In this Legal Accounting Wednesday (LAW) session, hosts Linda and Sarah Prevost discuss the various business entity structures commonly used by law firms and the practical accounting and tax considerations when selecting or changing an entity type. They outline the spectrum of formations—from sole proprietorships and single‑member LLCs to LLCs electing S‑corp status, professional LLCs (PLLC), professional associations (PA), and C‑corps—highlighting state‑specific variations. The conversation delves into the tax ramifications of each structure, especially the need for reasonable salary calculations, payroll adjustments, and timing of election filings. They stress the importance of involving tax professionals and maintaining clear communication among accountants, tax advisors, and firm owners when an entity change occurs. Practical bookkeeping issues such as updating the chart of accounts, distinguishing personal versus business expenses, and ensuring operating agreements reflect tax allocations are covered. The hosts also promote resources like LeanLaw’s roadmap, Josh’s webinars and courses, and their own community group where members can ask questions and share best practices. The overall tone is conversational and instructional, aiming to equip accountants and law‑firm owners with the knowledge to make informed entity decisions and manage the associated accounting changes.
Chapters
Hello, this is super too, Sarah. Hi everybody, welcome to Legal Accounting Wednesday, or better known as LAW. See how cute that is? So we are going to be here for a short time because today is, uh, the state of LeanLaw, and they're going to go over what's down their roadmap. So obviously we're going to hop on to that at in an hour, but we wanted to talk about business entities that we typically see with law firms and what we, what we see that happens. Uh, sometimes we see— well, we'll start with that, the different ones, kind of break it down. And then what do you do if your client says to you, oh, by the way, I'm changing from X to Z or X to Y or whatever? How do you manage that if they're changing? Are they changing from maybe an LLC to an S corp? How do you manage that? And I guess that's it. So, Sarah, you want to talk a little bit about the different ones that we see typically?
The formations we typically see, partnerships, or we typically see LLCs electing us. But there are certain states that have different structures that are also part of this layer. So you would need to know. But I will say that on the Lawyerist, they have this Great blog, and there is a, a whole thing about operations or options for business operations and formations and so forth of what, what status would work. Most solo firms start as a solo or a single-member LLC.
Mm-hmm.
And again, we— it's always good to just, you know, as you're doing this, he's getting your EIN and getting all that stuff, but then When you're, when you're accounting for it and you're in the books and you make a shift from an LLC electing S, you really do need to make some changes in those books to accommodate that. And, and we tend to find people just stay with the same thing and it gets a little confusing. And then you start asking like, what formation are you? And you have to look at the tax return and it's confusing.
That's weird.
It's into this weird space.
But so, um, well, when someone starts out as a solo, yeah, one of the things that they start out as a sole proprietor, let's just say, or a single election, when you look at that, they have to look at the fact that when you start out as any, any business as a sole proprietor using your Social Security as your, as your tax ID, and you have no corporate protections. And that's big if you're practicing law or even if you're running a bookkeeping firm. And I know most of us start out with that gig mindset. I part-time— I started out as a, as a solo as well. And I very quickly, because I had assets, I very quickly made it an LLC because that was the best thing for me to do in Rhode Island at that time. And then, then it ended up, because I was making money and doing well, then I Turned into, um, you know, I did the S corp election because I wanted to do that. But also with law firms, there's also— you'll find when you get a law firm client, you'll see PLLC depending on the state. Um, in Florida we have PAs, professional associations. So there's a lot of letters, right?
You guys have the PA, and I think Texas is also, uh, PA as well. Yeah.
LLC, isn't that professional limited liability company?
Yeah, there's those. And again, some states allow, some states don't. Now, the big change for a lot of folks is, well, one of the big delineators is you're getting taxed in this corporate-style mode with the LLC as an S election. But in that is your The adjustment for payroll tends to be a little choppy and hard. So understanding how that tool works for you, because it is a tool, it's not meant to be you're getting paid a salary on a paycheck. Like, take that hat off. It is a tool as well. And there's, and there's caveats behind it, the reasonable salary, all of that stuff.
And I'd love to have you talk about reasonable salary because that is something that is like, what's reasonable salary? And I've seen a few different tax people Determine how that— Yeah.
