How to Form a California Law Corporation: The Complete Guide

If you’re a California attorney planning to establish your own practice, you face a structural decision that will shape your liability exposure, tax treatment, and regulatory compliance obligations for years to come. Unlike many other states that allow attorneys to practice through Professional Limited Liability Companies (PLLCs), California restricts lawyers to a narrower set of entity choices: sole proprietorship, general partnership, registered limited liability partnership (LLP), or professional corporation.

For solo practitioners and small firms, the law corporation—a professional corporation specifically designed for legal practice—offers distinct advantages. This structure provides the liability separation of a corporation, enables tax planning through S-Corporation election, maintains the professional credibility clients expect from an established law practice, and creates a vehicle for succession planning that sole proprietorships and partnerships lack.

But forming a law corporation involves more than filing articles with the Secretary of State. You must navigate both corporate law requirements and State Bar regulatory oversight, maintain professional liability insurance or alternative security arrangements, comply with trust accounting obligations, and satisfy annual registration and reporting requirements. This guide walks you through the entire process, from the strategic pre-formation decisions that determine whether a law corporation suits your practice, through the dual-agency formation process, to the ongoing compliance obligations that keep your registration active.

Understanding the California Law Corporation: Legal Framework and Regulatory Structure

The California law corporation exists at the intersection of corporate law and professional regulation. It’s governed by the Moscone-Knox Professional Corporation Act (Corporations Code sections 13400-13410), law-specific provisions in the State Bar Act (Business and Professions Code sections 6160-6172), and the State Bar’s Law Corporation Rules (Title 3, Division 2, Chapter 3 of the Rules of the State Bar of California).

This layered regulatory framework reflects California’s policy determination that law practice requires enhanced oversight beyond what standard business corporations receive. The State Bar maintains direct regulatory authority over law corporations, including the power to suspend or revoke a corporation’s certificate of registration for violations of professional conduct rules or failure to maintain required insurance coverage.

Corporations Code Section 13401 defines a professional corporation as one organized under the Moscone-Knox Act to render professional services—in this case, legal services—where all shareholders are licensed to practice the profession. Section 13407 makes clear what the corporate structure doesn’t provide: personal immunity from your own malpractice. You remain personally liable for professional negligence in your legal work regardless of corporate status. What the corporation provides is liability separation from other shareholders’ malpractice and a buffer for ordinary business obligations like office leases and vendor contracts.

The State Bar’s Law Corporation Rules impose additional requirements beyond general corporate law. Rule 3.157 prohibits any law corporation from practicing law in California without maintaining a valid certificate of registration issued by the State Bar. This registration is annual—not a one-time filing. Rule 3.159 restricts law corporations to rendering legal services only, and only through attorneys who are active members of the State Bar. You can’t diversify into non-legal consulting services through your law corporation without potentially jeopardizing your registration.

When a Law Corporation Makes Sense (And When It Doesn’t)

Before committing to the formation process and ongoing compliance obligations, evaluate whether a law corporation aligns with your practice model and business goals.

The Case for Law Corporation Structure

Tax planning flexibility is the primary driver for most attorneys who choose corporate structure. An S-Corporation election allows you to reduce self-employment tax through the salary-versus-distribution strategy. You pay yourself a reasonable salary as an employee of the corporation (subject to standard payroll taxes), then take additional profits as shareholder distributions that aren’t subject to self-employment tax. The IRS scrutinizes S-Corporation salaries to prevent abuse, but when executed properly with documentation supporting reasonableness, the tax savings can be substantial.

California imposes only a 1.5% entity-level tax on S-Corporation income (compared to 8.84% for C-Corporations), with profits then passing through to shareholders without double taxation. For attorneys generating significant net income, the combination of reduced self-employment tax and favorable California S-Corporation rates typically outweighs the administrative burden and compliance costs.

Liability separation matters for multi-attorney practices. In a properly structured and maintained law corporation, you’re not automatically liable for your co-shareholder’s malpractice merely by virtue of shared ownership. This contrasts with general partnerships where partners face joint and several liability. The corporate structure creates clearer boundaries—though you’ll still need professional liability insurance, and clients can still sue the corporation itself.

Professional credibility and succession planning also factor into the decision. Clients often perceive “Smith Law Corporation” as more established than “John Smith, Attorney at Law.” The corporate structure facilitates bringing in junior attorneys as shareholders, enables formalized buy-sell agreements for retirement transitions, and creates continuity that sole proprietorships lack.

When Alternatives Might Serve You Better

If you’re just starting out with modest revenue expectations, the administrative overhead of corporate compliance might not justify the tax benefits. Corporations require formal minutes of meetings, separate bank accounts, annual statement of information filings, and consistent adherence to corporate formalities. Failing to maintain these formalities gives opposing counsel ammunition to pierce the corporate veil in litigation.

A registered limited liability partnership (LLP) provides many of the same liability protections without annual State Bar registration fees or the same level of regulatory oversight. LLPs must register with the Secretary of State and pay annual fees, but they don’t require separate State Bar law corporation certificates. For practices with multiple partners, an LLP often provides operational flexibility with lower administrative burden.

Sole proprietorships remain the simplest structure. You file a fictitious business name statement if practicing under anything other than your own name, obtain professional liability insurance, set up your trust account, and start practicing. No articles of incorporation, no corporate governance requirements, no franchise tax beyond what you’d pay on your personal income anyway. The tradeoff is unlimited personal liability for business debts and no entity-level structure for bringing in partners or planning succession.

The Dual-Authority Formation Process: Secretary of State and State Bar

Forming a law corporation requires approval from two separate agencies in sequence. You cannot reverse the order or skip steps.

First, you form the professional corporation with the California Secretary of State by filing Articles of Incorporation. This creates the corporate entity’s legal existence but doesn’t authorize you to practice law through the corporation.

