Law Firm Structure in General - Essay Example

?I. The United From the onset, Saudi’s laws clearly distinct between corporations operating commercially and those that operate with objects called “civil” objects. However, this legal comparison does not exist in the United States although various scholars have dealt on this issue. Professor Gary A. Munneke states: Debates on the question of ancillary business activities have focused on whether law is a business or a profession. Adherents to the “law is a profession” position have lamented the demise of traditional standards of ethics, civility, and public service. They view creeping commercialism as the root of the problem. “Law as a business? 7D-that is, a money-making trade-is seen as the antithesis of the public service ideal upon which the legal profession was founded. The idea that professionalism is grounded in public service has its roots deep in the history of Anglo-American law. In the distant past when the French speaking Norman kings dispensed justice to an Anglo- Saxon populace, it was necessary for parties to be represented by someone who could speak the language of the court. These representatives were inevitably nobles who served out of fealty to their king. For such early advocates, service rather than profit was the reason to assume this role. English barristers today do not accept a fee, but rather receive an “honorarium” in acknowledgement of this tradition of public service.1 However, ethical rules of the courts and bar associations form the fundamentals of practicing law in most American states. Case in point, the state of New York requires lawyers operating in the state to act in accordance to the New York Code of Professional Responsibility.2 1. Law firm structure in General By tradition, the organization of law firms is that of general partnerships. While a majority of law firms registers limited liability partnerships to shelter associates, or members, from explicit liability entirely or to a certain extent, the most fundamental organizational structure has been general partnership. The rise to partnership position in a law firm has been the biggest indicator of professional and personal success in law. In this case, “I have made partner” or “Making partner” are two phrases that occupy lawyers careers as they use it as a yardstick of success in private practice. In effect, lawyers draw a lot of satisfaction when referred as a partner, since the tag shows accomplishments in a lawyer’s private practice career. Thus, notwithstanding the all-too-common generational disparities, associates-the subordinate members- in law firms always desire to “make partners” in a law firm.3 In comparison to Saudi Arabia, lawyers in America have the capability of establishing professional organizations using an assortment of methods. According to an Ethics Opinion of the New York County Lawyers' Association, “A law firm may be structured as a professional corporation (PC), a limited liability company (LLC), or a limited liability partnership (LLP) without, by its structure alone, violating any ethical standard.”4 Conversely, the interpretation of Law Governing Lawyers states, “A lawyer may practice as a solo practitioner, as an employee of another lawyer or law firm, or as a member of a law firm constituted as a partnership, professional corporation, or similar entity.”5 In the comment of the restatement of Law Governing Lawyers, they mention that: A law firm established as a partnership is generally subject to partnership law with respect to questions concerning creation, operation, management, and dissolution of the firm. Originally, in order to achieve certain tax savings, law firms were permitted in most states to constitute themselves as professional corporations. Most such laws permitted that form to be elected even by solo practitioners or by one or more lawyers who, through their professional corporation, became partners in a law partnership. Pursuant to amendments to the partnership law in many states in the early 1990s, associated lawyers may elect to constitute the organization as a limited-liability partnership, with significant limitations on the personal liability of firm partners for liability for acts for which they are not personally responsible. Correspondingly, some states permit lawyers to form limited-liability companies. Lawyers who are members of professional corporations or limited-liability companies are subject to statutory and court rules applicable to such organizations set up to practice law.”6 As elucidated from the aforementioned, an American lawyer has various choices to choose from regarding on the form of practice in law they wanted to form. Beyond the forms explained in the abovementioned, lawyers can cooperate in other forms in joint ventures, or “special partners” for one single transaction whereby they cooperate in a united commission and represent a client jointly.7 However, the next section only covers, albeit temporarily, lawyers’ liabilities in associations with a business entity form. These associations are a professional corporation (PC), a limited liability company (LLC), a limited liability partnership (LLP), limited-liability companies (LLC). 1. Types of Co-partnership Available for lawyers in New York a) General partnership The Uniform Partnership Act is one of the simplest forms of partnership since it does not necessitate a written partnership agreement. In this regard, its simplicity in nature on the requirements implies that people can form and start partnerships after a handshake without any written agreement. However, the management is through partnership management and not through a single manager. Of greater importance, it is possible for people to be deemed as having formed a partnership even when their first intention was not to form a partnership.8 It is important to point out that a partnership is different from a sole proprietorship. First, a sole proprietor will work alone, but a partnership consists of two or more people as co-owner.9 Secondly, the Uniform Partnership Act (1997) governs the relationship in a partnership. There are some merits drawn from a general partnership. The most fundamental of these advantages is its ease in management. In addition, a properly formed general partnership does not meet the criteria of taxation as an “entity.”10 In this regard, the underlying characteristic of a partnership that relates to income tax is untaxed, and unchanged items on incomes eared, losses, deductions, or credit to the partners. In effect, a case where a partnership earn capital gains and tax-exempted interest imply that these items hold on to their tax status in instances where the partners report the items as shares distributed on partnership income.11 One drawback of a general partnership is the lack of limitation in financial losses on the amount of investment in a business, but the limits include all other partners’ personal assets. In effect, general partnership partners enjoy limited liabilities in their own activities and those of their partners.12 Secondly, there is a problem called the “phantom income” problem in partnerships by lawyers. In this case, partners pay taxes on their relative share of profits. In effect, this predicament challenges the plowing back the profits earned into the partnership for future growth.13 Finally, there is an effect of the pulling out of one member, their demise, or bankruptcy under the Uniform Partnership Act, which directs the formal recreation of a general partnership.14 b). Limited Liability Company (LLC) Generally, an LLC is an amalgam involving the corporate form and the partnership form. In this regard, an LLC is a mixture of owner’s personal liabilities, which are corporate limitations, and the operating and management flexibility of a partnership. In addition, it combines the opportunities for flexibility in the formation of capital, the distribution and allocation of the structures, and the tax treatment known as “pass through.”15 In New York, the New York Limited Liability Company Law governs the limited liability companies in the state.16 In order for people to form an LLC in New York, it is crucial to have one or more people to act as the organizers and file articles of organization with the Secretary of State.17 Nevertheless, there are single member LLC or simply known by the acronym SMLLC. The overriding benefit of LLC from sole proprietorships and general partnerships is that, the membership of LLC does not bear the liability on the LLC’s roles except when there is an accord converse to this decree. Besides, courts unvaryingly uphold the LLC liability shield.18 LLCs can be managed either by a member or manager-managed, which is not the case for a partnership. In effect, the flexibility nature of an LLC makes the operating agreement an indispensable document. In effect, the drafting of the operating document should be a well thought out and comprehensible process. 19 The statutes of LLC give the members flexibility in coming up with the best structure for their relationship. The courts support for freedom the parties exercise in drafting the agreement makes LLCs the most flexible business vehicles in the contemporary world. One advantage of LLCs is that there is no experience of the phenomenon of double taxation. Current federal laws on income tax classify all LLCs formed under the LLCS as partnerships provided they had two or more members during, or after, formation. In addition, the classification applies for an LLC that does not publicly trade its interests, but only if it applies for taxation as a corporation [Treas.Reg. 301.7701-3(a)]. In the state of New York, the classification of LLCs taxation follows the definition by the federal government [NY Tax Law Section 658]. In this regard, earned profits meet the criteria of taxation at the company level. For this reason, members of an LLC simply pay taxes on profits earned by their income tax returns.20 Read More