Law Firm Entity Structure: PC, PLLC, LLP, and Why the S-Corp Election Matters

A law firm’s entity structure does more than determine which state filing goes in the mail each year. It controls how much of the firm’s income is subject to self-employment tax, whether distributions can flow to the owners free of FICA, how liability is shared (or not shared) among the attorneys, and whether the qualified business income deduction under IRC 199A is available at all. Most firms land in one of three structures: a professional corporation (PC or PA), a professional limited liability company (PLLC), or a limited liability partnership (LLP). Solo practitioners and small firms tend toward PCs or PLLCs with an S-corp election layered on top. Multi-partner firms with ten or more attorneys overwhelmingly choose the LLP. And the single most impactful tax planning move for a profitable firm, regardless of entity form, is electing S-corp treatment by filing Form 2553 with the IRS.

What is the difference between a PC, PLLC, and LLP?

All three are entity forms specifically designed for licensed professionals, and each handles liability and taxation differently. Which options are actually available depends on the state where the firm is organized.

A professional corporation (PC, or PA in some states) is a corporation formed under a state’s professional corporation statute. Every state has one, though the specifics vary. In some states (California being the most notable), attorneys are required to use a PC if they want corporate-form liability protection, because California does not authorize PLLCs for attorneys. The PC provides entity-level liability protection: a judgment creditor of the corporation generally cannot reach the personal assets of the shareholders. But no entity form protects an attorney from liability arising from the attorney’s own malpractice. If Attorney A commits malpractice, Attorney A is personally liable regardless of the entity structure. What the PC does is protect Attorneys B and C from a claim that originated with Attorney A.

A PC is taxed as a C corporation by default. That means two layers of tax: the entity pays corporate income tax at 21% under IRC 11(b), and the shareholders pay tax again when dividends are distributed. Almost no law firm wants that result, which is why nearly every PC elects S-corp status. The S-corp election eliminates the entity-level tax and passes income through to the shareholders on Schedule K-1 (Form 1120-S). The trade-off is that S-corp shareholders who perform services must receive a reasonable salary (subject to FICA), but the remaining profit flows out as distributions free of employment tax.

A professional limited liability company (PLLC) is an LLC formed under a state’s LLC statute with an additional professional designation. It provides liability protection similar to a regular LLC: each member is shielded from the debts and obligations of the entity and from the malpractice of other members (though not from the member’s own malpractice). A single-member PLLC is a disregarded entity for federal tax purposes by default, meaning all income flows to the owner’s Schedule C and hits the SE tax base. A multi-member PLLC is a partnership by default. Either way, the PLLC can elect S-corp treatment by filing Form 2553, and that election is the most common move for a profitable single-attorney or small-firm PLLC.

Not every state allows PLLCs for attorneys. California does not. A few other states restrict or condition the PLLC form for certain professions. Before forming a PLLC, check your state bar’s rules on authorized entity forms, because the IRS won’t refuse a PLLC’s tax return, but the state bar can refuse to let you practice through one.

A limited liability partnership (LLP) is a general partnership that has registered as an LLP under state law. It’s the dominant structure for mid-size and large law firms. Virtually every AmLaw 100 firm is organized as an LLP. The key feature is the liability shield it provides among partners: an innocent partner is not personally liable for the malpractice or negligence of another partner. The negligent partner remains fully liable, and the firm’s assets are exposed, but the other partners’ personal assets are protected. The scope of that protection varies by state. Some states provide a “full shield” (protecting against all partnership obligations, including contract claims), while others provide only a “partial shield” (protecting only against claims arising from another partner’s wrongful acts or omissions).

For tax purposes, an LLP is a partnership. It files Form 1065 and issues Schedule K-1 to each partner. All ordinary business income allocated to a partner who performs services for the firm is self-employment income under IRC 1402(a). That includes both guaranteed payments under IRC 707(c) and the partner’s distributive share of ordinary business income. An LLP can elect S-corp treatment at the entity level, but this is unusual for larger firms because the S-corp rules impose constraints (100-shareholder limit, one class of stock, no nonresident alien shareholders under IRC 1361(b)(1)) that conflict with the flexible, multi-tier compensation structures most large firms use. The detailed mechanics of how partner compensation actually flows through the K-1 are covered in the companion article on partner compensation, guaranteed payments, and self-employment tax.

Why does the S-corp election save so much tax for law firms?

The savings come from splitting income into two buckets: salary (subject to FICA at 15.3%) and distributions (not subject to FICA). Without the election, all of a sole proprietor’s or partner’s net business income is subject to self-employment tax.