And there's a big debate in that all by itself. It's kind of like our 1099 gray bucket. There's some guidance on it. There's some great tools out there that you can use that can help you with it so that it's more factual based. And then, but then on top of that is if you're a partnership and you are being taxed in that S election, You cannot have unequal distributions. You can do something different in salary, but you cannot have that in distribution. And so there's these like little nuances as accounting professionals that we really need to make sure that we, we don't have to know it all, but that we have a good resource for ourselves to go back to. And the tax professional is that person and making sure you have a great resource there to validate what you're doing in the books. Yeah. And, you know, some people are of the thought process, oh, we need to Do a whole new set of books. I'm not going to dispel or just dissuade anyone from what they think is best. I'm just saying you really need to make sure that you're in balance with someone that does taxes for that business to ensure that everything is being looked at and that the owner understands as best to their ability. And they might come back 4, 5, 6 different times. That's okay, right, Linda?
I've always been of the mindset, if you're a sole proprietor and now you're going to become like an S corp or something like that, really, You end the sole proprietor and you start the S corp. But then if you're the LLC that is acting like an S corp, then that can continue on. But some of these are conversations. And we have Lillian here today with us.
Hi, Lillian.
If you have, you know, you have these conversations with clients, and I can tell you from Sarah and I's experience, like, they might forget to tell you that they've decided, they've talked to the tax person and they've decided to change. And then you're sitting there going, Well, you know, we need to be in this conversation, and that happens sometimes, which is why we're big proponents of— if you're working with our firm, we want to talk to the tax person. We want to talk to who you're strategizing with, whether it's a coach or something like that. We want to be kept in that loop because it's important for us to assist you through that growth. We're with you all the time. We're not there at the end of— you're not there just at the end of the year. And I think that sometimes that gets forgotten on, um, some some items when you're talking with the client, they forget to tell us.
So Josh is saying hello, which Josh is an expert in this area. Like, he would be a great guest.
It surprises me that he popped into this.
I know. He would be great if he wanted to be a guest speaker on this. But he did such a great webinar. I think it's still— you can—
He has a great webinar and he also has a course on it that he sets out all the pieces of this. So if you are newer to this kind of talk. Absolutely educate yourself because you want to be able to answer the— Josh said we're the best bookkeeper consultants. You want to be able to answer the client intelligently, right? If you're in a conversation and the client asks you like, should I be a sole proprietor? Should I change to an LLC? Should I be a PLLC? You want to be able to have that, be able to speak to it. And if there's no I'm also a big believer. There's no problem with saying, look, I'm not sure about that, but I will get back to you. Well, and sometimes, yeah.
I think it's important. You just hit it on the nose. It's good to speak to it because this isn't really technically your area per se. You can make recommendations. And but I really feel strongly, you got to get all the right people at the table. That's why you're part of a team. It isn't a solo conversation to have. So And of course, of course we're going to give you a shout out, Josh.
Of course. Absolutely.
But yeah, no, I think you're right, Linda. And it's also personal preference. It's learning it. We don't know what's happening on the personal side. That's why we want their tax professional engaged on this conversation. Very interesting.
And we've worked with some solo firms that are starting to have some firm growth. And I think sometimes it's good to maybe have the— if you're going to do the advisory work, which I don't like the word advisory, but if you Start to have those conversations where you're helping to consult with the client. You know, find out, do they have a business plan? Have they— like, they start to think these things through. You want to be able to assist them. You also want to be in the conversations. Even with what we do, if we onboard a firm, we want to know what the— what's the contract between the client and, and the law firm? What is— what's part of those rules? We just need to know the whole bit.
And if you're in a partnership and you just want to look at an operating agreement, so if you're not asking for it, ask for it. I mean, that is really important. It may not make a whole lot of sense to yourself sometimes as far as what it does, but the tax professional, there's key things inside of that that you need to know because reimbursement of costs, certain allocations, all of that stuff. So if you're feeling a little overwhelmed with the conversation, we have resources, right? We have just a general sense from the lawyer's thing. Linda, we have—
Yeah, we'll share that article. And maybe, Josh, if you can pop in the link to your webinar and maybe your course too, Because the course is self-guided, so you can actually work your way through it. I learned a lot when I did a course with— this is some of the things I learned. You learn a lot with working with your other business partner.
Yes.
A lot with working with Halon and going through that whole— that course was amazing as well. I learned a lot on that one.
So Josh threw out a great tip, pro tip, and I love this. This is so true. And I constantly forget you have to have a meeting. You could have a meeting by yourself with yourself. Just document your meeting. Part of the requirements. But you have to have a meeting. So Linda, we'll have our meeting.
Yeah, we should.
