Forming Your Own Firm
If you’re considering starting your own practice in Washington state, how you decide to structure your firm may have a large impact on bookkeeping, maintenance, and your bottom line. Below you’ll find the highlights of three of the most common law firm structures in Washington. Take a look:
Professional Limited Liability Partnership
The Breakdown: A PLLP limits the personal liability of partners from the debts and misdoings of other partners. Membership is limited to licensed professionals. PLLPs are formed with state’s Corporations Division. Filing fee is $200. Entity is subject to annual reports; report fee is $60.
Tax Structure: Pass-through entity. Profits reported on Schedule K-1, and partners pay income tax on their share of profits.
Initial Partners Required: At least two.
Liability Protection: Limits partners’ personal liability from debts of the business and misconduct of other partners.
Professional Limited Liability Company
The Breakdown: Hybrid entity sharing elements of partnership and corporation. Owners are referred to as members. Membership is limited to licensed professionals. Formed by filing Certificate of Formation with the state’s Corporations Division. Filing fee is $200. Subject to annual reports; report fee is $69.
Tax Structure: Pass-through entity by default. Profit reported on Schedule K-1 (unless it is a single-member PLLC, then Schedule C). Can elect to be taxed as a C or S-Corporation. If electing C or S-Corp status, you must set up W-2 payroll.
Initial Members Required: One.
Liability Protection: Limits personal liability of members from company debts and some lawsuits.
Professional Service Corporation
The Breakdown: All shareholders must be licensed professionals. Formed by filing Articles of Incorporation with the state’s Corporations Division. This entity type has stricter requirements concerning bookkeeping, and shareholder meetings and resolutions. Filing fee is $200. Annual report fee is $69.
Tax Structure: Subject to 35% corporate tax as a C-corporation; files tax return on Form 1120 each year. Can elect to be taxed as S-corporation, changing tax structure to a pass-through entity (shareholders report profits on Schedule K-1). Corporations must set up W-2 payroll.
Initial Shareholders Required: One.
Liability Protection: Limits personal liability of shareholders from company debts and lawsuits.
For Your Consideration
A law firm can operate as a regular corporation or LLC; however, all officers and members must be licensed professionals. Liability, member requirements, and tax structures are the same as their professional counterparts. Of course, you can operate as a sole proprietorship and begin practicing in the state after acquiring a business license.
Also, no matter what type of entity you choose for your law firm, despite the inclusion of the words “limited liability,” no entity will negate your need for malpractice insurance. For any of the corporate structures above, if a judgment for gross negligence was levied on a shareholder, member, or partner (and perhaps their direct supervisor), they would be personally liable, and all assets of the law firm may be vulnerable; however, the other members or shareholders would not be personally liable — but their assets in the company could be up for grabs.