A sole practitioner operating through a PLLC without an S-corp election pays SE tax on every dollar of net income. The combined rate is 15.3% on the first $176,100 of net SE earnings (for 2026), consisting of 12.4% for Social Security and 2.9% for Medicare. Above the Social Security wage base, the 2.9% Medicare tax continues on all net SE earnings, and the 0.9% Additional Medicare Tax kicks in on combined earnings above $200,000 (single) or $250,000 (married filing jointly). With an S-corp election, the attorney takes a reasonable salary, FICA applies only to that salary, and the remaining profit comes out as distributions that are subject to income tax but not employment tax.

The arithmetic is straightforward, and the dollars are large enough that most profitable firms act on it.

The election is filed on Form 2553, and timing matters. For an existing entity, the election must be filed by March 15 of the year it should take effect (or, more precisely, within two months and 15 days of the start of the tax year). For a new entity, the deadline is two months and 15 days after formation. Late elections may be accepted under Rev. Proc. 2013-30 if the firm can show reasonable cause, but “I didn’t know about it” is a reason to file for late relief, not a reason to wait. Missing the deadline is one of the most common and most expensive mistakes in law firm tax planning, because every month of delay is another month of SE tax that didn’t need to be paid.

What counts as reasonable compensation for an attorney?

The salary must reflect what a comparable attorney would earn performing similar services at a similar firm. The IRS scrutinizes professional service S-corps more heavily than almost any other category, and law firms sit near the top of that list.

The standard comes from the case law and IRS guidance: what would an unrelated employer pay someone to do this work? For a law firm owner, the relevant factors include the attorney’s billing rate, the number of hours billed, the firm’s gross revenue attributable to that attorney’s personal production, comparable salaries at peer firms in the same geographic market, the attorney’s experience and specialization, and any management or business development responsibilities beyond billable work.

There’s no statutory safe harbor percentage. Setting the salary at 40-60% of the firm’s net income is common in practice, but that range is descriptive (what firms commonly do), not prescriptive (what the IRS has endorsed). The IRS has never published a percentage. What matters is whether the salary is defensible based on the facts of the specific firm, and that defense requires documentation. Keep a file with the comparable salary data you relied on, and update it annually. If the IRS reclassifies distributions as wages, the firm owes back FICA taxes plus penalties and interest, and the savings from years of low salary can be wiped out retroactively.

The consequences of going too low are well documented. In Watson v. Commissioner (668 F.3d 1008, 8th Cir. 2012), the court upheld the IRS’s reclassification of distributions as wages where the shareholder (an accountant, in that case) took a salary far below what the work justified. The firm’s net income was approximately $200,000, and the salary was set at $24,000. The court found that unreasonable, and the resulting back taxes, penalties, and interest turned years of “savings” into a net loss.

The factors cut differently for different practice types. A personal injury attorney whose revenue comes in as contingency fees on a handful of large cases has a different comparability profile than a family law practitioner billing hourly at $350/hour across dozens of active matters. The IRS looks at what the attorney’s work is worth to the firm, not just what a “general manager” might earn. An attorney who personally generates $800,000 in revenue can’t credibly argue that their services are worth $80,000.

Of counsel and contract attorney arrangements. If your firm uses of-counsel attorneys or contract attorneys, the classification question (W-2 employee vs. 1099 independent contractor) carries real tax consequences. An attorney who sets their own hours, uses their own equipment, and works for multiple firms looks more like an independent contractor. An attorney who works full time at the firm’s office, on the firm’s cases, under the firm’s direction looks like an employee. Misclassifying an employee as an independent contractor triggers employment tax liability, penalties, and potential state workforce agency audits. The Section 530 safe harbor (Revenue Act of 1978) protects businesses that have a reasonable basis for treating a worker as an independent contractor, including a consistent historical practice of treating similar workers that way, but the safe harbor is narrow and fact-specific. Get the classification right from the start, because the cost of fixing it retroactively is always higher than the cost of setting it up correctly.

Does the QBI deduction apply to law firm income?

It depends on how much the attorney earns. The practice of law is explicitly listed as a specified service trade or business (SSTB) under IRC 199A(d)(2), which means the deduction phases out and eventually disappears at higher income levels.

The QBI deduction generally allows a 20% deduction on qualified business income from a pass-through entity. For non-SSTB businesses (construction firms, manufacturing companies, restaurants), the deduction is available at any income level, subject to W-2 wage and qualified property limitations. For SSTBs like law firms, the deduction is fully available below the income threshold, partially available within the phase-in range, and completely unavailable above the upper end.

For 2026, the phase-in begins at $191,950 (single) and $383,900 (married filing jointly). The phase-in range under current law is $75,000 for single filers and $150,000 for joint filers (widened by OBBBA), making the complete phase-out $266,950 (single) and $533,900 (joint). These thresholds are adjusted annually for inflation. A solo practitioner filing single with $180,000 in qualified business income would be below the threshold and could claim the full 20% deduction, a $36,000 reduction in taxable income. A partner with $500,000 in K-1 income gets nothing from IRC 199A.

