Overview: California Law Corporations
California attorneys may practice through several business structures, including sole proprietorships, general partnerships, law corporations, and registered LLPs. Law corporations are governed by Corporations Code Section 13401 and regulated by the State Bar of California.
Why Form a Law Corporation?
A law corporation provides significant advantages for legal practices:
- Limited liability for business debts
- S-Corp election reduces self-employment tax
- Easier succession and ownership transfer
- Multiple attorney owners possible
- Professional credibility and permanence
Regulatory Framework
Law corporations are governed by:
- State Bar of California
- CA Corporations Code § 13401-13410
- Business & Professions Code § 6160-6172
- California Rules of Professional Conduct
- ABA Model Rules (as adopted)
Business Structure Options
California attorneys may practice through:
- Sole proprietorship
- General partnership (attorneys only)
- Law Corporation (PC)
- Registered Limited Liability Partnership (LLP)
- LLCs are NOT permitted for law practice
Liability Considerations
Law corporations have specific liability rules:
- Malpractice liability remains personal
- Corporation shields from business debts
- Supervisory liability for associates
- Client trust account obligations remain
- Professional liability insurance essential
⚠️ LLC Prohibition for Law Practice
California does NOT allow attorneys to form LLCs for the practice of law. Business & Professions Code § 6160-6172 specifically limits legal practice to sole proprietorships, partnerships, law corporations, and registered LLPs. This prohibition applies regardless of whether other states permit legal PLLCs. The State Bar strictly enforces this restriction.
Ownership & Shareholder Requirements
California law strictly limits law corporation ownership to licensed attorneys. Unlike some professional corporations, law corporations cannot have any non-attorney owners, making ownership rules more restrictive than other professional corporations.
Permitted Shareholders
Only the following may hold shares:
- Active members of the State Bar of CA
- Attorneys admitted in other states (with CA registration)
- Trust for benefit of licensed attorney
- Estate of deceased shareholder (limited time)
- 100% attorney ownership required
Prohibited Shareholders
The following cannot own law corporation shares:
- Non-attorneys (including spouses)
- Other corporations or entities
- Paralegals or legal assistants
- Inactive or suspended attorneys
- Disbarred attorneys
💡 Multi-State Attorney Ownership
Attorneys admitted in other states may be shareholders in a California law corporation if they register as "Registered In-House Counsel" or practice under California's multijurisdictional practice rules. However, at least one shareholder must be an active member of the State Bar of California. Foreign lawyers (non-U.S.) generally cannot be shareholders unless they qualify as "Registered Foreign Legal Consultants."
Director & Officer Rules
Corporate governance requirements:
- All directors must be licensed attorneys
- President must be a licensed attorney
- All officers must be licensed attorneys
- One person may hold multiple offices
- Annual meetings required
Shareholder Agreement Terms
Essential provisions to include:
- Mandatory redemption on disbarment/suspension
- Death/disability buyout provisions
- Valuation methodology
- Client conflict provisions
- Departure procedures
Formation Process: Step by Step
Forming a California law corporation requires coordination with the Secretary of State, State Bar of California, and tax agencies. Here's the complete process.
Verify Bar Membership Status
Confirm all proposed shareholders are active members:
- Check State Bar of California member lookup
- Verify "Active" status for all attorneys
- Confirm no pending disciplinary actions
- Check malpractice coverage status
Select Corporate Name
Choose a compliant name for your law corporation:
- May include attorney names
- Can include practice area description
- Must include "A Law Corporation" or "A.L.C."
- Must not be misleading about practice
- Check Secretary of State availability
File Articles of Incorporation
Prepare and file Articles with specific provisions:
- State purpose as practice of law
- Reference Corporations Code § 13401(a)
- Include required professional corporation language
- File with Secretary of State
- Filing fee: approximately $100
Register with State Bar
Complete law corporation registration:
- Submit Application for Certificate of Registration
- Provide certified copy of filed Articles
- List all shareholders with Bar numbers
- Disclose directors and officers
- Pay registration fee ($50)
Adopt Corporate Documents
Prepare essential governance documents:
- Bylaws with mandatory redemption provisions
- Shareholder agreement (buy-sell, conflicts)
- Organizational board resolutions
- Stock certificates and ledger
- Initial board meeting minutes
Tax Elections and Registrations
Complete required tax filings:
- Apply for Federal EIN
- File S-Corp election (Form 2553) if desired
- Register with CA Franchise Tax Board
- Obtain local business licenses
- Register with EDD if hiring employees
Establish Practice Operations
Set up your law practice:
- Open client trust account (IOLTA)
- Open operating account
- Obtain professional liability insurance
- Register with State Bar Client Security Fund
- Set up case management systems
Professional Responsibility & Ethics
Operating a law corporation requires strict compliance with California Rules of Professional Conduct. The corporate form does not diminish individual ethical obligations—each attorney remains personally responsible for professional conduct.
