• • Design your PC from the start with clear parameters in bylaws and shareholder agreements for bringing in new shareholders, issuing equity to licensed attorneys, and raising capital.
  • Work with your advisors to build a long-term growth strategy that leverages your professional corporation’s structural advantages.
  • Put in place governance documents, such as bylaws and a shareholder agreement, to manage the PC’s operations and ownership as it evolves.
  • Discuss with your CPA how to compliantly issue equity compensation to licensed attorney employees and offer alternative incentives for non-attorneys.
  • When electing S-corporation status, ensure you pay yourself a reasonable salary in compliance with IRS guidelines, reflecting the market rate for your services to avoid penalties.
  • Evaluate potential mergers, acquisitions, and combinations carefully with your legal, financial and tax advisors to maximize strategic advantages.
  • When designing employee incentive plans, ensure compliance with California law by restricting equity ownership to licensed attorneys and providing alternative benefits to non-attorney staff.
  • Ensure that any new partners or shareholders meet all ethical and legal requirements, including being licensed attorneys in California, and that all agreements comply with the California Rules of Professional Conduct.

FAQs:

• • Can I still maintain control of my practice if I bring in other PC shareholders? Yes, you can structure different share classes (if operating as a C corporation), voting rights (if a C corporation), director roles, and officer titles to maintain control while complying with your bylaws and California law.
  • Are there any limits on who can own shares in my law practice PC? Shareholders must be licensed California attorneys, but the PC can have non-lawyer employees and contractors who do not hold equity or voting rights.
    
  • What’s the best way to bring in a partner to my solo practice? Issuing shares in your PC, updating governing documents like bylaws, and filing necessary paperwork with the state are often the most straightforward steps.
    
  • How can I grant an employee equity without giving up control? For licensed attorney employees, you can issue non-voting or minority shares (if structured as a C corporation), use stock options, or offer profit-sharing. Ensure compliance with California laws, which strictly prohibit non-attorneys from owning shares or equity in a legal professional corporation.
    
  • Is it a good idea to take on outside investors in my law practice? It depends, but non-lawyer, passive investors are generally prohibited or restricted in PCs to maintain compliance with ethics rules and prevent conflicts of interest.
    

Examples:

• • When an attorney established comprehensive business systems under his PC, the firm’s value rose substantially beyond just his personal practice.
  • Clients felt reassured hearing their lawyer’s firm would continue with a succession plan in place, rather than being dependent solely on her.
  • An attorney’s PC was able to transfer her valuable blog content, templates, and other assets to a new partner coming aboard, easing the transition.
  • By carefully building her firm’s brand, reputation, and business goodwill, an attorney commanded a strong valuation when she sold her practice.
  • An attorney found more interested buyers for his practice when they saw the PC held transferable value rather than just personal goodwill.

How to Proceed:

• • Identify the key business assets, systems, intellectual property, and goodwill you can build and transfer value to through your PC.
  • Document and implement succession and transition plans to provide continuity and market confidence in your firm’s lasting value.
  • Discuss with your CPA how to account for the PC’s goodwill, assets, and enterprise value distinctly from your personal practice.
  • Work with an experienced valuation professional to assess your practice’s marketability and value with and without a corporate structure.
  • Be intentional about building overall firm brand, reputation, and transferable value beyond just your skills and relationships.
  • Ensure compliance with ethical obligations under the California Rules of Professional Conduct when planning for practice succession or sale, including obtaining client consent and maintaining confidentiality during any transitions. 

FAQs:

• • How can a professional corporation increase my practice’s long-term value? By shifting value and assets from you as an individual to an enduring business vehicle marketable to successors.
  • Will my clients really care if my practice is incorporated? Many clients appreciate the implied stability and professionalism of a corporate structure vs. a solo practice.
  • What types of intellectual property can my PC own? Any proprietary systems, content, products or processes you develop in the practice can be corporate assets.
  • How do I differentiate personal goodwill from practice goodwill in an entity? Carefully tracking origination, client management, business development and other factors can help show where goodwill resides.
  • Is there a standard formula for valuing a law practice PC? No, but common approaches look at multiples of revenue or profit, discounted cash flows, comparable sales or asset values.

Examples:

• • When an attorney’s paralegal embezzled client funds, the PC structure shielded the attorney’s personal assets from the resulting settlement.
  • An attorney was held personally liable for his associate’s malpractice as a sole proprietor, lacking the protection a PC could have provided.
  • When a law firm defaulted on a loan, only the PC’s assets were at risk, not the shareholders’ personal property.
  • A landlord waived personal lease guarantees due to the PC’s strong financial position.
  • An associate’s sexual harassment of a legal assistant resulted in liability for the PC but did not expose the shareholders personally.

