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PROFESSIONAL SERVICE ENTITIES
Roger RoyseRoyse Law Firm, PC
1717 Embarcadero RoadPalo Alto, CA 94303
Skype: roger.royse
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
What is the Right Legal Structure For Your Law Firm?
Law Corporation Rules
Fee and State Bar RegistrationCertificate from SoSEach Shareholder is active Member of the Bar Death, disability or disbarmentNameInsurance or Undertaking ($50k per claim/$100k aggregate per lawyer)Legended stock certificates Bylaw restrictionsCircular 230
Ethical Issues
IRS Circular 230 restricts the firm’s practice before the IRS if any partners violate certain rules.
The entity name is a “communication,” subject to Rule 1-400.
The duties set forth in Rule 3-110 include the duty to supervise the work of subordinate attorney and non-attorney employees or agents.
Legal Requirements
Sole
PC
State bar and Rule 1-400 compliance
• Each partner must be an active bar member or an eligible law corporation
• State bar and Rule 1-400 compliance
• “RLLP” or “LLP”• Certification• Security
• Moscone-Knox PC Act• Licensed shareholders• State bar and Rule
1-400 compliance• Generally joint and
several liability• Registration• Security
LLP
Liability Protection
Sole
PC
Protection not provided.
Protection provided, except for personal negligence.
Protection provided, except for the professional (and employees)’s malpractice and payroll tax claims.
LLP
Income Tax
C Corp.
S Corp.
• Corporate level tax. Maximum rate of 35% plus 9.3% California
• Tax free formation, taxable distribution
• Excludible benefits• Deduction for
Compensation
• Pass-through• Tax free
contributions and distributions
• $800 annual minimum tax
• 39% Individual rate
• Pass-through, subject to excess net passive income tax rules
• 100 or less US-person individuals or trusts
• Single class of stock• Certain benefits for
< 2% shareholders• Tax free formation,
taxable distribution
LLP
Self-Employment and Payroll Taxes
LLPSelf-Employment Tax
PCPayroll Tax
Self Employment Taxes (SET): Partner: 12.4%
Medicare tax: (no max base) Partner: 2.9%
> $200k (single) or $250k (MFJ): Earned income: 0.9% (Passive income: 3.8% NIT)
Social security (max base $113,700). Employee: 6.2% / Employer: 6.2% No SET / Limited NIT Reasonable Compensation
Medicare (no max base) Employee:1.45% / Employer 1.45%
> $200k (single) or $250k (MFJ): Earned income: 0.9% (Passive income: 3.8%)
Employee Benefits
C Corp.
S Corp.
Deductible by corporation—not included in income of employee
Cash value of fringe benefits not excludable from partner’s income or deductible by the partnership (guaranteed payment)
Cash value of fringe benefits generally not excludable from > 2% owner-employee’s income or deductible by S corporation (W-2 wages)
LLP
Methods of Accounting
C Corp.
S Corp.
Generally accrual method if the C corporation’s annual gross receipts exceed $5 million.
Must use accrual method if a C Corporation is a partner, unless the partnership has less than $5 million gross receipts per year.
Must use accrual method if the S corporation maintains inventory.
LLP
Compensation / Distribution Policies
Gross SplitNet SplitSalariedSubjective
C Corp.
S Corp.
Deductible expenses
Compensatory bonuses
Special allocation / distributions based on gross or net revenues or a custom formula allowed; substantial economic effect required
Second class of stock rule
Compensatory bonuses
LLP
Other Policies and Provisions
Write OffsExpensesCLEFirm NameTitlesStaff & AssociatesNon–Equity PartnersPractice AreasOffice Locations
Liquidation and Dissolution
C Corp.
S Corp.
Amounts distributed in complete liquidation are treated as full payment in exchange for the stock
Shareholder level tax on liquidation
Jewel v. Boxer: “unfinished business” doctrine / “no compensation rule”—profits earned by former firm partners at their successor firms are ‘old LLP’ assets
One level of tax
Amounts distributed in complete liquidation are treated as full payment in exchange for the stock
Generally capital gain on stock sale
LLP
The Future of Law Practice
Jacoby & Meyers case
OnLine Solutions (RoyseLaw Incorporator)
Crowdsourced solutions (Rocket Lawyer)
Pooled resources (Lexis-Nexis, Lawyers.com)
Legal Force model
RoyseLaw Legal WizardRoyseLaw Incorporator
32
www.rroyselaw.com @RoyseLaw
PALO ALTO1717 Embarcadero Road
Palo Alto, CA 94303
LOS ANGELES1150 Santa Monica Blvd.
Suite 1200Los Angeles, CA 90025
SAN FRANCISCO135 Main Street
12th FloorSan Francisco, CA 94105
Palo Alto Office: 650-813-9700
Contact Us
The discussion of tax consideration was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding tax penalties that may be imposed by the Internal Revenue Service. Each party should seek advice based on the party’s particular circumstances from an independent tax advisor.
In accordance with Section 6694 of the Internal Revenue Code of 1986, as amended (the “Code”), we hereby advise you that the positions set forth herein may lack substantial authority and, therefore, may be subject to penalty under Code section 6662(d) unless adequately disclosed on IRS Form 8275.
Circular 230 Disclosure