Second, once the Secretary of State approves your articles and issues an entity number, you apply to the State Bar for a Certificate of Registration as a Law Corporation. Only after the State Bar issues this certificate may you legally practice law through your corporation.

This two-step process creates a potential trap: attorneys who form their corporation with the Secretary of State and immediately begin practicing through it before receiving State Bar approval. Doing so violates Law Corporation Rule 3.157 and subjects you to discipline. The registration isn’t a formality—it’s a prerequisite to lawful practice.

Plan your timeline accordingly. Secretary of State processing takes approximately five business days for standard mail submissions, though online filing through BizFile is faster. State Bar processing of complete law corporation applications typically takes four to six weeks. If you’re targeting a specific launch date, work backwards from that date and add buffer time for any application deficiencies that might require correction and resubmission.

Step-by-Step Formation: Secretary of State Level

Choose and Reserve Your Corporate Name

Your law corporation’s name must satisfy both Secretary of State requirements and State Bar professional conduct rules. Corporations Code Section 201 requires that corporate names be distinguishable from existing registered business names on Secretary of State records and not likely to mislead the public. Professional corporations must additionally comply with profession-specific naming rules under Section 13409.

For law corporations, the State Bar’s interpretation of California Rules of Professional Conduct, particularly Rules 7.1 (Communications Concerning a Lawyer’s Services) and 7.5 (Firm Names and Trade Names), governs naming choices. Rule 7.1 prohibits false or misleading communications about legal services. Rule 7.5 prohibits firm names that violate Rule 7.1, names that imply government affiliation unless true, and names suggesting legal aid organization status unless accurate.

Historically, California law firms used surname-based names: “Smith Law Corporation,” “Jones & Associates, A Professional Law Corporation,” or “Smith, Johnson & Williams, P.C.” This tradition reflected both professional conservatism and State Bar guidance favoring traditional naming conventions.

Modern practice allows more flexibility. Rule 7.5 explicitly permits trade names provided they don’t violate Rule 7.1’s prohibition on misleading communications. You could name your practice “Silicon Valley Patent Law Corporation” or “Coastal Employment Law Group, P.C.” if those names accurately describe your practice focus and geographic location. But names suggesting capabilities you don’t possess, geographic reach you lack, or specializations you haven’t been certified for by the State Bar all risk violating Rule 7.1.

The State Bar reviews and approves law corporation names as part of the registration process. Conservative naming choices expedite approval. Creative trade names that push boundaries may trigger scrutiny and requests for clarification about your practice areas and qualifications. Factor this into your timeline if you’re pursuing a distinctive brand name.

Reserve your chosen corporate name through the Secretary of State’s name reservation system if you want to lock it in while preparing your formation documents. Reservation costs $10 and holds the name for 60 days. Search existing business names through the Secretary of State’s BizFile database at bizfileonline.sos.ca.gov before committing to a name choice.

Prepare and File Articles of Incorporation

Your Articles of Incorporation must indicate that you’re forming a professional corporation under the Moscone-Knox Act to engage in the practice of law. The corporate purpose clause should state something like: “The specific purpose of this corporation is to engage in the practice of law in the State of California.”

Your articles must also indicate that shares will be issued only to persons licensed to practice law in California. This restriction implements Law Corporation Rule 3.160’s requirement that all shareholders be active State Bar members.

You can file articles using the Secretary of State’s standard form or draft custom articles with additional provisions. The standard Form ARTS-GS (Articles of Incorporation of a General Stock Corporation) works for professional corporations if you include the required professional purpose language and share restrictions. Custom-drafted articles can include enhanced indemnification provisions for directors and officers, specific procedures for share transfers and mandatory redemption, and other protective provisions the standard form doesn’t address.

The Secretary of State filing fee for domestic stock corporation articles is $100. If you submit documents in person at the Sacramento office, add a $15 counter drop-off fee. For faster processing, expedited services are available: 24-hour processing costs an additional $500, while 4-hour same-day service costs $750 beyond the base filing fee.

File through the Secretary of State’s BizFile Online portal for the fastest processing, or submit paper documents by mail. Online filing provides immediate confirmation and digital copies of filed documents. You’ll receive your entity number upon approval—the number you’ll need for your State Bar registration application.

Obtain Federal Employer Identification Number

Once the Secretary of State approves your articles, apply for an Employer Identification Number (EIN) from the IRS. This federal tax ID is required for opening business bank accounts, including your client trust account, and for filing employment and income tax returns.

Apply online at irs.gov through the EIN Assistant. The application is free and you’ll receive your EIN immediately upon completion. You’ll need your corporation’s exact legal name as shown on the filed articles, your California business address, and your personal Social Security Number as the responsible party.

Don’t delay this step. You cannot open corporate bank accounts without an EIN, and maintaining complete separation between personal and corporate finances is essential for preserving liability protection.

Draft Corporate Bylaws with Required Share Transfer Restrictions

Corporate bylaws govern the internal operations of your law corporation: how meetings are conducted, how officers are elected and removed, how shares can be transferred, and how decisions are made. While bylaws aren’t filed with any agency, they’re legally required and must contain specific provisions for professional corporations.

Moscone-Knox mandates certain share transfer restrictions. Under Corporations Code Section 13406, shares in a professional corporation can only be transferred to individuals licensed to practice the profession, to the corporation itself, or to shareholders who already own shares in the corporation. Section 13407 requires that share certificates contain conspicuous legends noting these restrictions.

Your bylaws should implement these statutory requirements with specific procedures: what happens when a shareholder loses their law license through suspension or disbarment, how shares will be valued if mandatory redemption is triggered, what payment terms apply for redemptions, and how disputes over valuation will be resolved.

Law Corporation Rule 3.160 adds another layer. It requires that shareholders be active members of the State Bar (not just licensed in California, but current members in good standing). Your bylaws should reference this requirement and establish procedures for immediate suspension of shareholder rights if a shareholder’s State Bar membership becomes inactive or suspended.

