LLP vs PC for 2- or 3-person firm

crosvs · #1 10-16-2009, 09:48 PM

To the attorneys out there (again!)

Obviously, there's only so much that reading code and statutes can tell you. It's the real-world experience that matters most.

Thoroughly frustrated with the job market for new attorneys in CA, I've finally decided with conviction to start my own firm. I'm fortunate enough that the two friends I trust and respect most with respect to their character and work ethic, not to mention their raw intelligence, have both indicated that they want to join me. To say I'm honored is an understatement.

So I'm in the process of throwing together this small firm with one (and most likely two) of these friends of mine.

I was originally going to go with an LLP, but it seems that an LLP requires insurance liability of at least $1,000,000 whereas a PC requires only $100,000 per partner. Insofar as liability protection, they both seem to be the same. Indeed, the only real differences seem to be with respect to taxes.

So my question really becomes: all things seem to be equal as between a small LLP and PC except that an LLP requires a much more expensive malpractice insurance plan. So ... why would any small firm EVER be an LLP instead of a PC? What am I missing here??

Any thoughts would be very useful at this point, and I thank you (as always!) for your input.

Cheers,

--Marc

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Krimson X · #2 10-16-2009, 10:18 PM

LLP or Limited Liability Partnership if you want to call yourselves partners.... PC or Professional Corporation if you want to call yourselves shareholders or directors. Our firm is a PC and we have directors instead of partners. I think the major difference is how the business of the firm is managed. Its been a while since I studied business entities.

In an LLP one partner is not responsible or liable for another partner's misconduct or negligence. This is an important difference from that of a limited partnership. In an LLP, some partners have a form of limited liability similar to that of the shareholders of a corporation.

Professional corporations, which may have a single director or multiple directors, do not usually afford that person or persons the same degree of limitation of liability as ordinary business corporations. Professional corporations often exist as part of a larger, more complicated, legal entity; for example, a law firmor medical practice might be organized as a partnership of several or many professional corporations.

I would believe this would explain the difference in the amount of liability/malpractice coverage needed for both.

crosvs · #3 10-16-2009, 10:22 PM

Yeah that sounds familiar from what I studied in biz entities class in law school too. But ... when there's only 2 or 3 directors or partners, what practical difference is there really? Especially if we're all equal owners / partners?

Krimson X · #4 10-16-2009, 10:29 PM

Quote:

Originally Posted by crosvs

Yeah that sounds familiar from what I studied in biz entities class in law school too. But ... when there's only 2 or 3 directors or partners, what practical difference is there really? Especially if we're all equal owners / partners?

I would believe that as your practice grows, you would transition from a LLP to a PC. I agree with you.

crosvs · #5 10-16-2009, 10:34 PM

Actually, because the malpractice insurance costs are LOWER for a PC, I would have suggested the opposite: start as a PC and then transition to an LLP.

Krimson X · #6 10-17-2009, 12:19 AM

Quote:

Originally Posted by crosvs

Actually, because the malpractice insurance costs are LOWER for a PC, I would have suggested the opposite: start as a PC and then transition to an LLP.

Yep. long day...

crosvs · #7 10-17-2009, 02:18 AM

heh np got it, thanks

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