By Joseph W. Boucher & Jennifer L. Knudson, Neider & Boucher S.C., Madison
Sept. 15, 2010 – Perhaps because of the economy, Practice411™, the State Bar of Wisconsin’s Law Office Management Assistance Program, has received an increase in requests for information from lawyers who are considering going solo or forming small firms, including requests for information on what limited liability entity to choose when forming their practices.
Following a Wisconsin Supreme Court Rule change in 1997, lawyers and law firms have been permitted to limit the legal liability in their law practices by forming their business as a limited liability company (LLC), a limited liability partnership (LLP), or a service corporation (S.C.). Due to the passage of time, newer lawyers might not be familiar with Clay R. Williams’ May 1997 article, LLCs, LLPs and S.C.s: The Rules for Lawyers Have Changed, detailing the rule change and requirements. Here is a brief overview.
Lawyers may use limited liability entities to avoid vicarious liabilities
It is important to understand that although organizing as a limited liability entity will protect an attorney owner or employee from the debts or contractual obligations of the entity and from the negligence and misconduct of any other person not under the owner/employee’s supervision and control, such organization will not shield the lawyer from his or her own acts, errors, and omissions associated with performing his or her professional services. While it goes without saying that attorneys and firms want to limit their exposure for liability – not only of themselves – but for their colleagues, individual attorneys are always responsible for their own professional negligence.
Whether an attorney chooses to form a business as an LLP, LLC, or service corporation, whether the service corporation is taxed as a regular corporation or elects to be subchapter S corp, the determination is largely a decision based on the individual attorney’s tax situation. It is a good idea to consult a CPA for advice on the taxability features of a particular entity. Briefly:
Individual lawyers can form single-member LLCs. The LLC organizational structure can protect an individual from normal contract liability and perhaps some personal liability for others’ legal work for which they are not directly responsible.
Multiple lawyers can form S.C.s, LLPs, or LLCs. Which entity they ultimately select is primarily a tax choice.
If multiple lawyers desire partnership tax treatment and are forming a new entity, LLCs are generally much better than LLPs. The LLP statute is dated as compared to the LLC statute. Both provide the same limited liability protection but the LLC statutes are simply more current.
The mechanics of forming a limited liability entity
Under SCR 20:5.7 and State Bar of Wisconsin requirements, lawyers and law firms must annually register limited liability organizations with the State Bar. The registration should include: 1) the name and address of the limited liability organization; 2) the name of the state in which the entity is organized if not Wisconsin; 3) the attorneys’ names, addresses, states/jurisdictions where licensed, attorney registration numbers, and their ownership interests in the firm; and 4) proof of liability insurance. The registration form must be submitted with a registration fee of $75 for the initial registration and $25 for subsequent years. The registration is effective July 1 through June 30 of each year.
Limited liability entities must carry professional liability insurance. SCR 20:5.7(bm) sets forth a graduated scale of insurance requirements for law firms based on the number of attorneys in the firm. Proof of liability insurance must be submitted with the annual registration with the State Bar and must include the name of the professional liability carrier, the policy number and expiration date, and the limits of liability and deductible.
Law firms organized as limited liability organizations must include a designation of that limited liability structure as part of their names. This requirement has led to wide varieties of usage. Some firms specifically say they are limited liability entities in addition to using LLC, LLP, or S.C. in their names. Others do not add any reference to the limited liability status other than by using the LLC, LLP, or S.C. designation.
SCR 20:5.7(e) also requires that law firms and attorneys provide a summary notice to clients and potential clients of the features of the law firm’s limited liability. Typically, a firm that has limited liability includes this notice in its engagement letter.
More solos and firms should take advantage of the protections afforded
Despite the benefits of forming as a limited liability entity, the numbers of lawyers forming such entities each year is still relatively small. There are more than 23,800 lawyers licensed in Wisconsin. There are 1,460 law firms and 4,844 solo practitioners. There are 995 limited liability business entities registered with the State Bar (447 S.C.s, 402 LLCs, 110 LLPs, and 36 other). We do not know how many LLCs are single-member LLCs. But it is clear from this data that many sole practitioners are not limited liability entities and that not all law firms are either. If you’re thinking about going solo or forming a firm, protect your business by organizing as a limited liability entity.
About the authors
Joseph W. Boucher, U.W. 1978 cum laude, is a CPA and a shareholder in Neider & Boucher S.C., Madison, where he practices in business law, with an emphasis in emerging companies. He chaired the State Bar committee that originally drafted Wisconsin’s LLC law. He also coauthored LLCs and LLPs: A Wisconsin Handbook, published by State Bar of Wisconsin PINNACLE.
Jennifer L. Knudson, Marquette 1998, is an associate in the firm, practicing in the areas of business, employment, and health law.
Related:
LLCs and LLPs: A Wisconsin Handbook
LLCs, LLPs and S.C.s: The Rules for Lawyers Have Changed, by Clay R. Williams, May 1997
Question and Answer: Limited Liability Practice, by Melvin McCartney, May 1997