For solo practitioners, the bylaws can be simpler since you’re the only shareholder, director, and officer. Corporations Code Section 13403 provides that single-shareholder professional corporations need only one director (who must be the shareholder), and that person may hold all officer positions. Your bylaws can reflect this simplified structure while still including the mandatory share restriction language.

If you’re forming a multi-shareholder law corporation, consider additional provisions for deadlock resolution, dispute resolution procedures (mandatory mediation before litigation), restrictions on competitive activity by departing shareholders, and client ownership and transition protocols.

Standard corporate bylaws templates from office supply stores or generic online sources won’t include the professional corporation-specific provisions you need. Use bylaws specifically designed for California professional corporations, or work with a business attorney experienced in law firm structures. For guidance on drafting compliant corporate bylaws, my Corporate Bylaws Generator accounts for professional corporation requirements.

Hold Organizational Meeting and Issue Shares

After the Secretary of State approves your articles but before you apply to the State Bar for registration, hold your organizational meeting of the board of directors. At this meeting you’ll adopt the corporate bylaws, elect officers (president, secretary, treasurer, and any vice-presidents), authorize the issuance of shares to initial shareholders, designate the corporation’s principal office address, authorize opening of corporate bank accounts including the client trust account, and appoint the registered agent for service of process.

Document everything in formal minutes. These minutes become part of your corporate records book and demonstrate that you’ve properly organized the corporation’s governance structure. The State Bar’s registration application requires information about your shareholders, directors, and officers—information that should be formalized through this organizational meeting.

Issue share certificates to all shareholders in accordance with the bylaws and the organizational meeting resolutions. Each certificate must contain the transfer restriction legend required by Section 13407. A typical legend reads: “The shares represented by this certificate are subject to transfer restrictions. These shares may be transferred only to persons licensed to practice law in the State of California, to existing shareholders of this corporation, or to the corporation itself. Transfer to any other person is void.”

Maintain a stock ledger in your corporate records book showing all share issuances, the name of each shareholder, number of shares held, dates of issuance, and certificate numbers. This ledger must be kept current and will be referenced in your State Bar registration materials.

File Initial Statement of Information

Within 90 days of filing your Articles of Incorporation, you must file a Statement of Information with the California Secretary of State. The filing fee is $25. Unlike LLCs (which file biennially), corporations must file annually.

The Statement of Information provides the Secretary of State with current information about your corporation’s officers, directors, registered agent, and principal business address. You can file online through BizFile or by mail using the appropriate form. Online filing provides immediate confirmation.

Mark your calendar for annual Statement of Information filings. Missing this filing results in penalties and eventual suspension of your corporate powers. The Secretary of State will mail reminders, but don’t rely solely on receiving those notices. Track the deadline independently.

Step-by-Step Formation: State Bar Registration

Verify Shareholder and Officer Eligibility

Before submitting your State Bar registration application, confirm that all shareholders, directors, and officers (other than secretary and assistant secretary) are active members of the State Bar in good standing. Law Corporation Rule 3.161 requires that all directors and all officers except secretary and assistant secretary be licensed attorney-shareholders.

Check each person’s State Bar standing through the State Bar’s attorney search database. “Active” means current license with no suspensions, disbarments, or involuntary inactive status. If any proposed shareholder or officer has any license issues—even pending disciplinary proceedings—resolve those before applying for law corporation registration.

This eligibility requirement continues throughout the life of your law corporation. If a shareholder’s State Bar status changes to suspended or inactive, you must report the change to the State Bar and address the ownership issue (typically through mandatory share redemption) to maintain compliance.

Select Insurance or Alternative Security Arrangement

Every California law corporation must maintain either professional liability insurance or provide alternative protection against claims through one of three mechanisms: a law corporation guarantee signed by shareholders, a bank letter of credit, or a cash deposit with the State Bar. Law Corporation Rules 3.163 through 3.165 detail these requirements.

The minimum protection amounts vary based on the number of active member shareholders in your corporation. Current requirements (verified through the State Bar’s Law Corporations program page) establish minimums of approximately $100,000 for single-member corporations, $300,000 for corporations with two to five members, and $500,000 for corporations with six or more members. Check the State Bar’s website for current amounts as these can be adjusted periodically.

Most law corporations satisfy this requirement through professional liability insurance (also called legal malpractice insurance or errors and omissions coverage). This approach serves dual purposes: it satisfies the State Bar registration requirement while also protecting you from financial devastation if a client sues for malpractice.

If you choose insurance, the policy must meet State Bar specifications. Coverage limits must meet or exceed the minimums for your firm size, the deductible cannot exceed specified caps, the policy must cover all acts or omissions of the law corporation and its shareholders and employees in providing legal services, and the policy must be issued by an insurer authorized to do business in California or approved by the State Bar.

Work with an insurance broker who specializes in lawyers’ professional liability coverage. Premiums vary significantly based on your practice areas (litigation and securities work typically costs more than estate planning or family law), your claims history, your years in practice, whether you’ve previously had coverage, and your geographic location.

The law corporation guarantee alternative involves shareholders personally guaranteeing claims against the corporation up to the specified minimum amounts. The State Bar provides Form Attachment A (Guarantee) that shareholders must execute. While this option costs nothing in premiums, it provides no actual protection—you’re personally on the hook for claims up to the guarantee amount, which defeats much of the purpose of incorporating. Most attorneys choose insurance for this reason.

Letters of credit and cash deposits are rarely used. They tie up capital that could otherwise generate returns or fund operations, and they don’t provide the actual liability protection that insurance offers.

