Starting your own business, instead of working for a boss, is probably the dream of most professionals. After passing the bar, many attorneys have one ultimate goal in mind: to put up their own firm. If you’re a lawyer who wants to start your own business of providing legal services in California, you should form a professional corporation. It is the entity of choice for law firms.  

What exactly is a Professional Law Corporation? Is it the right entity for lawyers in California?

What is a Law Corporation? 

Law corporations are a form of professional corporation that are duly registered with both the California Secretary of State and the State Bar of California. Law corporations are engaged in providing services in line with the legal profession.  

Which Government Agency Regulates Law Corporations? 

According to the California Corporation Code § 13401(b), all professional corporations must be registered with the corresponding government agency that is tasked to manage their profession. Law corporations that intend to provide legal services in California must be registered with the State Bar of California.  The formation of Law corporations is also regulated by the Business and Professions Code – Sections 6160 through 6172.

Considerations When Forming a Law Firm Professional Corporation in California 

Lawyers need to form a professional corporation if they plan to start a law firm in California. Here are a few of the considerations when forming this entity of choice: 

What are the California State Laws and Codes that Law Firms Must Abide by? 

Law firms in California must abide by the following State Laws and Codes:  

California Business and Professions Code 

California Code of Regulations  

Corporations Code  

Jump to the end section of this article to learn more about these laws and codes.  

Can a Law Firm be an LLC in California? 

A law firm cannot be a limited liability company. Based on the Corporations Code section 17375, the State Bar of California does not certify LLCs for the purpose of practicing law. The only entity of choice for law firms that intend to practice and provide professional services in California is a corporation.

Do I need a Certificate of Registration as a Law Corporation? 

Yes. Every Law Corporation is required to have a Certificate of Registration before it can be considered as a Professional Law Corporation and before it can engage in business. This can be obtained from the State Bar of California. You must submit an application to register as a Law Corporation and pay the necessary fees which are indicated in the schedule of charges and deadlines. You must also provide proof of security for claims as required by rule 3.158.  

Naming a Professional Law Firm Corporation 

Before registering with the Secretary of State, interested applicants must first check with the State Bar to ensure that the name desired has not already been registered. The name of your law firm, as registered in the State Bar records and on file with the Secretary of State, is the only name under which it may practice law. The name of the law corporation should also comply with the California Rules of Professional Conduct and the California Business and Professions Code and should include wordings or abbreviations that denote corporate existence. Examples of names that include a designation of corporate existence are a Professional Corporation, Professional Law Corporation, A Professional  Legal Corporation, Incorporated, Corporation, L.C. Ltd., and Professional Association.  

It is also stated in Rule 1-400 of the California Rules of Professional Conduct, that by using the word “Group” in your company name, you must name at least one other individual employed by your corporation. This person need not be an attorney. 

Law Offices 

Before you can include the term “Law Offices”, your law corporation should have more than one address or more than one attorney including the shareholder at the address of record for the corporation. A home address is accepted by the Law Corporation Program to qualify as the second office. Both of your addresses should be provided to the State Bar of California. 

Associate 

As per Rule 1-100 “Rules of Professional Conduct in General”, to include the word “Associate” in your company name, an employee or a fellow employee must be employed as a lawyer.  

 Associates 

The same principle applies in including the word “Associates”, at least two (2) other attorneys must be employed by the corporation. And, as required by the State Bar Law Corporation Rule 3.158, your corporation must carry out a guarantee of a sufficient amount to cover the attorneys practicing on behalf of the corporation.  

Are Law Firms Allowed to Use a DBA or Fictitious Name? 

It is prohibited by the State Bar of California for any law corporation to use a fictitious name or a “DBA”. Your company can only conduct business and practice law if you use the name you registered with the Secretary of State and approved by the State Bar. The usage of your company’s name should be in accordance with the requirements of the Rules of Professional Conduct. Check out more about DBA’s for professional law corporations here.

Setting Up the Law Professional Corporation’s Bylaws 

Bylaws are necessary for any professional corporation to operate efficiently. A law firm’s bylaws must be formulated at the conception of the company.  

Who can be a Shareholder of a Law Firm Professional Corporation in California? 

A shareholder of a law corporation must be licensed and entitled to practice law. The shares of a law corporation must be owned only by that corporation or a shareholder. The shares of a deceased shareholder must be sold or transferred to the law corporation or its shareholders within six months and one day following the date of death. The share certificates of the law corporation must set forth the preceding restrictions of this rule regarding ownership, sale, or transfer of shares. These restrictions must also be set forth in the articles of incorporation or bylaws.  