Yeah. State of the Union. No, I'm kidding. But yeah.
And so really this conversation about what entity type you want to move towards, if you know you're starting out, we all kind of start out in that, that you don't know if it's going to work out. So you start with maybe a sole proprietorship, but then that should be a conversation with your tax professional and maybe your accounting team if you have a team like we have. You should probably have that discussion because a lot of this comes up in our conversations when we do our monthly meetings with the law firms. What, you know, what, what we need to know what's going on and where you're looking to go to, where you, what are your goals? Like we have goals with our business. They have goals and it's, it's a refreshing conversation. They, they love to tell us what they want, where they want to move towards. And it's always fascinating to hear in the different practice areas where they're, where they're going towards and what their long-term goals are. And then their short-term goals as well. And that will help us. guide them through in addition to the tax person. Ultimately, the tax person should be having the conversation because they know the tax ramifications of making these changes. I remember, was it a couple of years back when everybody went C corp? Remember, like, everybody was a big thing. A lot of people decided to go C corp for some reason and I can't remember what it was. And now I'm starting to see people move.
And to be honest with you, I mean, it's just administration-wise. And the other thing too, this escaped my mind and now it came back as you were talking. To piggyback on what you just said, Why it's important to involve is there are timing moments of elections.
Yes.
So if you're going to make changes, that has to happen with your tax professional, and there are key intervals of when that can happen, when you're allowed, if a partial year is allowed, you know, it depends on your state. So that's why, going back to leaning on our— that's, I mean, we are, we're always a part of a team. I always speak to it. I love engaging with different partners too. But I mean, obviously my business partner, but we have other tax professionals we work with. And it's just if you can get the warm and fuzzy ones.
I'm kidding. No. And also the other piece of this, as you start to educate your client after they've made the decision, now you have to educate them sometimes about, okay, this is a personal expense that you just spent the business money on. And now we have to— why we have to do that. And then it also falls into your chart of accounts, your chart of accounts, the entity piece is going to change. So you really want to know these things, which is why you probably want to get more educated on this if you're new, because this is one of those things that you want to have the right— you don't want to go by what QuickBooks says it's supposed to be. Trust me.
Piercing the corporate veil. It's like that whole— you're just getting— we're going to go in the weeds, but we should maybe stop.
Yes, exactly.
Exactly.
If you guys are watching or you watch this replay, please put hashtag replay so we know that you guys watched it.
We'll share it in our group as The Accountants Law Lab.
And yes, Josh says you save money including your team and decisions, and I 100% agree with that. And if you're watching and you want to get more information on how this works with law firms, we do get into these topics. What is this? We have open forum this week. So this week is you guys that are in our group, you guys, you come to the table with your questions. That'll be coming out this afternoon. We'll put the post out. Ask the questions. We'll hop into whatever software you need for your clients if you're stuck on something. It's one of our probably most popular weeks when we do, do these kind of open forum kind of meetings. And yes, and we will put the links in, in the chat too and in the Facebook feed as well. And oh, look at that. My daughter actually showed up.
Hi. Hi.
So she must have had a quiet moment. But yes, so For sure. Uh, those are the things you need to look at. And truly, it's educating yourself and then being part of the team to be able to help your client. And that's the major key takeaways from this. Yeah. If you want to learn more, you can join our group. We meet every Friday and we discuss topics like this, or like this week, open borders.
You get to hang out with us, right?
You get to hang out with me and Sarah and Nicole. And we've got— our team is growing, so we have a lot more people in our group, which is so cool.
I know, I love it, I love it.
We have an amazing group of people there. So even if you just have one attorney and you're thinking about maybe niching or want to learn more about law firms, that's what we go over when we're, when we're on our meetings. So we have fun, and it's getting close to Christmas.
I can't believe that. I know, getting tired. Joking.
But yes, well, thank you for watching. I hope this was helpful, even if it's just to plant the seed to get to learn more about this stuff. And, um, we will be back next week Yes, but another topic, and that's what I want to say, if you have a topic that you want to learn about, put that in the, in the, in the comments as well, because we, we are very open to conversations on all this stuff, especially if it pertains to the legal industry.
Sorry, Chester, the little one, is making a lot of noise. I'm sorry.
I don't even hear him. So Walter I usually hear, but not Chester.
Yeah, Chester is—
I don't know, but Okay, thank you for watching, and don't forget to get over to LeanLaw's State of the Union or whatever they're calling it. And, um, yeah, so we will, we will be back next week.
