Tips for Incorporating Your Solo Law Firm
So you've decided to go solo? As you already know, it's tough out there, and getting clients can be a real chore. But now that you're committed, you're faced with a question that you may not have even considered when you decided to embark on this journey: "What kind of business entity am I?"
You have many choices, but unless you're a tax expert, making the right one can be a real challenge. Below we'll go into some of the considerations you should keep in mind in choosing a business entity for your solo firm.
Tax Savings -- Sometimes Huge
If you're clever, the correct selection of business entity can mean tremendous tax savings over the long haul. This isn't tax evasion, it's called dancing the tax code to your benefit. Just ask John Edwards, who saved $600K on taxes with his S corporation.
It's well known among the lay public that different business types enjoy different types of tax treatments under the law. But few people know the details. Here's a good rule of thumb when it comes to taxes: The simpler your entity, the easier it is to prepare and file your taxes, but the more taxes you will pay.
"Great!" you say, "Then I won't be a sole proprietor." Unfortunately, it's not that simple.
Costs and Maintenance
In most of the states besides California, LLCs are a very common and popular choice for solos. But each state has its own rules pertaining to the various types of business entities. Each entity has its own formation costs and each also has certain formalities that must be observed. The two corporation types, (S and C-Corporations) for example, require different meetings to be held. Clearly, we can almost guarantee that incorporating as a C-Corp for your solo practice would be a hair-brained idea. Also, your corporation is subject to a yearly $800 franchise fee (in California) per year!
It gets worse. Corporations are also subject to state taxes for employers, unemployment taxes, employee training taxes, and disability insurance taxes. There's more, but the list is too long for this post. See why only really loaded outfits become corporations?
Keeping It Simple
Let's just get down to brass tacks. Go out, purchase malpractice insurance, and get your required business licenses. Practice for a while as a sole practitioner. If you're making more than say $60,000 per year in profits, then look into forming an S-corporation for taxation purposes. At that point, the profits start justifying the costs of maintenance. At least, that's the way it is in the Golden State. Do your due diligence and check your applicable jurisdiction.
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- Handling Fee Splitting With an Outside Attorney (FindLaw's Strategist)