Law Firm Business Entity Formation

Texas Law Firm Business Entity Formation – Sole Proprietor

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August 2, 2021

Without a doubt, the easiest law practice to form is the unincorporated sole proprietorship. It is as straightforward as it sounds – it is for attorneys who wish to open their own practice as the sole attorney. The sole proprietor does not employ other attorneys, and all business decisions are made by the individual owner. In fact, if you have already engaged in business with no official entity formation, you are probably already classified as a sole proprietor. All you need to start this entity is your name and your social security number as your business’s identity. It is that easy.

If you are considering this option, let’s explore some pros and cons. In his book “Tax Savvy for Small Business,” Frederick Daily lists a few. One huge advantage is you will own all the profits. Conversely, a disadvantage is you own all the debts, too. A sole proprietor is considered a disregarded entity. In other words, according to Daily, “a solo and his or her business are one and the same in the eyes of the IRS.” The sole proprietor is personally liable for all debts whether personal or business, and these debts are unlimited.

It seems to make sense, due to ease of creating the entity, the sole proprietorship is a favorable option for attorneys who assume low risk of litigation and will not employ other attorneys or staff (due to liability). However, you must be aware, not only does the IRS view this entity as ‘one in the same,’ so does the law. This entity does not offer any liability protection for the owner. Any lawsuits or claims made against the firm are equally made against you and your personal assets.

On a good note, sole proprietor tax filings are simple: Unlike all other business entities, the sole proprietor does not file a separate document with the IRS for the business. Instead, a Form 1040, with supporting Schedule C is filed by the individual.

An additional pro/con: With no office staff, employee quarterly or annual tax filings are not required. However, a Schedule SE for your own self-employment tax will be filed along with your personal income tax filing. Yes, you pay employment taxes on yourself which may require you to pay quarterly estimated taxes. Sole proprietors are not obligated to pay franchise tax.

When starting a firm as a sole proprietor, most attorneys will use their personal name. It is not required by law for a sole proprietor to register the firm name with the Secretary of State, but we recommend it. The last thing you want to have happen is find out a year or two into your practice, another firm has your same name and they’ve registered it. Always check name availability, then register so you can move forward with confidence. If the sole proprietor choses to do business in a name other than his/her own, a “doing business as” registration is required with the county clerk. Texas Disciplinary Rules of Professional Conduct Rule 7.01 outlines applicable rules pertaining to law firm names.

To start a business as a sole proprietor, attorney Michael Navarro of Shackelford, Bowen, McKinley & Norton states: “Everyone has a different level of risk tolerance and as a business lawyer, I take that into account when providing counsel. However, when it comes to operating as a sole proprietorship, I have a much more ardent stance. While practicing law, or operating any business, as a sole proprietor is comparatively easy to set up and run, the lack of any liability protection is a disadvantage serious enough for me to strongly recommend against it. Having your personal assets at risk, even if you think you are adequately insured, simply isn’t a prudent approach to doing business – as a lawyer or otherwise.”

As you might have logically concluded, a sole proprietorship is very easy to set up on the front-end, but might not be the best option to choose. It is important to speak with an experienced attorney and CPA in your decision to start your firm practice. You may contact Michael Navarro at MNavarro@Shackelford.law and Matt Pittsford at MPittsford@PittsfordSamuels.com with questions

Of course, We’re Boss LLC is happy to help in any way we may. You may reach us at 281-245-6263 or Sherri@WereBoss.com

Sources:

The American Bar Association Legal Guide for Small Business: Everything You Need to Know about Small Business, from Start-up to Employment Laws to Financing and Selling. American Bar Association, 2010.

Daily, Frederick W. Tax Savvy for Small Business. Nolo, 2019.

Davis, Hal. How To Start A Solo Law Practice. Hal Davis, 2005

Eagan, Lauren A. How To Start A Law Firm When You’re Broke. American Bar Association, 2020

Foonberg, Jay G. How to Start and Build a Law Practice. ABA Law Practice Management Section, 2016.

Huss, William W. Start Your Own Law Practice: a Guide to All the Things They Don’t Teach in Law School about Starting Your Own Firm. Sphinx(r) Pub., 2005.

Internal Revenue Service. Sole Proprietorships.

https://www.irs.gov/businesses/small-businesses-self-employed/sole-proprietorships

Texas Center for Legal Ethics. Texas Disciplinary Rules of Professional Conduct. https://www.legalethicstexas.com/Ethics-Resources/Rules/Texas-Disciplinary-Rules-of-Professional-Conduct.aspx

Texas Governor’s Small Business. The Governor’s Small Business Handbook. https://gov.texas.gov/uploads/files/business/smallbusinesshandbook.pdf

Texas Secretary of State. Sole Proprietorship. http://texassecretaryofstate.com/sole-proprietorship/

Texas Secretary of State. Formation of Texas Entities. https://www.sos.state.tx.us/corp/formationfaqs.shtml

U.S. Small Business Administration. Sole Proprietorships.

https://www.sba.gov/content/sole-proprietorship

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