Complete Application for Certificate of Registration

The State Bar’s Application for Issuance of a Certificate of Registration as a Law Corporation requires detailed information about your corporate structure and personnel. Gather this information before starting the application:

Your Secretary of State entity number and exact corporate name as filed with the Secretary of State. Names and State Bar numbers of all shareholders, with their respective ownership percentages. Names and State Bar numbers of all directors. Names and State Bar numbers of all officers (noting which positions are held by non-attorneys, if any). Your corporation’s principal business address and mailing address (if different). Whether the corporation will employ non-shareholder attorney employees. Your chosen insurance or security mechanism with supporting documentation.

The application includes several attachments you must complete and submit. Attachment A (if using the guarantee option) contains the shareholder guarantee form. Attachment B addresses advertising, firm names, and letterhead—you’ll declare that your corporate name, any trade names, and all advertising comply with Rules of Professional Conduct 7.1 through 7.5. Attachment C lists all shareholders, officers, and directors with their roles and Bar numbers.

If you’re maintaining professional liability insurance to satisfy the security requirement, attach a certificate of insurance from your carrier confirming coverage meeting State Bar specifications. The certificate should show the coverage limits, effective dates, deductible amount, and confirmation that the corporation and its shareholders are insured for professional legal services.

The application fee is $257. Make your check payable to the State Bar of California. Submit the complete application package with all attachments and the fee by mail to the address specified on the application form. The State Bar doesn’t currently offer online filing for law corporation registration applications.

Processing typically takes four to six weeks for complete applications. Incomplete applications or those requiring clarification will be returned with instructions for correction, adding additional time. If the State Bar has questions about your application—particularly regarding your corporate name, insurance coverage adequacy, or eligibility of shareholders—they’ll contact you by mail.

Receive Certificate of Registration

Once the State Bar approves your application, they’ll issue a Certificate of Registration as a Law Corporation. This certificate authorizes your corporation to practice law in California. Only after receiving this certificate may you legally provide legal services through your law corporation.

Post your certificate in a conspicuous location in your office. You’ll use your law corporation registration number on letterhead, court filings, and correspondence—it identifies you as a properly registered entity authorized to practice law in corporate form.

The certificate is valid for one year. Mark your calendar for annual renewal well in advance of your expiration date to avoid late fees and potential suspension of your registration.

Tax Election: S-Corporation Status

Most California law corporations elect S-Corporation tax treatment for both federal and California purposes. This election is made at the federal level by filing IRS Form 2553 (Election by a Small Business Corporation) within 75 days of your incorporation date, or within 75 days of the start of the tax year in which you want the election to take effect.

S-Corporation taxation allows profits to pass through to shareholders without entity-level federal income tax, avoiding the double taxation that C-Corporations face. More importantly for California attorneys, S-Corporation status enables the salary-versus-distribution tax strategy that reduces self-employment tax exposure.

Here’s how it works: you pay yourself a reasonable salary as an employee of the corporation. This salary is subject to all standard payroll taxes (Social Security, Medicare, federal and state withholding). But any additional profits you distribute to yourself as a shareholder aren’t subject to self-employment tax—they’re treated as investment returns, not compensation. The IRS defines “reasonable salary” based on what similar attorneys in similar practice areas and geographic locations earn, so you can’t game the system by paying yourself $20,000 and taking $300,000 in distributions. But legitimate salary-distribution splits can produce meaningful tax savings.

California recognizes federal S-elections but imposes its own entity-level tax on S-Corporation income. The California Franchise Tax Board charges 1.5% on California-source net income for S-Corporations. This is far lower than the 8.84% that C-Corporations pay, and it applies in addition to (not in place of) the individual income tax you’ll pay on passthrough income.

File California Form 100S (California S Corporation Franchise or Income Tax Return) annually to report your corporation’s income and pay the 1.5% entity tax. Your personal income tax return will include your share of passthrough income from the corporation.

Work with a tax professional experienced with law firm taxation to structure your compensation optimally, ensure timely estimated tax payments, and maintain proper documentation supporting your salary determination. The IRS increasingly scrutinizes S-Corporation salary levels, and underpayment can trigger audits, assessments of additional employment taxes, and penalties.

Ongoing Compliance Obligations and Annual Requirements

Forming your law corporation is the beginning, not the end, of your compliance obligations. Multiple agencies impose annual requirements you must satisfy to keep your corporation in good standing.

Annual State Bar Law Corporation Renewal

Your Certificate of Registration expires one year from issuance. The State Bar will mail a renewal notice to your address of record approximately 60 days before expiration. Don’t rely solely on receiving this notice—track your renewal date independently.

Complete and submit the Annual Renewal form confirming that your corporation continues to comply with all Law Corporation Rules: all shareholders remain active State Bar members in good standing, all directors and relevant officers remain licensed attorneys and shareholders, your insurance or alternative security remains in place with adequate coverage limits, and your corporate structure and operations haven’t changed in ways that violate eligibility requirements.

The annual renewal fee is $103. Late renewal triggers a $113 penalty fee on top of the regular renewal fee. If your renewal becomes significantly overdue, the State Bar may suspend your Certificate of Registration, prohibiting you from practicing law through the corporation until you cure the deficiency.

Report any changes in shareholders, officers, or directors promptly. The Law Corporation Rules require notification within specified timeframes (often 30 days) of material changes. If you’re adding a new shareholder, that person must be an active State Bar member and you must update your registration to reflect the ownership change. Similarly, removing a shareholder triggers reporting obligations and may require amended registration materials.

Annual Statement of Information with Secretary of State

Every year (not every two years like LLCs), California corporations must file a Statement of Information with the Secretary of State updating the corporation’s officer, director, and registered agent information. The fee is $25.

Your filing window is determined by the month you filed your original Articles of Incorporation. For example, if you incorporated in April, your annual Statement of Information is due during the January-to-April period each year. File online through the Secretary of State’s BizFile portal for fastest processing and immediate confirmation.

Failure to file results in penalties initially, then eventual suspension of your corporate powers and forfeiture of your corporate status. A suspended corporation cannot legally conduct business, file lawsuits, or defend against claims. Reinstatement requires paying all back fees plus penalties, and during the suspension period your personal liability protection is compromised.

