When setting up a new law practice, there are lots of things to think about, including the type of law you want to practice, where you want to be located, how much you’ll charge, who you’ll work with, what practice management tools to use, the color of the carpet, and what your business cards will look like.
One of the first and most important decisions from a risk control standpoint is what type of legal entity to structure the practice as.
In most states, lawyers have several forms of organizational structure they can choose from. Most commonly: Limited Liability Company or Limited Liability Corporation (LLC); Limited Partnership or Limited Liability Partnership (LLP); Professional Corporation; Straight Partnership; or Sole Proprietorship.
Each structure has its pluses and minuses. What you choose will be guided by your—and, if you have them, your colleagues’—financial goals, appetite for risk, and by the local practice rules and state regulations.
Local and State Rules
The first step in deciding on your structure is determining what is allowed under applicable state rules. All states prohibit law firms from being structured as “regular” business corporations, but you can choose some form of limited liability structure.[1]
It is a good idea to opt for such when available, especially if you are practicing with someone else or sharing space with other professionals. By formulating a limited liability entity you can help limit your personal losses for everything from vicarious professional liability to shared premises liability.
Each structure has its own tax implications as well as liability implications. No structure can completely shield you from professional malpractice liability, however: to allow lawyers to be fully financially shielded from their own bad acts through prior structuring goes against professional conduct rules. See, e.g., MRPC 5.4; comment 14 to MRPC 1.8.[2]
Another tricky quirk of structuring a legal practice organization: rules prohibiting lawyers from sharing fees with non-lawyers. One way this comes into play is when lawyers look to structure their assets to protect against losing them to professional or other liability by placing them in a non-attorney spouse’s name.
It also matters if you are thinking of creating some sort of innovative pay structure for non-lawyer employees (like marketing professionals or administrators or even legal secretaries or legal assistants) like profit-sharing or bonus structures based on their contribution to the bottom line income from fees. Such a set-up is not necessarily prohibited, but you do need to follow the guidance provided by ethics opinions in your jurisdiction.[3]
Likewise, if you plan to create any sort of multi-professional practice—combining accounting and lawyer services under one roof, for instance, or including non-lawyer negotiators, lobbyists, or engineers in the practice—you must familiarize yourself with the rules and ethics opinions from your jurisdiction regarding same and create a structure that clearly delineates between fees earned for legal services and fees earned otherwise. Offering a multi-faceted one-stop shop to clients is doable, but requires some thought and creativity.
The Virtual Law Office
An interesting, relatively new, twist to law firm structure is the “virtual law office” or VLO. VLO’s range from a single attorney working solely from home, interacting with clients only remotely, and having no, or nearly no, hard copy paper of any sort or any permanent office space; to an attorney who is part of a larger brick and mortar firm but who only works from a remote location; to large associations or partnerships of lawyers spread across jurisdictions who interact with each other and with clients solely over the computer and through client portals.
As happens so often with technological advancements, the rules and case law have not kept pace with the speed of those innovations, so there is not yet a lot of clear guidance about how ethics rules apply to VLOs.
There is some reasonably clear guidance about whether or not you must have a physical office at which a client can find you (which rules vary from state to state), but less clarity about the general acceptability of working with clients across state lines under such circumstances.
Additionally, it is important to work closely with your insurance agent and underwriter to be sure that they are clear about the geographic reach of your practice and the various protections you implement to protect client confidentiality when interacting solely through a variety of remote contexts.
From a risk control perspective, direct contact—by telephone and preferably face-to-face—at least initially, is a strong asset in assessing whether your client is unhappy with your services as well as a very effective tool for diffusing escalation of that dissatisfaction into an actual professional liability claim.
Check out more tips about effective communication
as a risk control tool.
The Risk Control Bottom Line
Organizational structure of your new practice has connections to controlling both general business liability risk and professional liability risk. Take both into account when setting up your firm. Reference applicable practice rules and official opinions, confer with your insurance provider, and work with any proposed colleagues—whether they are lawyers or not—to determine what fits your—and their—appetite for risk.
[1] This prohibition generally applies to all service professions and is grounded in a desire to ensure that the professional is not only ethically but also financially motivated to avoid committing malpractice. Prohibiting full incorporation with all of its incumbent separation of business assets from personal liability ups the ante for any professional in practice, adding an extra layer of incentive to practice carefully and conscientiously. Limited liability structures allow the professional to protect personal assets against “regular” business debts and allows the business to be treated as a separate entity for tax purposes, while still exposing them to “enough” personal financial risk to properly promote conscientious practice and help avoid clients being faced with judgment proof service providers in the face of a meritorious claim of malpractice.
[2] There is also another underlying reason for the prohibition against organizing as a regular business corporation: allowing non-lawyers to hold shares in such a corporation or to sit on its board would violate the ethics rules regarding independence of lawyers, the prohibition against lawyers being directed by non-lawyers, and “entities” practicing law. See MRPC 1.8; MRPC 5.4.
[3] See MRPC 5.4(a)(3) (it is permissible to institute profit-sharing plans and pay bonuses to non-lawyers based on overall firm performance, but they cannot be based on a single matter’s fee)
