A California professional law corporation is a corporation formed to practice law under the Moscone-Knox Professional Corporation Act and the State Bar Act. To operate, it must incorporate with the California Secretary of State and then obtain a Certificate of Registration from the State Bar of California before rendering legal services. Its shares, directors and officers are generally limited to licensed attorneys, its name and bylaws must follow State Bar rules, and it must provide security for professional liability claims. Incorporating can offer tax and administrative benefits, but it does not shield an attorney from liability for his or her own malpractice.
Attorneys who want to incorporate their practice in California face rules that do not apply to ordinary businesses. Here are seven points to understand before forming a law corporation.
1. Two Regulators: The Secretary of State and the State Bar
A law corporation is formed by filing articles of incorporation with the Secretary of State as a professional corporation. That alone does not authorize it to practice law. Under the State Bar Act (Business and Professions Code §6160 and following) and the State Bar’s Law Corporation Rules, the corporation must apply to the State Bar for a Certificate of Registration, typically submitting filed articles, required bylaw provisions, information about shareholders, directors and officers, and proof of security for claims. The corporation must keep its registration current, pay required fees, and report changes such as new shareholders or a name change.
2. Choosing a Compliant Name
The corporation’s name must satisfy both corporate law and the State Bar’s rules. Law corporation names generally must include a designation such as “Law Corporation,” “Professional Corporation” or an approved abbreviation, and the name must not be false or misleading. Firm names are also governed by the California Rules of Professional Conduct, including Rule 7.5, which prohibits misleading firm names and trade names. Using the name of a lawyer who is no longer associated with the firm, or implying a relationship with a government agency, can create problems.
3. Who Can Own Shares and Serve as Directors and Officers
With limited exceptions, shares of a law corporation may be owned only by attorneys licensed in California (or as otherwise permitted by statute and State Bar rules), and directors and officers must generally be licensed attorneys. This reflects Rule 5.4 of the Rules of Professional Conduct, which bars nonlawyers from owning an interest in or directing the professional judgment of a law practice. Spouses, family members and outside investors cannot simply hold shares, which affects estate planning and capital raising.
4. Required Share Transfer Restrictions
State law and the Law Corporation Rules require the articles, bylaws or a written agreement to address what happens to shares when a shareholder dies or becomes disqualified from practicing law, for example through disbarment, suspension or resignation. In those situations, the shares must be sold or transferred to the corporation or to qualified persons within time limits set by statute and the State Bar’s rules, and the transfer terms must be documented in advance. Share certificates must also carry legends describing the transfer restrictions.
A well-drafted shareholder agreement should address valuation, payment terms and funding for these buyouts so the corporation is not caught without cash when a mandatory transfer is triggered.
5. Disqualified Attorneys
A law corporation may not allow an attorney who has been disbarred, suspended or has resigned to practice law through the corporation or to be held out as available to practice. The disqualified person’s name generally must be removed from the firm name, signage, letterhead, website and other materials within the time required by the rules. If the attorney later becomes eligible again, the rules may allow the person to reacquire shares.
6. Security for Claims and Limits on Liability Protection
A key difference from an ordinary corporation is that a law corporation must provide security for claims against it arising from the rendering of legal services. Under the State Bar’s rules, this is generally done through professional liability insurance meeting minimum coverage levels or a written agreement by the shareholders to guarantee payment of such claims up to specified amounts. Confirm the current requirements with the State Bar when forming the corporation.
Incorporation also does not protect an attorney from personal liability for his or her own professional negligence. The corporate form may help limit personal exposure to ordinary business debts and, in some cases, to the malpractice of colleagues, but the details depend on the security arrangements and the facts.
7. Tax and Entity Choice Considerations
A professional corporation can be taxed as a C corporation or can elect S corporation status if it meets the eligibility requirements. Many small law corporations elect S status, which generally allows income to pass through to the shareholders while paying attorney-shareholders reasonable compensation through payroll. In California, S corporations also pay a state franchise tax on net income, subject to an annual minimum tax. Our article on understanding S corporations explains the basics.
Attorneys sometimes ask whether they can form an LLC instead. California generally does not permit LLCs to render professional services that require a state license, including legal services, so a California law practice typically uses a professional corporation, a partnership, or a registered limited liability partnership (LLP), which has its own State Bar registration and security requirements. A sole practitioner can also simply practice as a sole proprietor.
Other Practical Points
- Adopt bylaws that include the provisions the State Bar requires, and keep corporate minutes and records up to date.
- Maintain separate bank accounts, including client trust accounts that comply with the Rules of Professional Conduct and State Bar trust accounting requirements.
- Update engagement letters, letterhead, and the attorney’s State Bar profile to reflect the corporate name.
- Review employment, retirement plan and benefits arrangements with tax advisors.
- Calendar annual State Bar renewal and Secretary of State filing deadlines.
The Takeaway
A professional law corporation can be a practical structure for a California law practice, but it is subject to rules that ordinary corporations are not. Planning the name, ownership, share transfer restrictions, security for claims and tax treatment up front makes registration smoother and helps avoid compliance problems later.
Frequently Asked Questions
Do I need State Bar approval to form a law corporation in California?
Yes. After incorporating with the Secretary of State, the corporation must obtain a Certificate of Registration from the State Bar of California before it can render legal services, and it must keep that registration current.
Can a nonlawyer own shares in a California law corporation?
Generally no. With limited exceptions, shares must be owned by licensed attorneys, and directors and officers must generally be attorneys, consistent with rules prohibiting nonlawyer ownership of law practices.
Does a law corporation protect me from malpractice liability?
No. Incorporating does not shield an attorney from personal liability for his or her own professional negligence. The corporation must also provide security for claims, usually through insurance or a shareholder guarantee.
Can a California law practice be an LLC?
Generally no. California does not allow LLCs to provide professional services that require a state license, such as legal services. Law practices typically use a professional corporation, a partnership or a registered limited liability partnership.
How Sutter Law Can Help
Sutter Law assists professionals with entity selection, incorporation and governance documents as part of our business formation practice. Contact us for a free consultation.
This article is general information, not legal advice. Reading it does not create an attorney-client relationship.
