When you open a law practice, you are also opening a business. That means you face many of the same challenges and requirements of any small business.

The following sections provide essential business information to help you meet those needs. 

 Step One, Find an Accountant

As you begin your adventure into the practice of law, it is important to remember that your law practice is, above all, a business. One of the FIRST THINGS you should do is find a reputable accountant that can help you navigate through the initial set-up and ongoing business administration of running a law practice. Just as you know many things about the law that the average person does not, a competent accountant knows many things about business that you may not, such as obtaining a franchise and excise tax certificate of registration, obtaining a local business license, getting a federal Employer Identification Number (EIN), making required quarterly estimated income tax payments, etc.

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Which Entity to Use?

As you begin your new practice, one of the first considerations is the business structure through which you will practice law.  There are several different options, and it is IMPERATIVE that you discuss your situation with your accounting professional BEFORE YOU BEGIN PRACTICING, as the business structure can have significant tax consequences.  The business structures most often used for solo or small firm practice in Tennessee include:

Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

The most popular business entity for solo or small firms is the LLC or PLLC.  The LLC and PLLC provide members with the advantages of both individual protection from general liability, such as leases, contracts, debts, and the acts and omissions of other members or employees, and “pass-through” taxation, where the members are taxed on their share of the profits but the entity itself does not pay federal income taxes (though it is subject to state franchise and excise taxes). Each individual member remains personally liable for his or her own malpractice.

The difference between an LLC and a PLLC is that a PLLC may only include members who authorized to render a specific professional service, such as the practice of law.  If you elect to utilize an LLC or PLLC and have more than one member, it is crucial that you utilize a formal Operating Agreement to specify each member’s interest in the business, how profits and losses will be shared, the admission and termination of members, etc.

A LLC or PLLC is easily formed by filing Articles of Organization with the Secretary of State.  The Secretary of State’s office provides several resources. The initial filing fee to form a Tennessee LLC is $50 per member, with a minimum of $300; an annual fee is paid in the same amount. State franchise taxes are equal to 0.25% of the firm’s net worth or tangible property in Tennessee, with a minimum of $100, and state excise taxes are equal to 6.5% of the firm’s Tennessee taxable income.

For more information about LLCs and PLLCs, see the Tennessee Revised Limited Liability Company Act, Tenn. Code. Ann. § 48-249-101, et seq. Part 11 of Chapter 249 deals specifically with PLLCs. Note that there are two LLC Acts in the Tennessee Code Annotated; individuals forming their law firms now or converting their current entities to LLCs or PLLCs should refer only to the Revised LLC Act in Chapter 249 of Title 48, which applies to all LLCs formed on or after January 1, 2006.

Corporation, Professional Corporation (PC), or Professional Benefit Corporation

A corporation is the traditional form of limited liability business entity. The firm is owned by shareholders who elect a board of directors to manage the affairs of the corporation. Shareholders receive individual protection from general liability for the obligations of the firm. However, both the entity itself and the distributions passed on to shareholders are subject to federal taxes, a conundrum known as “double taxation.” Shareholders may be protected from general personal liability for the obligations of the corporation and from liability arising from the conduct of other employees; however, an individual who renders legal services as an employee of a corporation is personally liable for his or her own malpractice. Shareholders hoping to form an “S-corporation” to receive the benefits of pass-through taxation, like a partnership or LLC, need to file IRS Form 2553.

A PC is a duly-formed corporation whose shareholders are authorized to render a specific professional service, such as the practice of law. A benefit corporation is a for-profit entity that has also chosen to pursue some public benefit, as measured against a third-party assessment standard and shown in an annual benefit report to its shareholders. Unlike LLCs and PLLCs, several procedural steps necessary to form and maintain a corporation in any of its variety of forms, including the election of directors, adoption of bylaws, etc. Failure to follow these corporate formalities is one of the factors courts will consider in determining whether to “pierce the corporate veil” to make the shareholder personally liable for corporate obligations. Note, however, that under Tenn. Code Ann. § 48-18-101(c), a corporation with fewer than fifty shareholders may dispense with a board of directors. Moreover, under Tenn. Code Ann. § 48-18-401, the corporation must have the officers listed in the bylaws and those officers (i.e., the attorney) may serve more than one position in the corporation.

In order to form a corporation, PC, or benefit corporation, the incorporator must file a charter with the Secretary of State.  The Secretary of State’s office provides several resources.

The PC has fallen from popularity among small law firms as a result of changes in the tax code that have encouraged the formation of LLCs and PLLCs. Be sure to discuss the possible tax implications with your accountant. For further information, see the general Tennessee Business Corporation Act, Tenn. Code Ann. § 48-11-101 et seq., the Tennessee Professional Corporation Act, Tenn. Code Ann. § 48-101-601, et seq., and/or the Tennessee For-Profit Benefit Corporation Act, Tenn. Code Ann. § 48-28-101, et seq.

Limited Liability Partnership  (LLP)

An LLP may be formed as an initial matter or when either a general partnership or limited partnership elects to become an LLP. The management of an LLP is similar to that of a general partnership or limited partnership. Like both of those entities, described in greater detail below, it is critical for a LLP to have a partnership agreement to govern its affairs.