How to Proceed:

• • Consult an asset protection attorney to design a PC structure that effectively shields personal assets from practice risks.
  • Evaluate how your malpractice insurance policy will be impacted by having the PC as the named insured, with individual attorneys listed as additional insureds.
  • Negotiate with bankers and vendors to transfer personal guarantees to the PC as the corporation grows.
  • Maintain corporate formalities to preserve the PC’s liability shield and avoid commingling personal and business finances.
  • Identify operational risks, especially those involving non-attorney employees, and implement safeguards with the help of legal counsel.

FAQs:

• • Can a professional corporation fully shield me from malpractice claims? Not entirely—you remain accountable for your own malpractice and negligence, but the PC can limit other liabilities.
  • Will forming a PC affect my malpractice insurance coverage and rates? Yes. Naming the PC as the insured and individual attorneys as additional insureds can enhance protection.
  • As a PC shareholder, can I still be required to personally guarantee debts? Yes, but this is less common if the PC is profitable and well-capitalized.
  • What happens if I fail to follow corporate formalities? You risk “piercing the corporate veil,” exposing your personal assets to corporate liabilities.
  • Will a PC protect my personal assets from employee lawsuits? It can shift primary liability to the corporation, but poor supervision may still create some personal exposure.

Examples:

• • A family law attorney found that branding her practice as an established PC conveyed more permanence and security to skittish divorce clients.
  • By publishing helpful content and ads under the firm’s clear PC brand, an estate planning lawyer attracted more clients and referrals.
  • Corporate clients felt more confident referring litigation matters and signing long-term retainers with an incorporated law practice rather than a solo practitioner.
  • A PI firm recruited top trial attorneys by offering a clear path to shareholder status backed by the PC’s structure and financials.
  • Press releases and marketing campaigns highlighting the firm’s track record, team, and future plans generated significant buzz thanks to the PC’s distinct brand.
  • An attorney grew her firm’s brand by sharing educational content and insights while maintaining client confidentiality and adhering to ethical advertising standards, attracting new clients ethically and professionally.

How to Proceed:

• • Develop a distinct logo, website, business name, and branding that reflects your practice’s corporate identity and team structure.
  • Create a marketing plan that leverages your PC’s structure and track record to target key client segments and position your firm as a leader in the field.
  • Highlight the stability, resources, and bench strength of your PC in client pitches, networking, and referral discussions.
  • Develop an attorney recruiting and retention strategy that emphasizes your PC’s partnership structure, support infrastructure, and growth trajectory.
  • Amplify your PC’s presence with press releases, content marketing, ads, events, and community engagement.
  • Always comply with ethical guidelines from the California State Bar regarding client confidentiality, advertising, and marketing strategies.

FAQs:

• • Will clients really care if my practice is a sole proprietorship or a PC? Many clients value the stability and professionalism associated with a corporate structure over a solo practice.
  • How do I market my practice brand after incorporating? Develop cohesive branding across your logo, website, marketing materials, and online directories to build name recognition and trust.
  • What should I highlight about my new PC to prospective clients? Emphasize experience, team depth, resources, and your commitment to client service under an established corporate structure.
  • Can I still market under my own name as a PC? Yes, but shift the focus to building brand equity for your firm, not just your personal brand.
  • How can a PC structure help me recruit top talent? Many attorneys and staff prefer the opportunities and stability offered by an established corporate practice.
  • What ethical considerations should I keep in mind when marketing my PC? Follow the California Rules of Professional Conduct by ensuring truthful advertising, safeguarding client confidentiality, and avoiding misleading statements.

Examples:

• • By maintaining orderly, centralized PC records, an attorney successfully completed an audit and tax filing with her CPA.
  • A lawyer received a stern warning from his CPA about commingling personal and business funds, which is far easier to avoid with a PC entity.
  • An employment attorney advised a growing firm to standardize its contracts and policies within a compliant PC framework.
  • By outsourcing IT systems monitoring, a PC reduced in-house technology issues and minimized risks.
  • With clean PC books and a strategic plan, a firm secured an expansion loan after receiving proactive financial guidance.

How to Proceed:

• • Establish clear systems, software, and responsibilities for maintaining accurate, organized corporate, tax, and employee records.
  • Set up distinct bank accounts and credit cards for your PC and implement policies to avoid any commingling of funds.
  • Engage legal counsel to develop compliant contracts, handbooks, procedures, and governance documents for the PC.
  • Assess outsourcing opportunities for specialized tasks such as accounting, IT, marketing, and benefits administration for efficiency.
  • Meet regularly with your CPA, attorney, and financial advisor to review finances, compliance, and strategy for growth opportunities.
  • Consult the California State Bar’s rules on ethical practice and fee-sharing agreements to ensure compliance with all business structures.

