Choosing the right business structure is a pivotal decision for any law firm. Both Professional Corporations (PCs) and Partnerships offer unique advantages and limitations, from liability protection and tax treatment to management style and growth opportunities. This blog, drawing on insights shared by Tamara B. Pow – Founding Partner, Strategy Law, LLP at the Law Firm Growth Conference, examines the pros and cons of each structure in California to help firms determine the most suitable choice for their needs.

Understanding the Basics: PCs vs. Partnerships

Before diving into the pros and cons, it is essential to understand the fundamental differences between these two structures. In a partnership, partners share ownership and management responsibilities, as well as the firm’s financial risks and rewards in accordance with the terms of a Partnership Agreement. In contrast, a Professional Corporation (PC), provides owners (shareholders) with liability protection while subjecting the firm to specific corporate regulations.

The following sections outline the key benefits and drawbacks of both PCs and partnerships, allowing you to weigh which structure aligns best with your firm’s goals.

1. Liability protection

PCs: Liability protection

• Pros: One of the most significant advantages of forming a PC is the liability protection it offers. With a PC, individual shareholders generally aren’t personally liable for the firm’s debts or legal liabilities, reducing personal financial risk. This structure can protect owners from malpractice claims or other liabilities caused by fellow shareholders, a key benefit in the legal industry where exposure to claims can be high.
• Cons: While a PC shields owners from financial liability in many cases, it does not protect against personal malpractice. Owners still need to maintain malpractice insurance.

Partnerships: Shared liability and increased exposure unless an LLP is formed.

• Pros: Partnerships (unless a limited liability partnership (LLP) is formed), offer no protection against liability. Partners may find this acceptable in smaller firms where there’s a high degree of trust and shared responsibility.LLPs protect individual partners from personal liability for the firm’s debts or liabilities for another partner’s malpractice, similar to PCs. 
• Cons: Unlike an LLP is formed partnerships do not provide the same level of protection against debts or legal actions. Partners may be personally liable for business obligations if the firm cannot meet its debts, which can put personal assets at risk.

2. Complexity and costs of formation

PCs: Higher initial costs and complexity

• Pros: A PC offers the benefit of a more formalized structure, which may appeal to larger firms or to attorneys who don’t want partners. 
• Cons: Maintaining a PC can be more costly and administratively burdensome than forming a partnership. PCs require adherence to specific state regulations and mandatory board shareholder meetings. This complexity makes PCs better suited for firms that can handle additional administrative tasks. 

Partnerships: Simplicity and lower costs

• Pros: Partnerships are simpler to establish. Forming a partnership often requires only a partnership agreement and minimal initial fees, making it a practical choice for newer or smaller firms. LLPs require a filing with the Secretary of State as well. 
• Cons: While partnerships are easier to establish, they lack the formal corporate structure that some owners may find appealing. Additionally, the absence of rigid regulatory requirements may lead to operational inconsistencies if the firm expands. Also, a partnership must have at least two partners at all times, which could result in a dissolution of the firm if the partners split. 

3. Taxation and profit distribution

PCs: Corporate tax benefits with some drawbacks

• Pros: PCs could offer certain tax planning opportunities, such as taking advantage of corporate tax rates and retaining earnings within the corporation to defer taxes. PCs may also allow for tax deductions related to employee benefits, potentially reducing the overall tax burden for the firm.
• Cons: A primary disadvantage of PCs is the potential for fixed tax rates and double taxation, where income is taxed both at the corporate level and again as dividends to shareholders. To manage this, many PC owners elect to be taxed as an S corporation or use salary distributions to avoid dividend taxes, but this strategy requires careful planning.

Partnerships: Pass-through taxation

• Pros: Partnerships like S corporations offer pass-through taxation, meaning income is reported on individual partners’ tax returns, avoiding corporate federal income tax. This often results in lower tax liability. Partnerships also allow for flexible profit-sharing arrangements, which can be tailored to reflect individual contributions.
• Cons: Partnership taxation can be complicated to understand and manage. 

4. Decision-making and control

PCs: Centralized management and defined roles

• Pros: PCs have a centralized management structure, which includes a board of directors responsible for major decisions and officers to manage day to day operations. This structure provides a clear chain of command, making it easier to define leadership roles and streamline decision-making. For firms with specific growth goals or a need for structured governance, this formal hierarchy can be advantageous.
• Cons: The formality of a PC can sometimes lead to additional legal costs and/or slower decision-making, as significant actions require board approval. This structure may not be ideal for smaller firms that benefit from the agility of more collaborative decision-making processes. A separate shareholder agreement is needed to cover terms that would be covered b a partnership agreement. 

Partnerships: Collaborative control

• Pros: In a partnership, the partnership agreement can provide that each partner has a say in major decisions, fostering a collaborative environment where all voices are valued. This can create a strong sense of shared purpose and enable quick decisions, particularly beneficial for small or mid-sized firms.
• Cons: Shared decision-making may lead to conflicts if partners have differing goals or visions for the firm. Without a clearly defined governance structure, partnerships may struggle with internal disagreements, especially if the partnership agreement lacks guidance. 

5. Growth and expansion potential

PCs: Scalable structure for expansion

• Pros: PCs are often better suited for growth, to other states that may not recognize a California LLP.  This makes PCs a good choice for firms looking to expand geographically.
• Cons: The requirement for corporate formalities can MAKE a PC more costly and time-intensive, which may make it less appealing for small firms or those unsure about immediate growth prospects. 

Partnerships: Flexible, cost-effective growth

• Pros: Partnerships allow for flexible growth. This flexibility can benefit firms looking to expand gradually or retain a close-knit, collaborative culture.
• Cons: For firms with large-scale growth ambitions, a partnership structure may eventually become restrictive, as partners require limited liability and a California LLP may not be allowed to register in other states, and California won’t accept some other forms of entities like professional LLCs/ 

6. Succession planning and exit strategies

PCs: Easier ownership transfers

• Pros: Subject to the terms of any shareholder agreement, PCs allow for straightforward ownership transfers through the sale of shares, making it easier to bring in new owners or transfer ownership upon retirement. This structure can be more appealing for firms that want a clear path to succession and a formal exit strategy.
• Cons: While PCs facilitate ownership transfers, this process can still be complex and, if not otherwise set forth in a shareholder agreementmay involve valuation and regulatory considerations that add costs.

Partnerships: Personalized exit arrangements

• Pros: Partnerships allow for tailored buyout arrangements, enabling partners to structure exits based on individual circumstances. This can be beneficial for firms that prioritize personalized succession planning and are committed to retaining the firm’s culture over time.
• Cons: Partner exits in a partnership can require substantial negotiation and may lead to financial strain if buyout terms are not pre-established in the partnership agreement.. Without a clear succession plan, transitions can be challenging, potentially impacting firm stability.

Summary

Deciding between a Professional Corporation and a Partnership involves weighing the unique needs, growth ambitions, and risk tolerance of your firm. Whether your firm thrives through the simplicity of a partnership or the formal structure of a corporation, entering into a solid shareholder agreement or partnership agreement will support long-term stability and success.

This blog is written as of April 2025. Recommendations and legal requirements are changing rapidly, so please continue to review our legal updates or review postings on relevant government websites.

All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation or any specific situation without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement, including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations.  No blog constitutes a guarantee, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.