California Franchise Tax Obligations

All California corporations, including law corporations, must pay the minimum $800 annual franchise tax to the California Franchise Tax Board. This is due for each taxable year the corporation is in existence, with one critical exception: newly incorporated corporations are exempt from the $800 minimum in their first taxable year. You’ll still owe tax on any net income at the applicable rate (1.5% for S-Corps, 8.84% for C-Corps), but not the minimum if you have no or minimal income.

The first franchise tax payment is due the 15th day of the fourth month after the close of your first taxable year. For calendar-year corporations incorporated in January, this means the first payment is due the following April 15th. For corporations incorporated late in the year, this timing can create confusion. A corporation incorporated in November operates for only two months before year-end, is exempt from the $800 minimum for that first year, but must pay the $800 by April 15th of the following year for its second taxable year.

File your California corporate tax return (Form 100 for C-Corps, Form 100S for S-Corps) by the 15th day of the fourth month after your tax year ends. April 15th for calendar-year corporations. Extensions are available but don’t extend the time to pay—only the time to file the return.

Estimated tax payments are required if you expect to owe more than $500 for the year. For most profitable law corporations, quarterly estimated payments are necessary to avoid underpayment penalties. Work with your tax advisor to calculate appropriate estimates and establish a payment schedule.

Trust Accounting and Client Funds Management

California Rules of Professional Conduct Rule 1.15 (Safekeeping Funds and Property of Clients and Other Persons) imposes detailed requirements for handling client funds. Your law corporation must maintain at least one client trust account—either an Interest on Lawyers’ Trust Account (IOLTA) or a non-IOLTA account depending on circumstances.

Open your trust account in a bank that participates in California’s IOLTA program if you’ll be holding client funds on a short-term basis or in amounts where the interest earned would not exceed the cost of administering separate interest-bearing accounts. The interest from IOLTA accounts funds legal services for low-income Californians.

For client funds held long-term or in amounts large enough that the interest would exceed administrative costs, establish non-IOLTA trust accounts that pay interest to the specific client.

Rule 1.15 requires meticulous record-keeping. You must maintain contemporaneous records of all trust account receipts and disbursements, individual client ledgers showing the balance held for each client, monthly three-way reconciliations comparing bank statements to your trust account records and individual client ledgers, and retention of all records for five years after final distribution.

Commingling personal or business operating funds with client trust funds is prohibited and constitutes a serious ethical violation. Never use the trust account to pay firm expenses or your own compensation, even if you rationalize that you’re “just borrowing temporarily” or “the money belongs to me from fees earned.” The trust account exists solely for client funds and costs advanced on clients’ behalf.

Many disciplinary proceedings against California attorneys involve trust account mismanagement. The State Bar takes these violations seriously because they suggest dishonesty and pose risks to clients. Implement rigorous trust accounting procedures from day one, consider using trust accounting software designed for law firms, and if you’re unfamiliar with trust accounting requirements, consult with an attorney who specializes in legal ethics or take CLE courses covering IOLTA compliance.

Maintaining Corporate Formalities

Preserving your liability protection requires treating your law corporation as a separate legal entity. Failing to maintain corporate formalities gives creditors and litigants grounds to pierce the corporate veil—a legal doctrine allowing them to reach your personal assets by demonstrating that the corporation is really just your alter ego.

Hold annual shareholder meetings even if you’re the sole shareholder, and document those meetings in formal minutes. Your minutes should reflect significant decisions: approval of the prior year’s financial statements, election or re-election of directors, election of officers, compensation decisions, major contracts or commitments, and any amendments to bylaws or operating policies.

Hold annual director meetings (which may be the same meeting as the shareholder meeting if your shareholders and directors are the same people) and document those as well. Director meeting minutes demonstrate that the board is actively overseeing the corporation’s affairs.

Maintain a separate corporate bank account and never commingle personal and corporate funds. All business income should be deposited to the corporate operating account. All business expenses should be paid from the corporate account. Pay yourself through formal payroll (for salary) and documented distribution resolutions (for shareholder distributions), not by just grabbing money from the corporate account when you need cash.

Sign contracts and other legal documents in your capacity as an officer of the corporation, not personally. Use signature blocks like “Smith Law Corporation, by John Smith, President” rather than just “John Smith.” This clarifies that the corporation is the contracting party, not you personally.

Keep your corporate records book updated with copies of filed documents (Articles of Incorporation, amendments, Statement of Information filings), bylaws and any amendments, all meeting minutes, stock ledger showing share ownership, and shareholder agreements or buy-sell agreements.

The Absolute Prohibition on Non-Lawyer Ownership

This cannot be emphasized strongly enough: California law corporations cannot have non-lawyer shareholders under any circumstances. Law Corporation Rule 3.160 requires that all shareholders be active members of the State Bar. California Rules of Professional Conduct Rule 5.4 prohibits lawyers from sharing legal fees with non-lawyers or forming partnerships with non-lawyers if any of the partnership’s activities include the practice of law.

These restrictions eliminate several business models that work in other industries or other states. You cannot give equity to a marketing consultant in exchange for business development services. You cannot offer stock options to non-lawyer administrative staff as incentive compensation. You cannot take on venture capital investment with investors receiving equity stakes. You cannot structure a management company owned by non-lawyers that holds equity in your law corporation while providing administrative services.

The prohibition extends beyond direct ownership. You also cannot structure arrangements that give non-lawyers de facto ownership or control. A management services organization (MSO) that dictates your client intake, controls fee decisions, directs case assignments, or extracts profits through percentage-based fees would violate Rule 5.4’s fee-sharing prohibition even if the MSO technically doesn’t own stock in the law corporation.

