Hey everyone! I’m Bette Hochberger, CPA, CGMA. When starting or restructuring your law firm, choosing the right business structure is more than a legal formality—it can significantly affect how much you pay in taxes and how your firm operates financially. Law firms commonly choose between an LLC, LLP, or S Corporation. Each structure has different tax implications, and understanding them can help you make the best decision for your practice.
LLC (Limited Liability Company)
An LLC is a flexible option that’s often ideal for solo attorneys or small firms. It offers limited liability, protecting your personal assets from the firm’s debts or legal issues. From a tax standpoint, a single-member LLC is treated as a sole proprietorship, meaning the firm’s profits are reported directly on your personal tax return. If your firm has multiple members, it’s generally taxed as a partnership unless you elect otherwise.
The main benefit of an LLC is its simplicity. Profits “pass through” to the owner(s), avoiding double taxation. However, owners typically pay self-employment taxes on the full amount of net income. You do have the option to elect S Corporation tax treatment later, which may reduce those taxes.
LLP (Limited Liability Partnership)
An LLP is commonly used by law firms with two or more partners. It provides similar liability protection as an LLC, especially important in professional services where you don’t want to be held personally responsible for another partner’s mistakes.
Tax-wise, an LLP functions much like a partnership. Income passes through to each partner’s personal tax return, based on their ownership percentage or the partnership agreement. Like an LLC, partners are subject to self-employment tax, and profits aren’t taxed at the firm level. Some states have specific rules for LLPs, so it’s important to ensure compliance based on where your firm operates.
S Corporation
An S Corporation can be a tax-efficient structure for law firms that are generating consistent profits. The key advantage is that you can pay yourself a salary and take the rest of the profits as distributions. While your salary is subject to payroll taxes, distributions are not, potentially reducing your overall tax burden.
However, S-corps do come with more IRS scrutiny and administrative requirements. You must pay yourself a reasonable salary, file payroll reports, and handle more formalities than with an LLC or LLP. Additionally, all shareholders must be U.S. citizens or residents, and you can’t have more than 100 shareholders.
So, when deciding on a structure, think about how many people are in your firm, how much you expect to earn, and how involved you want to be with payroll and compliance. Each structure has advantages depending on your goals, income, and growth plans. The best move? Talk to a tax professional who understands the unique needs of law firms.
Need help figuring out the best structure for your firm? Reach out—we’re here to guide you through the process.
As always, stay safe, and I’ll see you next time!