The shares of a shareholder who is ineligible to practice law or legally disqualified to render professional services to the law corporation must be sold or transferred to a qualified shareholder within ninety days after the date of ineligibility or disqualification. The terms of such a sale or transfer of shares must be set forth in the articles, the bylaws, or a written agreement. The shares of a shareholder disqualified for any reason may be resold to that shareholder upon his or her becoming eligible to practice law.  

Note that these rules do not apply to nonprofit public benefit corporations. 

Who can be an Officer/Director in a Law Corporation? 

The same qualifications for shareholders in a law firm are required from officers and directors of the corporation.  In determining who can be an officer or director, the number of shareholders of a Law corporation must be considered. In the case where there is only one shareholder, that person shall also act as the director of the said corporation. Such person shall also serve as the president and treasurer of the corporation. The other officers, for that matter, no longer need to be licensed individuals. 

In a professional corporation that only has two shareholders, such shareholders shall act as two directors at the same time. Between them, they shall also fill the offices of the president, vice president, secretary, and treasurer. 

Requirements for Registering a Law Firm with the State Bar 

Rules and application materials are available on the State Bar website. Information required to register a law corporation includes: 

• Proof of registration with the Secretary of State; 
• Submission of bylaws and a sample share certificate containing the appropriate restrictions on share ownership; 
• A completed application that reports all the attorneys who are associated with the corporation; 
• Submission of the Guarantee for Claims in the appropriate amount; and 
• A Declaration of Compliance with Rule 1-400.

What are the duties of a Law Corporation after being formed? 

After being formed, the Law Corporation shall only operate under the name registered with the Secretary of State and approved by the State Bar. The Law corporation must always retain a valid and effective Certificate of Registration issued by the State Bar. Also, the Law corporation must submit an Annual Renewal to continue operation and pay any required fee unless exempted. If there are any changes regarding the contact information of the corporation such as a change in address or e-mail address, the company must report to the State Bar within thirty (30) days. It is expected that every Law corporation must observe all rules and laws set forth by the State Bar and must not fail or fail to do anything that would constitute a cause for discipline.    

In addition, if a law corporation decides on employing an attorney who has resigned, been disbarred, been suspended from the practice of law, or resigned with charges pending, the corporation may not authorize such attorney to practice law or represent that he or she can still practice. Every duty assigned to such an attorney must be supervised by the company. The name of a disbarred or resigned attorney must also be removed from a company’s business name, signs, advertisements, letterhead, and other materials within sixty days of disbarment or resignation. 

Is there a resource to find the California Laws and Regulations relating to the Practice of Law in a professional Law Corporation? 

Yes, you can find the guide by clicking on this link

CASE STUDY: He wanted to perform legal work and accept payment, but did he need to be a professional corporation?

The short answer is no. Being a lawyer is sufficient to receive payment for legal work, and they can operate as a sole proprietorship, general partnership, a limited liability partnership, or as a professional law corporation. 

However, choosing to be a professional law corporation is a great option to separate out liability when accepting payment.
 

Diving Into the Scenario and the Incorporation Options 

Today I had a telephone conference with a client whom we will call Steve. Steve is a copyright attorney. Steve currently works with a large law firm out of Los Angeles. The large Los Angeles law firm proposed that they pay attorney fees to Steve as an independent contractor for providing legal services to clients of the law firm. They are suggesting that Steve practice law through his own firm. Steve’s accountant thought that since a lawyer may form a law corporation, this would be a good idea. The plan could present Steve with a lot of advantages when it came to the preparation of his state and federal taxes.
 

Steve wanted to know whether or not a lawyer or law firm needs to form a professional law corporation in order to receive payment for legal fees from the large Los Angeles law firm for the legal work he provided; or, in the alternative, could he provide services through another business entity type?
 

In most states in the US, including California, lawyers are not necesssarily required to form a professional law corporation (often referred to as a “professional corporation” or “P.C.”) in order to provide legal services for payment as a business entity.
 

There are a few options when discussing the alternative types of business entities used for the receipt of fees paid for legal services provided to a client: sole proprietorship, limited liability partnership, a general stock corporation, or as a professional law corporation. We focus on Professional Law Corporation as one of the optimal methods.
 

About Professional Law Corporations in California 

In California, the Moscone-Knox Professional Corporation Act is the law that governs professional corporations in the state. The professional corporation act governs the formation and operation of law corporations. In terms of a law corporation, the California State Bar is the government agency (mentioned in the Professional Corporation Act) in charge of regulating lawyers.
 