Why such strict rules? The State Bar’s position is that lawyer professional judgment must remain independent from non-lawyer financial interests. If a venture capitalist owns part of your law firm, they might pressure you to prioritize revenue over ethical obligations or client interests. If your marketing firm owns equity and extracts percentage-based fees, they might push you to accept marginal cases or pursue aggressive tactics that compromise your professional responsibilities.

Other states and countries take different approaches. The District of Columbia allows non-lawyer ownership under certain circumstances. The United Kingdom permits Alternative Business Structures where non-lawyers can own law firms. Some California attorneys advocate for similar reforms here. But current California law does not permit it, and violating the rules subjects you to discipline including potential disbarment.

If you’re considering any arrangement involving non-lawyer equity, profit-sharing, or control, consult with an attorney who specializes in legal ethics before proceeding. What seems like a creative business solution might be career-ending professional misconduct.

Professional Liability Protection: What the Corporate Structure Does and Doesn’t Provide

Attorneys sometimes misunderstand what incorporating as a law corporation protects them from. The corporate structure does not shield you from personal liability for your own professional malpractice. Corporations Code Section 13407 makes this explicit: shareholders of professional corporations remain personally liable for any negligent or wrongful acts or omissions committed by them or by any person under their direct supervision and control while rendering professional services.

If you negligently miss a statute of limitations, provide bad advice that costs a client money, or breach your fiduciary duties, you’re personally liable for resulting damages. The fact that you practiced through a law corporation rather than as a sole proprietor doesn’t change your personal exposure for your own errors.

What the law corporation structure provides is liability separation between shareholders for each other’s independent malpractice. If your co-shareholder commits malpractice and you weren’t involved in that matter, had no supervisory relationship over that attorney, and had no knowledge of the error, you’re generally not personally liable—though the corporation itself can be sued.

The corporate structure also provides a liability buffer for ordinary business obligations. If your law corporation signs an office lease and later can’t pay rent, the landlord’s remedy is against the corporation, not automatically against you personally (unless you’ve personally guaranteed the lease, which commercial landlords often require). If the corporation purchases equipment on credit and defaults, the creditor’s claim is against the corporate entity.

But these protections only hold if you maintain corporate formalities and avoid alter ego problems. Courts pierce the corporate veil when corporations are undercapitalized, when shareholders commingle personal and corporate funds, when corporate formalities aren’t observed, when the corporation is used to perpetrate fraud, or when the corporation is really just the shareholder’s alter ego rather than a separate entity.

Given that the corporate structure doesn’t eliminate malpractice liability, why does the State Bar require professional liability insurance or alternative security? Because the insurance requirement protects both clients (who have a fund to collect from if they prevail on a malpractice claim) and attorneys (who avoid personal financial devastation from a single catastrophic claim).

Most attorneys should maintain professional liability coverage with limits well above the State Bar minimums. The minimums are designed to satisfy registration requirements, not to adequately protect a busy law practice. If your practice involves high-exposure matters—complex litigation, large commercial transactions, securities work—consider limits of $1 million per occurrence or higher. Discuss appropriate coverage levels with your insurance broker and consider your risk profile, practice areas, and potential claim sizes.

Advertising, Trade Names, and Professional Conduct Rules

Your law corporation’s marketing activities must comply with Chapter 7 of the California Rules of Professional Conduct (Rules 7.1 through 7.5), which govern communications about legal services and firm identification.

Rule 7.1 prohibits false or misleading communications. This includes statements that contain material misrepresentations of fact or law, omit facts necessary to make the statement not misleading, or are likely to create unjustified expectations about results you can achieve. Common violations include claiming success rates (“I’ve won 95% of my cases”) without adequate substantiation, suggesting ability to improperly influence courts or officials, comparing your services to others’ unless the comparison can be factually substantiated, or implying specialization in areas where you haven’t been certified by the State Bar’s Legal Specialization program.

Rule 7.5 governs firm names and trade names. You cannot use firm names that violate Rule 7.1, names that imply government affiliation unless true, or names suggesting you’re a legal services organization unless accurate. The rule explicitly permits trade names, resolving decades of ambiguity about whether California attorneys could practice under descriptive names like “Bay Area Tax Law Group, A Professional Law Corporation” rather than surname-based names.

When you submit your State Bar law corporation registration application, Attachment B requires you to declare that your corporate name, any trade names you’ll use, and all advertising materials comply with Rules 7.1 and 7.5. The State Bar reviews corporate names for compliance and may request clarification if your chosen name raises questions about accuracy, misleading implications, or specialization claims.

Your law corporation’s letterhead, website, business cards, and advertising materials must accurately identify the entity. Include your full corporate name, your State Bar registration number, and your business address. If you use a trade name, make clear that it’s a trade name of your registered law corporation—for example: “Silicon Valley Patent Law, a Trade Name of Smith Law Corporation.”

Lawyer advertising has become substantially more permissive over the past few decades as First Amendment protections have expanded, but California still prohibits certain content. Don’t make guarantees about outcomes, disparage other lawyers or law firms, make unsubstantiated claims about expertise or results, or pay non-lawyers for client referrals (which violates Rule 5.4’s fee-sharing prohibition).

If you’re establishing a law firm website—and in modern practice, you should be—ensure it includes required disclaimers. While California doesn’t prescribe specific disclaimer language, a statement like “This website is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by accessing this website or contacting our firm” helps manage expectations and reduces misunderstandings.

Common Formation Mistakes and How to Avoid Them

Practicing Before Receiving State Bar Registration. The most serious mistake is forming your corporation with the Secretary of State and immediately beginning to practice law through it before the State Bar issues your Certificate of Registration. This violates Law Corporation Rule 3.157 and subjects you to discipline. Wait for State Bar approval before taking on clients or providing legal services through your new corporation.

