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Professional Service Entities Power Point

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How to choose the right leal structure for your law firm.

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Professional Service Entities Power Point

  1. 1. PROFESSIONAL SERVICE ENTITIESRoger RoyseRoyse Law Firm, PC1717 Embarcadero RoadPalo Alto, CA 94303rroyse@rroyselaw.comwww.rroyselaw.comwww.rogerroyse.comSkype: roger.royseIRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this communication,including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding penaltiesunder the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
  2. 2. What is the RightLegal Structure ForYour Law Firm?Law Corporation RulesFee and State Bar RegistrationCertificate from SoSEach Shareholder is activeMember of the BarDeath, disability or disbarmentNameInsurance or Undertaking($50k per claim/$100kaggregate per lawyer)Legended stock certificatesBylaw restrictionsCircular 230
  3. 3. Ethical IssuesIRS Circular 230 restrictsthe firm‟s practice beforethe IRS if any partnersviolate certain rules.The entity name is a“communication,” subjectto Rule 1-400.The duties set forth inRule 3-110 include theduty to supervise the workof subordinate attorneyand non-attorneyemployees or agents.
  4. 4. Legal RequirementsSolePCState bar and Rule1-400 compliance• Each partner must bean active barmember or an eligiblelaw corporation• State bar and Rule1-400 compliance• “RLLP” or “LLP”• Certification• Security• Moscone-Knox PC Act• Licensed shareholders• State bar and Rule1-400 compliance• Generally joint andseveral liability• Registration• SecurityLLP
  5. 5. Liability ProtectionSolePCProtection notprovided.Protectionprovided, except for personalnegligence.Protectionprovided, except forthe professional(and employees)‟smalpractice andpayroll tax claims.LLP
  6. 6. Income TaxCCorp.SCorp.• Corporate level tax.Maximum rate of 35%plus 9.3% California• Tax free formation,taxable distribution• Excludible benefits• Deduction forCompensation• Pass-through• Tax freecontributions anddistributions• $800 annualminimum tax• 39% Individual rate• Pass-through, subjectto excess net passiveincome tax rules• 100 or less US-personindividuals or trusts• Single class of stock• Certain benefits for< 2% shareholders• Tax freeformation, taxabledistributionLLP
  7. 7. Self-Employmentand PayrollTaxesLLPSelf-EmploymentTaxPCPayrollTaxSelf Employment Taxes (SET):Partner: 12.4%Medicare tax: (no max base)Partner: 2.9%> $200k (single) or $250k (MFJ):Earned income: 0.9%(Passive income: 3.8% NIT)Social security (max base $113,700).Employee: 6.2% / Employer: 6.2%No SET / Limited NITReasonable CompensationMedicare (no max base)Employee:1.45% / Employer 1.45%> $200k (single) or $250k (MFJ):Earned income: 0.9%(Passive income: 3.8%)
  8. 8. Employee BenefitsCCorp.SCorp.Deductible bycorporation—notincluded in income ofemployeeCash value offringe benefits notexcludable frompartner‟s incomeor deductible bythe partnership(guaranteedpayment)Cash value of fringebenefits generally notexcludable from > 2%owner-employee‟sincome or deductibleby S corporation (W-2wages)LLP
  9. 9. Methods ofAccountingCCorp.SCorp.Generally accrualmethod if the Ccorporation‟s annualgross receiptsexceed $5 million.Must use accrualmethod if a CCorporation is apartner, unlessthe partnershiphas less than $5million grossreceipts per year.Must use accrualmethod if the Scorporation maintainsinventory.LLP
  10. 10. Compensation /Distribution PoliciesGross SplitNet SplitSalariedSubjectiveCCorp.SCorp.Deductible expensesCompensatory bonusesSpecial allocation /distributions basedon gross or netrevenues or acustom formulaallowed; substantialeconomic effectrequiredSecond class of stock ruleCompensatorybonusesLLP
  11. 11. Other Policies and ProvisionsWrite OffsExpensesCLEFirm NameTitlesStaff & AssociatesNon–Equity PartnersPractice AreasOffice Locations
  12. 12. Liquidation andDissolutionCCorp.SCorp.Amounts distributed incomplete liquidationare treated as fullpayment in exchangefor the stockShareholder level taxon liquidationJewel v. Boxer:“unfinished business”doctrine / “nocompensation rule”—profits earned byformer firm partners attheir successor firmsare „old LLP‟ assetsOne level of taxAmounts distributed incomplete liquidation aretreated as full payment inexchange for the stockGenerally capital gain onstock saleLLP
  13. 13. The Future of Law PracticeJacoby & Meyers caseOnLine Solutions (RoyseLaw Incorporator)Crowdsourced solutions (Rocket Lawyer)Pooled resources (Lexis-Nexis,Lawyers.com)Legal Force model
  14. 14. RoyseLaw Legal WizardRoyseLaw Incorporator32
  15. 15. www.rroyselaw.com@RoyseLawPALO ALTO1717 Embarcadero RoadPalo Alto, CA 94303LOS ANGELES1150 Santa Monica Blvd.Suite 1200Los Angeles, CA 90025SAN FRANCISCO135 Main Street12th FloorSan Francisco, CA 94105Palo Alto Office: 650-813-9700Contact Us
  16. 16. The discussion of tax consideration was not intended or written to be used, and cannotbe used, by any taxpayer for the purpose of avoiding tax penalties that may be imposedby the Internal Revenue Service. Each party should seek advice based on the party‟sparticular circumstances from an independent tax advisor.In accordance with Section 6694 of the Internal Revenue Code of 1986, as amended(the “Code”), we hereby advise you that the positions set forth herein may lacksubstantial authority and, therefore, may be subject to penalty under Code section6662(d) unless adequately disclosed on IRS Form 8275.Circular 230 Disclosure

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