The beginning phases of starting one’s own law firm can be overwhelming. Here is everything an attorney needs to know about the organizational structures of a law firm.
There are several different ways one can choose to organize the structure of their law firm. The structure of the firm will usually depend on the nature of practice the attorney wishes to pursue. Additionally, choosing the most fitting organizational structure for a law firm will ultimately depend on the level of flexibility and security the attorney wishes to maintain in their practice.
Factors to Consider When Organizing the Structure of a Law Firm
How a law firm is structured will determine how the entity of the business operates, if one or more attorneys will manage it, and how the assets of the entity are maintained. It is recommended that an attorney decides on a few key factors they want to prioritize in determining which structure would suit them and their firm best.
There are two main factors that are crucial to consider when deciding on which organizational structure of a firm is best for an attorney: flexibility and security. Some structures of firms will provide more flexibility for the entity to expand in the practice of law and growing of business, while others may be more restrictive in those aspects. It is very important to recognize beforehand if an attorney is looking to eventually grow their firm, as this may be limited by which kind of structure they decide upon. Additionally, the second key factor to keep in mind when trying to decide upon how to structure a law firm is security. A law firm may have more or less legal liability that falls on the managing partner(s) depending on which type of organizational structure they choose to implement in their firm.
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Types Structures Used to Organize a Law Firm
There are various different organizational structures used to construct a law firm. An attorney should keep in mind their decision on how much flexibility and security they are looking for in a structure to aid in their selection of a structure for their firm. Here are several types of ways an attorney can choose to organize the structure of their law firm:
1. Sole Proprietorship
A sole proprietorship is a type of business where one individual is the owner and manager of all of the entity’s assets. This is a suitable option for an attorney wishing to practice law without a partner. This structure of a sole proprietorship is the most simple way to organize a law firm, but it will come at the cost of all the liabilities and responsibilities falling on the single attorney who runs it.
2. Professional Corporation
A professional corporation is a type of legal entity that is independent of the individuals who run and own the corporation, usually shareholders. This grants an attorney both the freedom to run their practice on their own terms and the protection from liabilities as they would become the responsibilities of the corporate entity.
The structure of a professional corporation is more complex than sole proprietorships, partnerships of LLP’s. Corporations will have more legal obligations for the attorney, such as a higher level of governance and answering to a board of directors.
3. General Partnership
A general partnership is a business that is owned by two or more individuals equally share in the profits and liabilities of the entity. This is a suitable option for an attorney looking to run their firm with a partner or multiple partners. However, it is important to distinguish that since the entity is equally shared and maintained between the partners, any partner can alter any part of the business without consent or notification of their other partners. A general partnership will usually require a partnership agreement among all the partners to divide up the managerial responsibilities, but this relies on the compliance and cooperation of the other partners in the firm.
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4. Limited Liability Partnership
A limited liability partnership is very similar to a general partnership but it differs in the respect of the division of responsibilities. In a limited liability partnership, the liability and profits are not shared by all of the partners, like in a general partnership. Limited liability partnerships may be in the best interest of the attorney if they are looking for a similar option to a general partnership but without the aspect of shared assets.
5. Limited Liability Company
A limited liability company is a hybrid entity between a professional corporation, general partnership, and sole proprietorship.
It is structured so that it combines the pass-through taxation of a partnership or sole proprietorship while also maintaining the limited liability of a corporation. This may be an advantageous choice for attorneys looking to protect their liability and security while keeping the flexibility of the company.
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