C. Selecting the Right Entity Structure
In establishing your law practice, you have four distinct structures to choose from: the
general partnership, the professional corporation, the limited liability company and the
registered limited liability partnership. Liability for the firm's obligations is a main
factor which distinguishes the entities from one another. In order to form a law firm as a
particular entity, one must follow the exact filing procedures in the relevant statutory
provisions, with the exception of the general partnership. A general partnership can be
established with no formal filing with the state.
1. General Partnership
In a general partnership, the partnership is liable for the wrongful acts or omissions
of a partner acting in the ordinary course of business of the partnership, or within the
authority of the partnership. Tex. Rev. Civ. Stat. Ann. art.6132b, SS 3.03(a) (West 1996).
All partners are jointly and severally liable for all obligations of the partnership,
unless otherwise agreed by the claimant or provided by law. (SS 3.04, supra).
If you intend to practice as a solo practitioner, the general partnership might be the
most logical choice. A solo practitioner doesn't need to worry about vicarious liability
for the malpractice of other firm attorneys there aren't any! Still, you might wish to
consider other structures, if you intend to practice with other attorneys or are concerned
about limiting other types of liability, e.g., contractual liability.
2. Professional Corporation
A professional corporation is just that a corporation for professionals. Law firms are
prohibited from practicing law as regular business corporations, due to the liability
shield that a corporation provides to its shareholders, directors and officers. See
Delaney v. Fidelity Lease Ltd., 517 S.W.2d 410, 423 (Tex. Civ. App. El Paso 1974), rev'd
on other grounds 691 S.W.2d 543 (Text 1975). A professional corporation modifies the
corporate veil somewhat, so that attorneys in a professional corporation are still liable
for their own professional errors and malpractice. See Tex. Rev. Civ. Stat. Ann.
art. 1528e, SS 16 (West 1996).
Only licensed professionals may hold office in a professional corporation. (SS 10). Thus,
only attorneys may hold office in a law firm organized as a professional corporation. The
Texas Professional Corporation Act states that only the malpracticing attorney acting in
the course of his employment and the corporation itself are jointly and severally liable
for the professional misdeed. (SS 16). Other individual shareholders, officers or
directors are not liable for the misconduct of another officer, employee or agent
rendering professional services within the scope of his employment. A shareholder or
officer is not personally liable for other corporate debts, such as contract obligations.
Nevertheless, this provides little protection, as sophisticated creditors (such as
landlords and banks) will demand that individual shareholders personally guarantee
corporate debts.
For a solo practitioner, a professional corporation offers the same protection for
professional misdeeds as all other business entities none. In addition, both individual
shareholders and the corporation must pay federal income tax, unless the corporation
qualifies for Subchapter S treatment. See I.R.C. SS 1361 (1994). Thus, for the solo
practitioner, incorporating as a professional corporation may mean double federal
taxation. Professional corporations are also subject to the Texas franchise tax. See
Tex. Tax Code Ann. SS 171.001(a) (West 1992). Finally, incorporation as a professional
corporation requires attention to corporate procedure, such as bookkeeping and corporate
minutes, so as to ensure that the corporation is treated as a separate entity.
3. Limited Liability Company
A limited liability company, or LLC, is treated as a partnership for federal income
tax purposes. See Prop. Treas. Reg. SSSS 301.7701-1 to 301.7701-3, 61 Fed. Reg.
21,989 (1996). LLCs thus avoid the double taxation problem of most corporations. LLCs,
however, are still subject to the Texas franchise tax. See Tex. Tax Code Ann. SS
171.001(a) (West 1992).
Texas specifically authorizes professionals to organize into LLCs, or professional limited
liability companies (PLLCs). See Tex. Rev. Civ. Stat. Ann. art. 1528n, SS 11.01
(West 1996). The liability provisions of a PLLC are identical to those in the Texas
Professional Corporation Act. Also see SSSS 11.04 - 11.05; and see also Tex.
Rev. Civ. Stat. Ann. art. 1528e, SSSS 15 - 16 (West 1996). A LLC, but not the individual
members, managers or officers, is liable for the professional misdeeds of a member,
manager or employee conducted within the scope of employment. See Tex. Rev. Civ.
Stat. Ann. art. 1528n, SS 11.05 (West 1996). The members of a LLC are also not vicariously
liable for the contractual debts incurred by another member of the LLC. The individual
attorney is still personally liable for his or her own acts or omissions. Unlike
professional corporations, LLCs are specifically exempt from all Texas securities laws. (supra
SS 11.06).
One-member LLCs are permitted, but the tax status (classification as a partnership or
corporation) of one- member LLCs is currently unresolved. See Francis J. Wirtz and
Kenneth L. Harris, Tax Classification of the One- Member Limited Liability Company, TAX
NOTES (June 28, 1993). The IRS refused to consider a ruling request regarding the tax
status of one-member LLCs. Rev. Proc. 95-10.
4. Registered Limited Liability Partnership
Texas was the first state to enact limited liability partnership (LLP) legislation in
1991. A LLP is essentially a general partnership which limits one partner's liability for
another partner's professional misdeeds. A partner in a LLP is not liable for errors,
omissions, negligence, incompetence or malpractice of another partner/representative
committed in the course of the partnership, unless the first partner either directly
supervised the negligent partner, was directly involved in the misdeeds, or had notice or
knowledge of the misdeeds. See Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(a) (West
1996); art. 6132b, SS 15(2) (West 1996). A LLP must also carry at least $100,000 of
liability insurance to cover such professional misdeeds (such as malpractice). See
Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(15)(d); art. 6132b, SS 45-C (West 1996).
A solo practitioner gains no benefit by forming his law firm as a LLP. The LLP provisions,
as all other entities, do not excuse a partner for his own professional misdeeds. A law
firm with at least two partners may well consider forming as a LLP. The LLP is the entity
currently favored by Texas law firms, because of the limitations on malpractice liability.
Unlike a LLC or professional corporation, a LLP does not have to pay the Texas franchise
tax. See also Tex. Tax Code Ann. SS 171.001(a)(West 1992). Although the LLP
structure protects a partner from vicarious liability for another partner's malpractice,
it does not provide protection for other types of liability, such as contractual
liability. See Tex. Rev. Civ. Stat. Ann. art. 6132b- 3.08(a)(2)(A) (West 1996).
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D. Personnel Policies
An employee manual is a critical management tool if you have more than ten employees. Your
manual needs to address a wide range of topics including policies on vacation, sick days,
short- and long-term disability, maternity leave, Family Medical Leave Act compliance,
insurance, substance abuse, work schedules, client confidentiality, compliance with
Americans with Disabilities Act, sexual harassment, discrimination, publicity, employee
evaluations, job descriptions, discipline, and termination. If you need a head start on an
employee manual, the following model employee manual for law firms is available in hard
copy with WordPerfect diskettes: Berne C. Rolston, Law Office Staff Manual: Model
Policies and Procedures for Law Office Personnel, LAW PRACTICE MANAGEMENT (1992).
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