The primary advantage of the LLP is the limitation of personal liability of the general partners for obligations and liabilities committed by another partner or employee. However, a general partner may still be liable for his or her own omissions, negligence, wrongful acts, misconduct, or malpractice or for those of attorneys that he or she supervises.

The Secretary of State’s office has forms available to register an LLP here: https://sos.tn.gov/sites/default/files/forms/ss-4482.pdf, or to convert an existing general partnership or limited partnership to an LLP here: https://sos.tn.gov/sites/default/files/forms/ss-4489.pdf. For more information on limited liability partnerships, see relevant portions of Tennessee’s Revised Uniform Partnership Act, especially the part focused on LLPs, Tenn. Code Ann. § 61-1-1001, et seq., and the section regarding partners’ liability, Tenn. Code Ann. § 61-1-306.

Partnership (also known as a General Partnership)

In Tennessee, a “partnership” is an association of two or more persons to carry on as co-owners of a business or other undertaking for profit.  Each partner is an agent of the partnership for the purpose of its business, and an act of a partner in the ordinary course of business generally binds the partnership, even if that act is taken without the knowledge of the other partners. A partnership is liable for wrongful acts of a partner acting in the ordinary course of business.

Importantly, all partners are generally jointly and severally liable for all obligations of the partnership, unless otherwise agreed by the claimant or provided by law. This means that ultimately one partner could be held liable for the malpractice of another partner. For obvious reasons, partnerships have become far less popular with the emergence of the limited liability entities described above.

A general partnership does not require any formal organization, and can simply be created by operation of law if the characteristics of a partnership are present. However, the partnership may file a Statement of Partnership Authority with the Secretary of State’s office that identifies partners and permits the specification and limitation of authority of some or all partners.

If you do elect to form a general partnership, it is very important to have a partnership agreement that clearly defines the relationship between the partners, including the sharing of property and losses, liability for claims by third parties against the partnership, contributions to the partnership, and exit rights.

For more information on partnerships, refer to Tennessee’s version of the Revised Uniform Partnership Act, Tenn. Code Ann. § 61-1-101, et seq.

Limited Partnership

A limited partnership is a partnership formed by two or more persons that has at least one general partner and at least one limited partner.  A general partner has management authority is liable for obligations of the partnership, much the same as any partner in a general partnership. A limited partner, typically a “passive investor,” is generally not liable for the obligations of a limited partnership, but may still be liable for his or her own omissions, negligence, wrongful acts, misconduct, or malpractice. The “control rule,” under which a limited partner opened himself or herself up to liability by participating in the control of the business, is eliminated in the Revised Uniform Limited Partnership Act adopted in Tennessee in 2017.

Limited partnerships have waned in popularity as more flexible limited liability entities, described above, have developed over the past few decades. To form a limited partnership, you must file a Certificate of Limited Partnership with the Tennessee Secretary of State, available here: https://sos-tn-gov-files.s3.amazonaws.com/forms/SS-4470.pdf. As with a general partnership, it is critical for a limited partnership to have a partnership agreement that specifies the relationship between the partners.

For more information on limited partnerships, refer to the Revised Uniform Limited Partnership Act of 2017, Tenn. § 61-3-101, et seq.

Sole Proprietorship

A sole proprietorship exists when an attorney “hangs out a shingle” and does business under his or her own name without forming a separate business entity for practice.  The legal practice and the individual are considered a single entity, and earnings are generally taxed directly to the owner.

A sole proprietorship does not require any formal organization, initial filing fees, or annual report filings or fees, as it is not a separate entity from the lawyer. Thus, if you simply begin practicing law without creating any legal entity, you have formed a sole proprietorship. The attorney’s personal liability in the sole proprietorship will be unlimited, and his or her personal assets are subject to creditors of the practice.


There are many questions to consider when choosing your business entity.  Will you have a partner in your firm?  Will you have employees?  How will you protect your personal assets if the firm is unsuccessful and creditors come looking?  What are the tax benefits of one entity over another?

A solo practitioner could simply operate under a sole proprietorship; however, there may be advantages with utilizing one of the limited liability entities.  For example, an attorney operating as a PLLC or PC is still liable for that attorney’s own professional malpractice just as if that attorney rendered the service as a sole proprietor; however, the attorney is not personally liable for the conduct of other employees unless the attorney is also at fault.  Importantly, the LLC, PLLC, or PC structure may help protect the attorney from general personal liability, such as on a commercial lease, accounts payable, etc.

Business structure becomes increasingly important when multiple attorneys practice together, as the business structure will help dictate management, responsibilities, succession, and liability.

If you choose to utilize a formal business structure, it is much easier to do it from the beginning rather than beginning as a sole proprietorship and changing after the practice has been established.

Further information on formal business structures (including fee schedules and forms) can be located on the website of the Tennessee Secretary of State.

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Note that Rule 5.4 of the Rules of Professional Conduct prohibits a lawyer from forming a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law.  Likewise, a lawyer may not practice with or in the form of a PC, PLLC, or other association authorized to practice law for a profit if (1) a non-lawyer owns any interest, (2) a non-lawyer is a corporate director, officer, or occupies the position of similar responsibility in any form of an association other than a corporation, or (3) a non-lawyer has the right to direct or control the professional judgment of a lawyer.

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