Can a Lawyer Be a Sole Proprietorship?

By Lea Cook

Many new attorneys begin practicing law as a sole proprietorship -- doing business under your own name, not as a separate legal entity. There are no formal organizational requirements to form a sole proprietorship -- you just get to work. A sole proprietorship can be easy and immediate, and often has low associated costs. There also are negative implications to doing business as a sole proprietor, including personal and tax liability.

Management

There are no federal requirements to establishing a sole proprietorship, and typically no state requirements, either. Some cities or counties may require a license to do business within the locality. While other business entities require officers, a board of directors or annual meetings, the individual proprietor holds complete control. You decide how to run the business, including personnel, advertising and client relationships. You have the right to receive all of the business profits.

Liability

The biggest disadvantage to doing business as a sole proprietor is there is no limit to liability. Your personal assets are at risk if the business is sued by a creditor or becomes involved in other litigation. Malpractice insurance is available, but there is no guarantee that you will not face a judgment beyond what your malpractice insurance covers. Another downside is tax liability. All business earnings are taxed directly to the individual at your individual tax rate and subject to self-employment tax. The only way you can transfer interest in a sole proprietorship is through selling assets, which typically incurs additional tax liability.

Ready to start your LLC? Start an LLC Online Now

Other Issues

Access to capital to establish a sole proprietorship may be limited. Lenders may be more prone to offer financial assistance to a registered business entity instead of an individual. Another issue is that when you die, the business dies with you. Family members interested in proceeding with your legacy will have to establish an entirely new entity.

Options

Other business structures offer some liability protection, as well as more beneficial tax consequences. State laws vary on the types of businesses that can be formed within the state. Most states allow a limited liability company, which gives management flexibility similar to a sole proprietorship, as well as liability protection. While an LLC can protect against business debts, it will not shield you from professional negligence. A limited liability partnership, or LLP, is similar to an LLC, except for tax consequences. An LLP may also require that one partner accept additional liability, depending on state law. A professional limited liability company, or PLLC, is an LLC used by licensed professionals. Some states require licensed professionals to form as a PLLC instead of an LLC.

Ready to start your LLC? Start an LLC Online Now
Pros & Cons of LLP Vs. Partnership

References

Resources

Related articles

What Makes an LLC Different Than a PLLC?

When forming a new business, particularly if professional in nature, you should understand the difference between Limited Liability Companies and Professional Limited Liability Companies. An LLC is a business entity that is formed under state law. Some states allow for the formation of specialized LLCs, such as a the PLLC. Each state has different restrictions on each business type, and LLCs and PLLCs are not business entities that are available in every state.

Can Accountants Form an LLC?

Because business entity formation is governed by state law, whether or not accountants can form a limited liability company depends on where you will be practicing. The issue accountants run into is professional liability. A limited liability company, or LLC, is designed to remove personal liability for business owners, but many states do not allow professionals to escape personal responsibility for professional malpractice.

Can a Business Own Part of an LLC?

Members of a limited liability company (LLC) can be individuals or business entities, including corporations, trusts or even other LLCs. Your existing business may want to form a new LLC as an investment or to spread out and protect your business’ assets or liabilities. Your business entity may either be the single member of the new LLC or may share ownership with other businesses or individuals. Most states have very few restrictions on LLC ownership.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Is the Difference Between a Solo Practice & a Sole Proprietorship?

Selecting the legal structure of a business is one of the first and most important decisions that a new business owner ...

LLC Vs. PC Solo Practice

Limited liability companies and professional corporations are two forms of business structure available in most states ...

What Is a Disadvantage of the Corporate Form of Business Entity?

Compared to other business entities, corporations offer many advantages, such as liability protection and ease of ...

How to Create an LLC for Investments

Limited liability companies, or LLCs, are flexible business entity structures that have characteristics of a ...

Browse by category
Ready to Begin? GET STARTED