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LLC's, LLP's, PC's, PARTNERSHIPS

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LLC's, LLP's, PC's, PARTNERSHIPS BUSINESS ORGANIZATIONS FOR LAWYERS AND LAW FIRMS Gary W. Derrick Derrick & Briggs, LLP A Professional Partnership Chase Tower, 28th Floor 100 N. Broadway Ave. Oklahoma City, Oklahoma 73102 www.derrickandbriggs.com Copyright © 2017 Gary W. Derrick All Rights Reserved. August 2017 TABLE OF CONTENTS Page Introduction ................................................................................................................ 1 Historical Background .............................................................................................. 1 Characteristics of the Professional Entity ............................................................... 2 Entities Under the Oklahoma Professional Entity Act ....................................... 2 Entities Not Under the Oklahoma Professional Entity Act................................. 3 Characteristics of the Professional Corporations .................................................. 3 General ............................................................................................................... 3 The C Corp ......................................................................................................... 4 The S Corp .......................................................................................................... 4 Characteristics of PLLCs .......................................................................................... 5 Characteristics of Professional LLPs ....................................................................... 6 Subclass of General Partnership ........................................................................ 6 The Limited Liability of LLPs – Broad Scope .................................................... 7 Special Requirements of the LLP Laws – Security for Claims ........................... 8 LLPs Under RUPA.............................................................................................. 9 The Advantages and Disadvantages of PLLCs, LLPs, PC’s, Sole Proprietorships and Partnerships ................................................................ 10 The PLLC – Advantages ................................................................................... 10 “Pass through” Partnership Taxation – In General .................................. 10 Special Allocations ..................................................................................... 10 Formation ................................................................................................... 10 Basis Step Up for Borrowings .................................................................... 11 Adding New Members ................................................................................. 11 Departing Members .................................................................................... 11 Ownership of Appreciable Property ........................................................... 11 Limited Liability .......................................................................................... 12 Simplicity of Operation ............................................................................... 12 The PLLC – Disadvantages .............................................................................. 12 Self-Employment Income ............................................................................ 12 The LLP – Advantages ...................................................................................... 12 “Pass through” Partnership Taxation – In General .................................. 12 Limited Liability .......................................................................................... 13 Operational Flexibility ............................................................................... 13 Discrimination Rules .................................................................................. 13 The LLP -- Disadvantages ................................................................................ 14 Formation ................................................................................................... 14 Potential Loss of Limited Liability ............................................................. 14 Self-Employment Income ............................................................................ 14 The C Corp – Advantages ................................................................................. 14 Limited Liability .......................................................................................... 14 Familiarity ................................................................................................. 14 Medical Expense Deductions ...................................................................... 14 The C Corp – Disadvantages ............................................................................ 14 Double Taxation ......................................................................................... 14 Self- Employment ........................................................................................ 15 Franchise Taxes .......................................................................................... 15 Complexity .................................................................................................. 16 Hierarchical Structure ................................................................................ 16 The S Corp – Advantages.................................................................................. 16 Still a Corporation ...................................................................................... 16 Limited Liability .......................................................................................... 16 Self-Employment Taxes ............................................................................... 16 The S Corp – Disadvantages ............................................................................ 17 S Corp Restrictions ..................................................................................... 17 Lack of Partnership Taxation ..................................................................... 17 Franchise Taxes .......................................................................................... 18 Complexity and Hierarchical Structure ...................................................... 18 The Sole Proprietorship – Advantages and Disadvantages ............................. 19 The Partnership – Advantages and Disadvantages .......................................... 19 Conversion from an Existing Entity .................................................................. 19 Conclusion ................................................................................................................ 20 BUSINESS ORGANIZATIONS FOR LAWYERS AND LAW FIRMS Introduction Oklahoma lawyers today have a wide range of entities through which they may practice. In addition to the historical choices of sole proprietorships and partnerships, Oklahoma lawyers may practice through corporations (either C or S corporations), limited liability companies or limited liability partnerships. Each entity has unique characteristics, which pose advantages and disadvantages. This paper will examine the advantages and disadvantages of these entities to provide a basis on which lawyers may make informed decisions about what entity is right for them. Historical Background In 1961, Oklahoma adopted its Professional Corporation Act.1 The act’s adoption resulted from two developments: first, a recognition that limited liability does not impair the traditional professional relationship between a lawyer and the client, and second, a desire by professionals to gain rather substantial income tax advantages that were then available only to corporations. Regarding the first development, professionals were long denied the use of corporations due to a belief that the corporation’s limited liability was incompatible with the professional relationship.2 The belief does not withstand examination. The professional relationship is grounded in the duties that a lawyer owes a client. If a lawyer breaches a duty, he or she is liable regardless of the presence of a professional corporation. In other words, a corporation’s limited liability offers no protection from an individual’s breach of duty. The individual is personally liable whether he or she practices as a sole proprietorship or through a corporation. The desire for corporate tax advantages was a second incentive for professional corporations.3 At the time, the Internal Revenue Code permitted generous deductions for qualified retirement program contributions by corporations. These deductions were not available to sole proprietorships or partnerships. The disparity has since been eliminated,4 but the advantage was for many years a powerful economic incentive to become a professional corporation. As an alternative to sole proprietorships or partnerships, the professional corporation stood professionals in good stead for many years. They were not, however, the preferable answer for all professionals. To avoid the double taxation of C corporations, professionals had to pay out annually as compensation all money that 1Okla.Stat. tit. 18, §§801-19. 2 See Johnson, Jennifer J., Limited Liability for Lawyers: General Partners Need Not Apply, 51 Bus. Law. 85, 92-102 (Nov. 1995). 3 See gen., Note, The Taxation of Professional Corporations and Associations, 75 Harv.L.Rev. 776 (1962). 4Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, §238. Gary W. Derrick ©2017
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