Law firms traditionally have organized as partnerships, but in recent years many states have authorized law firms to organize as professional corporations or professional LLCs, subject to special requirements. You might expect lawyers to comply with the law when they form an entity for their law firm. If so, you could be disappointed. In Washington state, at least, many law firms are unlawfully organized.
I began to look into this last month, when I noticed a press release from a law firm in South Carolina that trumpeted the firm’s change from a partnership to a limited liability company. The press release indicated that the firm was “positioning ourselves to maximize our efficiencies so we can continue to achieve the most successful outcomes for our clients.” That sounded good. I started wondering about Washington state, where I practice.
Washington’s LLC Act authorizes professional limited liability companies (PLLCs) for licensed professionals such as attorneys. RCW 25.15.045. The LLC Act subjects PLLCs to the provisions of Washington’s Professional Service Corporation Act (PSCA), RCW chapter 18.100. The PSCA prohibits licensed professionals, such as attorneys and health care providers, among others, from operating as a corporation unless they use a “professional service corporation.” This form preserves the professional relationships between service providers and their clients or patients, and prohibits ownership of shares or member interests in the entity by persons not licensed to render the professional services for which the entity was formed. RCW 18.100.090.
A review of the Washington Secretary of State’s online business entity search page showed that there are hundreds of Washington law firms organized as limited liability companies. Roughly 15% of the law firms organized as LLCs are not PLLCs, but instead are standard LLCs. This is determinable from the names, because a PLLC must have the word “professional” or “PLLC” in its name. RCW 25.15.045(4). The Secretary of State’s records also show for each entity a category that distinguishes PLLCs from standard LLCs. The Secretary of State’s categorization is apparently determined from each LLC’s certificate of formation, which is filed with the Secretary of State. The certificate of formation for a PLLC is required to state that it is a professional LLC. RCW 25.15.005(10).
A large majority of those law firms that are non-professional LLCs appear to be solo practitioners. That is not a defense to the professional LLC requirement, because the PLLC statute applies even to single-member LLCs. RCW 25.15.045(1). There are also a number of Washington multi-lawyer firms organized as standard LLCs.
Why are there so many violations? I assume the lawyers that formed these entities did not intend to violate the law. That leaves two possible explanations: either inadvertence, or perhaps a difference of opinion as to whether the PLLC structure is optional or mandatory for law firm LLCs.
It is not obvious on the face of the LLC Act that the PLLC structure is mandatory: “A person or group of persons licensed or otherwise legally authorized to render professional services within this or any other state may organize and become a member or members of a professional limited liability company under the provisions of this chapter for the purposes of rendering professional service.” Id. (emphasis added). The word “may” suggests an alternative rather than a requirement.
Last year, however, the Washington Supreme Court removed any doubt on this issue. Columbia Physical Therapy, Inc., PS v. Benton Franklin Orthopedic Assocs., PLLC, 168 Wn.2d 421, 228 P.3d 1260 (2010). The court treated an LLC like a corporation, and held that licensed medical professionals practicing in an LLC would violate the rules against the corporate practice of medicine if the LLC were not organized as a PLLC. 168 Wn.2d at 438. The court’s analysis makes clear that the same result would hold for the other licensed professional services listed in the PSCA, including the practice of law. Washington law has long prohibited lawyers from practicing law as a corporation. State ex rel. Lundin v. Merchs.’ Protective Corp., 105 Wash. 12, 177 P. 694 (1919).
Law firms improperly organized as standard LLCs rather than PLLCs have apparently not drawn much attention from the Washington State Bar Association. That may change if law firms formed as non-professional LLCs begin conducting other businesses in addition to the practice of law, which RCW 18.100.080 prohibits for professional service corporations and PLLCs. RCW 18.100.080.