Inadequate Share Transfer Restrictions in Bylaws. Generic corporate bylaws don’t include the share transfer restrictions and mandatory redemption provisions required for professional corporations. Your bylaws must comply with Corporations Code Sections 13406 and 13407 and implement procedures for what happens when shareholders lose their law licenses. Failing to include these provisions creates problems if you later need to remove a disqualified shareholder or if you try to sell your practice.

Commingling Personal and Corporate Funds. Opening a corporate bank account but then treating it like your personal account destroys the corporate liability protection. Every business expense must come from the corporate account. Every dollar of business income must be deposited to the corporate account. Pay yourself through formal payroll and documented distributions—never just withdraw cash when you need it.

Missing Trust Accounting Requirements. Attorneys who’ve always practiced in firms where someone else handled trust accounting sometimes form their own practice and set up trust accounts incorrectly or fail to maintain required reconciliations. Rule 1.15 violations are common grounds for discipline. If you’re unfamiliar with trust accounting, take a CLE course or consult with an attorney experienced in solo practice setup before accepting your first client retainer.

Failing to File Annual Statement of Information. The $25 annual filing seems minor, but missing it results in penalties and eventual suspension of corporate powers. Calendar the filing date, set multiple reminders, and don’t rely solely on receiving the Secretary of State’s renewal notice in the mail.

Not Making Timely S-Election. You have 75 days from incorporation (or from the start of the tax year for which you want S-Corp status) to file Form 2553. Miss that deadline and you’re taxed as a C-Corporation for the entire year, facing double taxation on profits. File the S-election immediately after incorporation, get IRS confirmation, and keep the confirmation with your corporate records.

Inadequate Professional Liability Coverage. Meeting the State Bar’s minimum coverage requirements doesn’t mean you’re adequately protected. A single serious malpractice claim can easily exceed $100,000 or $300,000. Consider higher limits based on your practice areas and risk profile. Saving money on premiums is poor economics if you face an uncovered claim that wipes out your personal assets.

The Financial Commitment: Formation and Ongoing Costs

Understanding the full cost picture helps you budget appropriately and avoid surprises.

Formation and first-year costs for a California law corporation include Secretary of State filing fee for Articles of Incorporation ($100), initial Statement of Information ($25), State Bar Application for Certificate of Registration ($257), first-year minimum franchise tax (exempt for newly incorporated corporations, but owe tax on net income at applicable rates), professional liability insurance (varies by coverage levels and practice areas, typically $2,000-$10,000+ annually for solo practitioners), attorney fees for document review and formation assistance (if engaging counsel, varies widely), and corporate records book and supplies ($50-150 if purchasing a kit).

Your minimum direct filing costs are approximately $382 (SOS $100 + SI $25 + State Bar $257), not counting insurance, which is mandatory but variable. Most attorneys should expect total first-year costs of $2,500-$10,500+ depending on insurance premiums and whether they engage counsel for formation.

Ongoing annual costs include State Bar law corporation renewal ($103, annually), State Bar late renewal penalty if missed ($113 additional), Statement of Information annual filing ($25), minimum franchise tax ($800 for corporations with taxable income in subsequent years), professional liability insurance (annual premiums), S-Corporation tax return preparation (typically $800-$3,000 depending on complexity), and payroll processing if you have employees including yourself on payroll (varies by provider and frequency).

Budget for approximately $4,000-$7,000 in annual compliance costs beyond your insurance premiums. For profitable practices, the tax savings from S-Corporation treatment typically exceed these compliance costs. The break-even point varies by individual circumstances, but generally attorneys generating more than $75,000-$100,000 in net income benefit from the corporate structure’s tax advantages enough to justify the administrative burden.

Frequently Asked Questions

Can I convert my existing sole proprietorship or partnership into a law corporation?

There’s no formal statutory conversion process from sole proprietorship or partnership into a corporation like there is for converting LLCs to corporations. Instead, you form a new law corporation, receive State Bar registration, then wind down your sole proprietorship or dissolve your partnership. The law corporation takes over your practice—you transfer client relationships, notify clients of the entity change through formal letters and updated engagement agreements, ensure all pending matters transition properly, and close out the old entity’s bank accounts and tax obligations. From a client’s perspective, you’re still their lawyer—you’re just practicing through a different entity structure. From a legal perspective, the law corporation is a new entity that’s entering into new engagement agreements with your existing clients.

If I’m the sole shareholder, do I really need to hold annual meetings and keep minutes?

Yes, even single-shareholder corporations should document annual meetings in formal minutes. These minutes serve multiple purposes: they demonstrate to the IRS and courts that you’re treating the corporation as a separate entity (not just your alter ego), they document major decisions like compensation changes and provide contemporary records if those decisions are later questioned, they establish that you’re observing corporate formalities which protects your liability shield from veil-piercing arguments, and they create a paper trail for your own reference about when decisions were made and why. The meetings don’t need to be elaborate—you can hold a five-minute meeting by yourself each year, document that you approved the prior year’s actions and re-elected yourself to all positions, and be done. But skipping them entirely gives opposing counsel ammunition if anyone ever challenges your corporate status.

What happens if I lose my State Bar license through suspension or disbarment?

If your law license is suspended or you’re disbarred, you must immediately stop practicing law through your law corporation. Law Corporation Rule 3.160 requires that all shareholders be active State Bar members in good standing. If you’re a solo practitioner who loses your license, your law corporation can no longer operate—you must wind down your practice, transfer your clients to other attorneys, and eventually dissolve the corporation. If you’re part of a multi-shareholder law corporation and lose your license, your shares must be redeemed by the corporation or purchased by the remaining shareholders. Your corporate bylaws should contain provisions establishing procedures and valuation formulas for these scenarios. Plan for these contingencies in advance through buy-sell agreements, because resolving ownership disputes after someone loses their license is substantially more difficult than implementing pre-agreed procedures.

Can my law corporation own a building or make non-legal investments?

