After a decade of practicing trial litigation at a prestigious Big Law firm, Attorney Steven Smith was ready to take the next big step in his career. He had built a reputation as a formidable litigator, successfully handling complex cases for high-profile clients. But despite the security and prestige of his Big Law career, Steven felt the pull to start his own boutique law firm, focusing exclusively on litigation matters. His goal was to create a firm that offered personalized, client-focused representation, free from the limitations of a larger corporate structure.

However, while Steven was a seasoned litigator, corporate law and the mechanics of forming a professional law corporation were outside his area of expertise. He knew that establishing his firm correctly from a legal and regulatory standpoint was crucial to its success. That’s when he turned to us for guidance on forming his professional law corporation in California.

Now, with his law corporation successfully formed and also registered with the California State Bar (CalBar), Steven faces a new set of challenges. He must ensure ongoing compliance with state regulations, manage the operational aspects of his corporation, and navigate the financial responsibilities that come with owning a law practice.

To help attorneys like Steven, this article outlines everything an attorney should know about running a law corporation in California, including legal, financial, and operational considerations.

Law Corporation Annual Renewals

Once a law corporation is formed and registered with the California State Bar, it’s important to maintain compliance through annual renewals. Each year, the corporation must submit an **Annual Report** to the State Bar. This report ensures that the State Bar has updated information on the corporation, including details about directors, shareholders, and officers.

– Annual Filing Requirements: Failing to submit the annual report on time can result in penalties or even suspension of the law corporation’s Certificate of Registration. The California State Bar takes this responsibility seriously, and it’s essential to remain vigilant with annual filings.

– Fictitious Business Name (FBN): While some corporations may consider using a different name for branding or marketing purposes, the California State Bar expressly prohibits law corporations from using “Doing Business As” (DBA) or fictitious business names. The law corporation must practice solely under the name registered with the California Secretary of State. Failure to comply with this rule can result in disciplinary actions from the State Bar.

– Professional Liability Insurance: While not required by law, maintaining **professional liability insurance** is highly recommended for law corporations. This type of coverage protects the firm from malpractice claims and helps instill confidence in clients.

Corporate Governance Responsibilities

Running a law corporation in California involves more than just practicing law—it requires diligent attention to corporate governance. Unlike sole proprietorships, law corporations must adhere to specific structural and operational guidelines.

– Shareholders and Officers: In California, all shareholders of a law corporation must be licensed attorneys. At least 100% of the corporation’s shares must be owned by licensed attorneys. Steven’s law corporation will need to maintain this structure and ensure that only qualified attorneys hold shares.

– Annual Meetings and Documentation: As a law corporation owner, Steven must hold annual shareholder meetings and keep minutes of these meetings. Important decisions, such as changes in corporate officers or amendments to bylaws, should be documented through formal resolutions to ensure corporate transparency and accountability.

Issuing Stock Certificates

Law corporations are required to issue stock certificates to their shareholders, and these certificates must clearly outline the restrictions set forth by Rule 3.157 of the California Rules of Professional Conduct. Under this rule, specific guidelines govern the ownership, sale, and transfer of shares within a law corporation.

– Qualified Shareholders: Only licensed attorneys who are entitled to practice law can be shareholders in a law corporation. This means that each shareholder must maintain their eligibility to practice law, ensuring compliance with legal and ethical standards.

– Ownership and Transfer Restrictions: The shares of a law corporation may only be owned by the corporation itself or its shareholders. If a shareholder passes away, their shares must be sold or transferred to the corporation or its remaining shareholders within six months and one day from the date of death. Additionally, if a shareholder becomes ineligible to practice law or is legally disqualified, their shares must be transferred to a qualified shareholder within 90 days.

– Certificate and Bylaws Requirements: These restrictions on ownership, sale, and transfer of shares must be explicitly stated on the stock certificates issued by the law corporation. Furthermore, the corporation’s articles of incorporation or bylaws must also reflect these restrictions. This ensures transparency and adherence to Rule 3.157 in all shareholder agreements.

– Resale of Shares: If a disqualified shareholder later becomes eligible to practice law again, they may repurchase their shares, provided this is outlined in the corporation’s bylaws or a written agreement.

By following these rules, law corporations ensure that ownership remains within the bounds of those qualified to render professional legal services, protecting the integrity and structure of the corporation.

Taxation and Financial Management

they can see it is – and do my walk right now As a law corporation, Steven’s firm is a separate legal entity and is taxed accordingly. This presents both opportunities and challenges, particularly when it comes to managing the corporation’s finances. Below are key areas Steven needs to consider:

– Corporate Taxation: Law corporations in California are subject to state franchise tax laws, meaning they must file annual tax returns with both the Internal Revenue Service (IRS) and the California Franchise Tax Board (FTB). The minimum franchise tax in California is $800, regardless of income, so law corporations are responsible for paying this fee annually.

– Double Taxation: One of the challenges law corporations face is double taxation. In a typical C corporation structure, the corporation itself is taxed on its income, and then shareholders are taxed again on any dividends they receive. This creates a higher tax burden on both the corporation and its shareholders.