These laws establish certain requirements that must be met in order to form and maintain a professional law corporation, such as the involvement of the California state bar association in the incorporation process.
 

Lawyers rendering such legal services through a professional law corporation are considered to be employees of the corporation. Taxes and other legal obligations related to the services provided are the responsibility of the corporation.
 

I advised Steve that the answer was “yes.” Steve may provide legal services for payment as a professional law corporation. He could also be a sole proprietor, a partner in a general partnership, or a partner in a limited liability partnership and offer legal services that way.
 

Lastly, I made it clear that Steve may NOT provide legal services through a limited liability company.

I only take flat fee agreements and I also have my clients waive that the funds are being placed in a trust account ( in the event that the payment is deemed not to be a flat fee). I’ve never used a trust account due to the flat fee situation.  Is that an issue in anyway?

My recommendation is for you to open an IOLTA account for your law practice. Open the account with the smallest amount permitted by your bank. Once it is open, you can basically forget about it. Do mention it to your accountant or CPA for year-end accounting purposes.

I have attached rule 1.15 for your review.

As you know, IOLTA stands for “Interest on Lawyers’ Trust Accounts.” Rule 1.15 of the California State Bar Rules of Professional Conduct requires attorneys who handle client funds or funds entrusted by others, including settlement checks, fees advanced for services not yet performed, or money to pay court fees, to hold those funds in one or more interest-bearing bank accounts labeled as a “Trust Account,” or words of similar import.

If the amount is large or the funds are to be held for a long period of time, the attorney must place the money in an individual interest-bearing account for the benefit of the client.

However, if the amount of client funds is small or the funds will be held for such a short period of time that they are not capable of earning interest for the client in excess of the cost of maintaining a separate bank account, then they are pooled in a single account with similar funds of other clients.

The interest on these pooled-fund, IOLTA accounts is forwarded to the State Bar of California and used to support approximately 100 nonprofit legal aid organizations that provide civil legal aid to indigent and low-income people, seniors, and persons with disabilities.

If these circumstances do not describe your deal with client money in your office, there is no requirement that you open the IOLTA account.

Can I Use a DBA?

Fred is a successful attorney who had built a reputable law firm specializing in personal injury cases. He received an email from his advertising agency recommending that he add “injury and accident attorneys” to his Google My Business name. The agency explained that this would increase his search rankings for licensed professionals and make his firm more visible to potential clients.

However, the email also contained a requirement and request for Fred to file a DBA (Doing Business As) with the city and county where his business law office was located to make the name change official. Fred was hesitant to follow this advice and sought a second opinion.

He contacted his colleague Andy, who informed him that using a DBA to operate his law corporation violated the California Rules of Professional Conduct. The only name under which Fred’s law corporation could practice was the law corporation’s name on file with the State Bar and the Secretary of State.

We explained to Fred that the name of the law corporation had to comply with the California Rules of Professional Conduct and ng or abbreviations denoting corporate existence. We shared an excerpt from Rule 1-400 of the California Rules of Professional Conduct to explain the rule.

Here is the rule:

The name of your law corporation in State Bar records (and on file with the Secretary of State) is the only name under which it may practice law. Rule 3.152-B of the Law Corporation Rules requires that the name “complies with the California Rules of Professional Conduct and that the name includes wording or abbreviations denoting corporate existence…” Please refer to the excerpt from California Rules of Professional Conduct Rule 1-400.

Fred realized he could not proceed with the name change without violating the rules. Fred thanked us for the advice and decided to stick with his current business name. He also instructed his advertising agency to develop alternative strategies to improve his search rankings.

Does a lawyer NEED to form/be a professional law corporation in order to receive legal fees for payment from another law firm for the legal work provided?

The short answer is no. Being a lawyer is sufficient to receive pay,ment for legal work, and they can operate as a sole proprietorship, general partnership, a limited liability partnership, or as a professional law corporation. 

However, choosing to be a professional law corporation is a great option to separate out liability when accepting payment.

Work with an expert in Professional Law Firm Corporations: trust a specialist to know the intricacies of entity choice for your business!

Start a Law Firm – Form a Professional Corporation with the Help of a Corporate Lawyer in California 

We, at Incorporation Attorney, have helped many professionals start their own corporations in California. Our team of corporate lawyers are experts with the requirements for starting law firms as a professional corporations. If you’re planning to put up a law firm, we can help you make sure that the formation of your entity of choice is correctly completed. Call us today at +1 (714) 634-4838! 

Full California Law for Reference