Client Confidentiality
Protecting client information:
- Corporation bound by attorney-client privilege
- All employees must sign confidentiality agreements
- Secure document and data management
- Conflict walls for imputed conflicts
- Departure procedures for client files
Conflict of Interest
Managing firm-wide conflicts:
- Imputation of conflicts to all attorneys
- Conflict checking systems required
- Lateral hire screening procedures
- Informed consent documentation
- Prospective client conflicts
Trust Accounts (IOLTA)
Client fund handling requirements:
- Separate client trust account required
- IOLTA enrollment for interest
- Strict commingling prohibition
- Monthly reconciliation required
- Records retention (5+ years)
Supervision Obligations
Managing partner responsibilities:
- Supervise all legal work
- Train and supervise non-lawyer staff
- Establish ethical policies
- Monitor compliance
- Report misconduct
⚠️ Fee Sharing Prohibition
California Rule 5.4 prohibits sharing legal fees with non-lawyers. This means:
- Non-attorney staff cannot receive percentage-based compensation
- Referral fees to non-attorneys are prohibited
- Non-attorneys cannot have ownership interests
- Exception: Death benefits to deceased attorney's estate
- Violation can result in disbarment
Law Corporation vs. Registered LLP
California attorneys commonly choose between law corporations (PCs) and registered limited liability partnerships (LLPs). Each structure has distinct advantages depending on firm size, growth plans, and tax situation.
| Factor | Law Corporation (PC) | Registered LLP |
|---|---|---|
| Liability Protection | Shareholder liability limited to investment | Partners protected from other partners' malpractice |
| Tax Treatment | C-Corp (can elect S-Corp) | Partnership taxation (pass-through) |
| Self-Employment Tax | S-Corp distributions not subject to SE tax | Partner distributive share subject to SE tax |
| Ownership Transfer | Stock transfers relatively simple | Requires partnership agreement amendments |
| Insurance Required | No state minimum (recommended) | $1M minimum for LLP liability protection |
| Formalities | Corporate minutes, meetings, resolutions | Less formal; partnership agreement controls |
| Best For | Solo/small firms, S-Corp tax planning | Multi-partner firms, flexible governance |
✅ LLP Insurance Requirement
California registered LLPs must maintain at least $1,000,000 in professional liability insurance (or provide an equivalent security deposit) to receive liability protection. Without this coverage, partners have unlimited personal liability for the partnership's obligations. Law corporations have no statutory minimum insurance requirement, though professional liability coverage is strongly recommended and often required by malpractice carriers.
Associate Attorneys & Staff
Hiring associate attorneys and support staff in a law corporation involves employment considerations, supervision obligations, and potential paths to partnership. California law imposes specific requirements on attorney employment relationships.
Associate Employment
Hiring associate attorneys:
- W-2 employment (not independent contractor)
- Must be active State Bar member
- Supervision by senior attorney required
- Malpractice coverage considerations
- Clear compensation structure
Compensation Structures
Common associate compensation models:
- Base salary plus discretionary bonus
- Lockstep progression by year
- Origination/collection credits
- Merit-based increases
- Profit sharing (for partners)
Partnership Track
Path to shareholder status:
- Typical track: 7-10 years
- Equity vs. non-equity tiers
- Capital contribution requirements
- Buy-in financing options
- Performance criteria
Support Staff
Non-attorney employees:
- Paralegals and legal assistants
- Must be supervised by attorneys
- Cannot give legal advice
- Cannot have ownership interest
- Confidentiality agreements required
💡 California Non-Compete Rules
California Business & Professions Code § 16600 generally voids non-compete agreements, and Rule 1.2.1 specifically prohibits restricting an attorney's right to practice after leaving a firm. However, you can include reasonable provisions regarding:
- Notice periods for departure
- Orderly client transition procedures
- Return of firm property and files
- Confidentiality of firm information (not client names)
Frequently Asked Questions
No, law corporations must be 100% owned by licensed attorneys. Unlike some other professional corporations that allow minority non-professional ownership, California law prohibits any non-attorney ownership in law corporations. Community property interests do not override this requirement—shares must be held solely by the licensed attorney spouse. Consider a separate property agreement to clarify ownership.
No. California explicitly prohibits LLCs for the practice of law. Your options are sole proprietorship, general partnership (with other attorneys), law corporation (PC), or registered LLP. Some attorneys form separate LLCs for non-legal business activities (consulting, real estate ownership), but any entity that provides legal services must use an authorized structure.
If you're the sole shareholder and your license is suspended or revoked, you must wind down the law corporation's practice, notify clients, and either dissolve the corporation or sell it to another licensed attorney. Your bylaws and shareholder agreement should include mandatory redemption provisions for this scenario. The State Bar may supervise the transition of client matters.
To add an attorney shareholder: (1) Verify their State Bar status is "Active"; (2) Run conflicts check for the new attorney's prior clients; (3) Determine buy-in terms and valuation; (4) Authorize share issuance via board resolution; (5) Update shareholder agreement; (6) Issue stock certificates; (7) Notify State Bar of ownership change via amended registration. Consider whether the new partner will be equity or non-equity initially.
While California doesn't require attorneys to carry malpractice insurance (except for LLPs needing $1M minimum), it's strongly recommended. Many sophisticated clients require proof of coverage. California does require attorneys to disclose to clients whether they carry malpractice insurance. The law corporation should be named as an insured on the policy, and coverage should extend to all attorneys practicing under the corporation.
An attorney licensed only in another state generally cannot be a shareholder in a California law corporation unless they: (1) Also obtain California bar admission; (2) Register as "Registered In-House Counsel" (limited to in-house work); or (3) Qualify under multijurisdictional practice rules for temporary practice. At least one shareholder must be an active member of the State Bar of California.