To minimize this, Steven can pay himself a reasonable salary as a shareholder-employee. This salary is deductible as a business expense, reducing the corporation’s taxable income. However, beyond salary considerations, another effective strategy to reduce double taxation is for Steven to make an S corporation election with the IRS.

S Corporation Election: A Strategy to Minimize Double Taxation

By electing S corporation status, Steven can have his law corporation taxed as a **small business corporation** under Subchapter S of the Internal Revenue Code. This election provides several important benefits:

1. Pass-Through Taxation:
   With an S corporation election, Steven’s law corporation becomes a “pass-through” entity. Instead of the corporation paying taxes on its income, the income (or loss) is passed directly to the shareholders and taxed only at the individual level. This eliminates the double taxation issue on corporate income, as the corporation itself is not subject to federal income tax.
2. Self-Employment Tax Savings:
   While Steven will still pay himself a reasonable salary (subject to payroll taxes such as Social Security and Medicare), any additional profits distributed as shareholder dividends are not subject to self-employment taxes. This can result in significant tax savings on income that exceeds his salary.
3. Limited Liability Protection:
   Even after making the S corporation election, Steven’s law corporation retains its limited liability protection. This ensures that the corporation remains a separate legal entity, keeping Steven’s personal assets shielded from the firm’s liabilities. He enjoys the tax benefits of an S corporation while maintaining the corporate protections of a C corporation.

While the S election can offer considerable tax advantages, it comes with certain eligibility requirements, including limitations on the number and type of shareholders. Consulting a tax professional is recommended to ensure it aligns with Steven’s overall business goals.

– Accounting and Bookkeeping:
As a new law corporation, it’s critical for Steven to establish a robust accounting system to manage the firm’s income, expenses, payroll, and distributions. Accurate bookkeeping is essential for filing taxes efficiently, staying compliant with both state and federal tax obligations, and avoiding costly penalties. Keeping meticulous records also ensures that the corporation remains in good standing with regulatory agencies like the IRS and the California Franchise Tax Board.

Address and Email Changes for the Law Corporation

It’s important to note that the law corporation’s official address is maintained separately by the California State Bar from the attorney’s individual membership profile. If Steven needs to update the corporation’s address or email, he must notify the State Bar’s Law Corporation Department.

To report these changes, Steven can download and complete the Special Report Form from the California State Bar’s website at [www.calbar.ca.gov](https://www.calbar.ca.gov), under the ‘Forms’ section. Updating the individual membership profile alone will not update the corporation’s contact details. Ensuring this information is current helps the State Bar maintain accurate records for communication.

Corporation Changes

If the law corporation undergoes any structural changes—such as changing the corporate name—Steven must report these changes to the California State Bar. This process requires submitting the Special Report Form and, in cases where the corporation’s name changes, attaching certified amendment documents from the California Secretary of State, which can be obtained through [bizfileOnline.sos.ca.gov](https://bizfileOnline.sos.ca.gov).

Timely reporting of such changes ensures that the law corporation’s records are up to date with both the State Bar and the Secretary of State, protecting the corporation’s legal standing.

Client Trust Accounts (IOLTA) Compliance

Handling client trust funds is a critical part of running a law firm in California. Steven’s law corporation must comply with the state’s Interest on Lawyers Trust Accounts (IOLTA) requirements.

– Segregation of Funds: Client funds must be deposited into a trust account separate from the firm’s operational accounts. This ensures that client money is safeguarded and only used for its intended purpose.

– Reconciliation and Record-Keeping: Steven must keep detailed records of all client trust transactions and regularly reconcile the trust account. The State Bar of California has strict rules regarding IOLTA compliance, and failure to meet these standards can lead to disciplinary action.

Closing the Corporation

If Steven decides to close his law corporation, it’s crucial to follow the proper procedures for revoking its registration with the California State Bar. A law corporation’s Certificate of Registration remains active until officially revoked.

To initiate the revocation process, Steven must follow the procedural instructions available on the State Bar’s website at [www.calbar.ca.gov](https://www.calbar.ca.gov), under ‘Forms’, ‘Law Corporations’, ‘Revocation’.

There are important guidelines to consider depending on when the law corporation ceases to operate:

– Cessation of Practice Before January 31st: If the law corporation ceased practicing before January 31st, and Steven requests a backdated revocation of the Certificate of Registration, he is not required to file an annual report for that year.

– Cessation of Practice On or After February 1st: If the corporation stopped operating on or after February 1st, Steven must file the law corporation’s annual report and pay the filing fee before requesting revocation.

Non-Payment Documents

If there are any outstanding payment issues related to the law corporation, Steven must send the relevant documents to the following address:

The State Bar of California
Division of Regulation – Law Corporation
180 Howard Street
San Francisco, CA

Key Takeaways

Forming a law corporation in California brings a variety of new responsibilities for attorneys. Beyond practicing law, attorneys like Steven must manage corporate governance, financial obligations, and compliance with regulations set forth by the California State Bar and Secretary of State. By staying proactive and informed, attorneys can ensure their law corporation operates smoothly and remains in good standing.

For personalized legal advice and assistance with forming or managing your law corporation, contact *The Law Offices of Gale and Vallance, A Professional Corporation* today. Let us help you achieve your business goals with confidence and compliance.