Starting your own practice? Picking the right legal structure…

Feb 27

Starting your own practice? Picking the right legal structure…

Michael Carabash There are 5 possible legal structures a lawyer could choose from when deciding whether or not to go out on their own or in combination with others: (1) Sole Proprietorship, (2) Association, (3) General Partnership, (4) Limited Liability Partnership, or (5) Professional Corporation.

Each structure has its own advantages and disadvantages with respect to ease of creation, continuation (e.g. administrative paperwork), ownership, taxes, liability, and ease of dissolution.

Over the course of the next few posts, I’ll discuss the advantages and disadvantages of each of these legal structures – beginning with the sole proprietorship.

Sole Proprietorship

Defined
If you are the sole lawyer/owner of the law practice, then the law practice will carry on business as a sole proprietorship – an unincorporated business organization that has only one owner. There is no separate legal existence between the owner and the sole proprietorship. With a sole proprietorship, “[y]ou will have complete control over your expenses your work load, your trust account, and your revenue. There will be no need to consult others if you choose to expand your business and you have the freedom to work out of your home to keep your overhead to a minimum” (Wendy E. Oughtred in Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), at p. 43).

Advantages and Disadvantages
The advantages and disadvantages of running s sole proprietorship are clearly spelled out in the following sources: Judge William Huss, Start Your Own Law Firm: A guide to all the things they don’t teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), p. 13. See also Felicia S. Folk, Getting Started: Opening Your Law Office (updated September 2004), Law Society of British Columbia, p. 5: online: Law Society of British Columbia.

According to those sources, the advantages of running a sole proprietorship include:

The freedom of making all of the decision;
All profits going to the owner/operator;
Work can be done where and when the owner/operator desires;
More client contact;
No partners meetings;
Flexibility;
The freedom from wrangling over fees and distributions; and
The personal satisfaction of achieving success by the use of one’s own knowledge, skills, and experiences.

The disadvantages of running a sole proprietorship, however, include:

Lack of specialization, leading to lack of knowledge about various subject areas and the risk of making mistakes
Succumbing to financial problems;
Not being able to handle large or complex matters (and the large fees that go with them);
Having responsibility over all administrative details;
No income-balancing with partners;
Not being able to have anyone in the office to handle emergencies while the owner/operator is absent;
Isolation from other lawyers; and
High overhead expenses for equipment.

Ideally Suited
Overall, a sole proprietorship may be ideally suited for small towns or suburban areas, where everyone tends to know everyone else, and the problems are rarely so catastrophic that a large firm has to be brought in. The sole practitioner can make a very good living taking care of small criminal cases, traffic and drunk driving matters, wills and probate matters, small business contracts,leases, and other services that fulfill people’s needs in that kind of environment.

Ease of Creation
By and far, creating a sole proprietorship is easier than creating any other type of business organization. Ontario’s Business Names Act provides that “[n]o individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual”18. Registering a sole proprietorship’s name can be done by completing and submitting an on-line application for a Master Business
License to:

Companies and Personal Property Security Branch
Ministry of Government Services
393 University Ave., Suite 200
Toronto, Ontario M5G 2M2

The cost is $60.00 and the Master Business License must be renewed every 5 years at a cost of $60.00.

Continuity
If a sole proprietorship’s owner stops working (e.g. retires, dies, goes bankrupt, etc.), then the business will cease to exist. In other words, a sole proprietorship has no continuity above and beyond the owner’s.

Liability
The owner is exposed to unlimited personal liability for the sole proprietorship’s debts and obligations. That being said, a sole proprietor will not be incurring liability as a result of anyone else’s negligence or malpractice (which may be the case with a partnership).

Taxation
Income earned by a sole proprietorship flows to the owner, where it is fully taxed at the owner’s personal income tax rate. Despite this downside, the owner will be able to offset losses and business expenses from the sole proprietorship or any other source of income (e.g. businesses or property) against his or her personal income from any source of income. The fiscal year end for the sole proprietorship will be the same as for the individual owner – namely, December 31st of each year.