Law Corporation Rule 3.159 limits law corporations to rendering legal services only. This restriction means your law corporation cannot engage in non-legal business activities like real estate investment, owning rental properties, operating consulting services, or making passive investments in other businesses. If you want to own the building where your practice operates, purchase it personally or through a separate investment entity, then lease space to your law corporation at fair market rates. Some attorneys establish separate entities for real estate ownership and investment activities while practicing law through their law corporation. Consult with both a business attorney and tax advisor before implementing multi-entity structures to ensure you’re not creating problems with fee-sharing rules, ethical restrictions, or inadvertent tax complications.

I practice in California but want to expand to Nevada. Can my California law corporation practice in both states?

This requires careful analysis of both states’ corporate practice rules and your license status. If you’re admitted in both California and Nevada, you’ll need to determine whether your California law corporation can qualify to do business in Nevada or whether Nevada law requires a separate Nevada professional entity. Many states don’t allow out-of-state professional corporations to provide services in their jurisdiction—you must form a local professional entity. The multistate practice landscape varies by state and practice area. Consult with attorneys familiar with multijurisdictional practice rules in both states before expanding across state lines, because practicing without proper licensure and entity registration in a state where you’re providing legal services can result in unauthorized practice discipline in both jurisdictions.

Can I have different classes of stock in my law corporation, such as voting and non-voting shares?

California’s Corporations Code allows corporations to create different classes of stock with varying rights, but Law Corporation Rule 3.160’s requirement that all shareholders be active State Bar members and Rules 3.161’s governance requirements effectively limit what you can do with stock classes in a law corporation. You could potentially create classes that differ in economic rights (different dividend or liquidation preferences) as long as all shares still meet the eligibility requirements and all shareholders remain active Bar members with appropriate governance roles. But you cannot create ownership structures that give non-lawyers economic interests in the practice, and you cannot create governance structures that vest control in non-licensees. Any multi-class stock structure in a law corporation requires careful analysis to ensure State Bar compliance. Most law corporations use simple common stock structures to avoid complications.

What’s the difference between a law corporation and a registered limited liability partnership (LLP)?

Both structures provide liability protection for attorneys, but they differ in regulatory oversight and operational flexibility. Law corporations require dual approval from the Secretary of State and the State Bar, annual State Bar registration renewal and fees, mandatory professional liability insurance or alternative security, and more formal governance requirements (bylaws, officers, directors, meeting minutes). LLPs register with the Secretary of State only, have less intensive annual reporting, are not subject to State Bar law corporation registration and annual fees (though they must comply with general professional conduct rules), and offer more flexible management structures. For multi-attorney practices, LLPs often provide operational advantages with less regulatory oversight. For solo practitioners or small firms seeking tax advantages through S-Corporation election, law corporations offer better tax planning opportunities. The choice between structures depends on your practice size, growth plans, tax situation, and tolerance for administrative compliance.

Getting Started with Your California Law Corporation

If you’re ready to form your California law corporation, begin by confirming that you’re an active State Bar member in good standing, determining your corporate name and ensuring it complies with professional conduct rules, deciding whether you’ll have co-shareholders and verifying their State Bar status, obtaining professional liability insurance quotes, and consulting with a tax advisor about S-Corporation election strategy and compensation planning.

Consider whether you need attorney assistance for formation. The mechanics aren’t insurmountable for a detail-oriented lawyer who researches the requirements carefully—you understand legal documents and procedure, after all. But mistakes in corporate formation create compliance problems that are costly to fix later. An attorney experienced with law firm structures can ensure your articles and bylaws contain required provisions, that your shareholder agreements address mandatory redemption scenarios, that your State Bar application is complete, and that you’ve satisfied all eligibility requirements.

For corporate governance documents including bylaws and organizational resolutions, my Corporate Bylaws Generator is designed to help professionals create compliant documents. If you’re bringing in partners or co-founders, review my Co-founder Agreement Generator and Founders Agreement Generator to formalize your business relationships and establish clear expectations.

Your law corporation represents a significant professional and financial commitment. Take the time to do it right from the beginning. The dual-agency approval process requires patience, the ongoing compliance obligations require discipline, but the tax advantages, liability protection, and professional structure make it worthwhile for many California attorneys building sustainable practices.

If you need legal assistance with your California law corporation formation, want a professional review of your proposed structure, or have questions about your specific situation, schedule a consultation to discuss your practice needs.

Official Resources and Primary Sources

California State Bar
Law Corporations program page: https://www.calbar.ca.gov (search for “law corporations”)
Law Corporation Rules: Title 3, Division 2, Chapter 3 of the Rules of the State Bar
Application forms and attachments: Available on Law Corporations program page
Contact for questions: Check State Bar website for current contact information

California Secretary of State
BizFile Online (business search and filings): https://bizfileonline.sos.ca.gov
Forms, samples, and fees: https://www.sos.ca.gov/business-programs/business-entities/forms
Current processing times: https://www.sos.ca.gov/business-programs/business-entities/processing-times

California Statutes
Corporations Code §§ 13400-13410 (Moscone-Knox Professional Corporation Act): https://leginfo.legislature.ca.gov
Business and Professions Code §§ 6000-6228 (State Bar Act, including law corporation provisions §§ 6160-6172): Same source
California Rules of Professional Conduct: Available on State Bar website

California Franchise Tax Board
Corporate tax information: https://www.ftb.ca.gov/file/business/types/corporations/index.html
Publication 1060 (Minimum Franchise Tax): Available at FTB.ca.gov

Internal Revenue Service
EIN application: https://www.irs.gov/businesses/small-businesses-self-employed/apply-for-an-employer-identification-number-ein-online
Form 2553 (S-Corporation election): Available at IRS.gov

This guide provides general legal information about forming California law corporations and is current as of publication date. Laws, regulations, State Bar rules, and fees change periodically. This information should not be construed as legal or tax advice for your specific situation. Consult with a qualified attorney and tax professional regarding your particular circumstances before making formation decisions.