FAQs:

• • What business records must a California PC maintain? Articles of incorporation, bylaws, meeting minutes, shareholder records, financials, and tax filings are essential.
  • Can I deduct business expenses paid with personal funds? It’s best to have the PC pay directly, but reimbursement is possible with proper documentation.
  • Do I need an employee handbook and policies for my PC? Yes, handbooks and policies help ensure consistency, compliance, and risk management as your firm grows.
  • What functions can a PC outsource most easily? Accounting, IT, marketing, HR, and billing/collections are common options to outsource.
  • How often should I review my PC’s financials and systems? Review financials monthly with your CPA and quarterly with external advisors for strategic planning.

Questions: Basics & Benefits of a Professional Corporation

• • 1. What is the main purpose of forming a professional corporation?
    • A) To shield personal assets from law practice liabilities
    • B) To reduce tax liabilities and gain tax benefits
    • C) To ensure practice continuity and succession
    • D) All of the above
  • 2. How does a PC limit an attorney’s personal liability exposure?
    • A) It doesn’t – attorneys are still fully liable for malpractice claims
    • B) It creates a corporate shield separating personal and practice debts and liabilities
    • C) It eliminates the need for malpractice insurance entirely
    • D) It prevents clients from bringing any lawsuits against the practice
  • 3. What tax benefits can attorneys gain by forming a PC?
    • A) Deducting more business expenses than sole proprietors
    • B) Reducing self-employment taxes by electingS-corporation status
    • C) Shifting income and losses strategically among shareholders
    • D) All of the above
  • 4. How can a professional corporation help ensure practice continuity?
    • A) It has perpetual existence separate from individual attorneys
    • B) It allows naming successors in advance to take over if needed
    • C) It protects the practice from going through probate if an attorney dies
    • D) All of the above
  • 5. What is a key advantage of a PC over a general partnership?
    • A) PC shareholders aren’t personally liable for each other’s malpractice
    • B) PCs file simpler tax returns than general partnerships
    • C) Only PCs can have centralized management, not partnerships
    • D) General partnerships can’t hold any property or assets in the entity name

Answers: Basics & Benefits of a Professional Corporation

• • 1. D) The main reasons to form a PC are to limit liability, reduce taxes, ensure succession, and facilitate growth – a full suite of advantages.
  • 2. B) It creates a corporate shield separating personal assets from business debts and liabilities, but owners remain liable for their own malpractice.
    
  • 3. D) A PC opens up a range of potential tax deductions, strategies and savings not available to sole proprietors, especially with S-corp status.
  • 4. D) PCs provide much greater continuity than sole proprietorships by having perpetual existence, allowing successor planning, and avoiding messy probate.
  • 5. A) The biggest structural advantage is that PC shareholders have limited liability, while general partners are personally liable for all partnership debts.

Questions: Forming & Maintaining Your Professional Corporation

• • 1. Who can form and own a legal professional corporation in California?
    • A) Any individual or company as long as one director is a licensed attorney
    • B) Only licensed California attorneys can be shareholders, directors or officers
    • C) At least 50% of the owners must be California licensed attorneys
    • D) One licensed attorney is required, but any other professionals can also be owners
  • 2. Which of the following is NOT required to form a California PC?
    • A) Articles of Incorporation filed with the Secretary of State
    • B) Bylaws setting out core governing rules and procedures
    • C) A shareholders agreement signed by all equity partners
    • D) S-corporation tax election filed with the IRS and FTB
  • 3. What should you consider when selecting your PC’s legal name?
    • A) Whether it’s distinguishable from other businesses in CA and your practice area
    • B) If the name implies a false or misleading connection to any other lawyers
    • C) Whether the name states or implies a partnership if there isn’t one
    • D) All of the above
  • 4. How often must a California legal PC hold shareholder and director meetings?
    • A) Shareholder meetings are required annually, director meetings as set in the bylaws
    • B) The PC must hold at least quarterly meetings of both shareholders and directors
    • C) No meetings are required by law, but should be held regularly and documented
    • D) Only an initial organizational meeting is required, and then as desired
  • 5. Which of the following formalities is NOT required for a California PC?
    • A) Issuing shares to all equity holders and maintaining a share ledger
    • B) Keeping copies of all formation documents, amendments, minutes, and consents
    • C) Having all shareholders sign a buy-sell agreement for share transfers
    • D) Maintaining separate PC financial records and accounts from personal

Answers: Forming & Maintaining Your Professional Corporation

• • 1. B) Only licensed CA attorneys can have any ownership stake in a legal PC, though the entity can have non-attorney employees and contractors.
    
  • 2. D) Articles of Incorporation and bylaws are required, and a shareholders agreement is highly advisable, but an S-corp election is optional.
    
  • 3. D) All of these considerations are important to avoid legal and ethical risks surrounding misleading or conflicting practice names.
    
  • 4. C) No specific meeting cadence is legally required, but most PCs should hold at least annual shareholder and board meetings to ensure proper governance.
    
  • 5. C) While a buy-sell agreement is a best practice, it is not legally required like share issuance, record maintenance, and financial separation.