This is one of the most significant disadvantages of the SSTB classification. A construction company owner with $600,000 in pass-through income can still claim the QBI deduction (subject to the W-2/UBIA limitations). An attorney with the same income cannot. The deduction simply isn’t available, and no entity restructuring can change that. Splitting the practice into separate entities or relabeling income as something other than legal services runs directly into the anti-abuse rules in Treas. Reg. 1.199A-5(c)(2), and the IRS has made clear it will look through those arrangements.

For attorneys whose income falls near or within the phase-in range, the planning opportunity is limited to managing taxable income. Maximizing retirement plan contributions (a Solo 401(k) or defined benefit plan), timing deductible expenses, and charitable giving strategies (including donor-advised fund bunching) can pull taxable income below the threshold in some years. But for most equity partners at mid-size and large firms, income is too far above the threshold for any of those levers to reach it. The QBI deduction is most relevant for junior partners, of-counsel attorneys, and solo practitioners whose income is still in the low-to-mid six figures.

How do state entity taxes and PTET elections change the math?

State-level taxes can shift the entity analysis in ways that federal law alone doesn’t predict. Several states impose entity-level taxes on S-corps, LLCs, or partnerships that reduce the net benefit of the S-corp election or add costs that wouldn’t exist under a different structure.

California imposes a minimum franchise tax of $800 on every LLC and every S-corp, regardless of income. S-corps pay an additional 1.5% tax on net income. That 1.5% entity-level tax doesn’t exist for partnerships or sole proprietorships, so a California S-corp election has a built-in cost that most other states don’t impose. For a firm netting $400,000, the California S-corp tax alone is $6,000 on top of the $800 minimum, which reduces (but usually doesn’t eliminate) the federal SE tax savings from the election.

New York imposes a fixed-dollar minimum tax on S-corps based on New York receipts, ranging from $25 to $4,500. New York City adds its own corporate tax on S-corps at rates that can be significant for Manhattan-based firms.

Illinois imposes a 1.5% replacement tax on both S-corp and partnership income, so the S-corp election doesn’t create a state-level advantage or disadvantage relative to partnership taxation in Illinois.

The pass-through entity tax (PTET) election is a separate planning layer that works alongside the entity structure. Now available in most states, the PTET allows a pass-through entity (S-corp, partnership, or LLC) to pay state income tax at the entity level rather than having the tax flow through to the owners’ personal returns. Because the entity-level tax is deductible as a business expense, it bypasses the $10,000 SALT deduction cap imposed by IRC 164(b)(6). For law firm partners in high-tax states (New York, California, New Jersey, Illinois), the PTET election can recover thousands of dollars in state tax deductions that would otherwise be lost to the SALT cap.

The PTET mechanics vary by state (some require annual election, some require estimated payments, some apply only to certain entity types), so the analysis has to be done state by state. But for any law firm in a high-tax state, ignoring the PTET election leaves money on the table.

What tax issues arise when partners join or leave the firm?

Partner transitions produce some of the most complex tax questions in professional services, and they’re among the most frequently mishandled.

Buy-sell agreements. Every multi-partner firm needs a buy-sell agreement that governs what happens when a partner retires, dies, becomes disabled, or is expelled. The agreement should specify the valuation method (formula, appraisal, or fixed price), the payment terms (lump sum or installment), and the funding mechanism (life insurance, firm reserves, or a combination). The two main tax structures are the cross-purchase (where the remaining partners buy the departing partner’s interest) and the entity redemption (where the firm itself buys back the interest). A cross-purchase gives the buying partners a step-up in their outside basis in the partnership; an entity redemption does not, unless the firm has a Section 754 election in place. Life insurance funding can be structured as either cross-purchase policies (each partner owns a policy on the other partners) or entity-owned policies (the firm owns policies on each partner). The entity-redemption approach is simpler when there are many partners, because the number of policies needed is N rather than N x (N-1).

IRC 736 payments. When a partner retires or withdraws, payments to the departing partner are classified under IRC 736. Payments for the partner’s interest in partnership property (IRC 736(b)) are treated as a distribution or as payment in exchange for the partnership interest. Payments for goodwill and unrealized receivables (IRC 736(a)), where the partnership agreement does not provide for goodwill payments, are treated as a distributive share of partnership income or a guaranteed payment. The distinction matters because IRC 736(a) payments are deductible by the partnership (they reduce the remaining partners’ taxable income), while IRC 736(b) payments are not. For law firms, unbilled work in progress and accounts receivable can be substantial, and whether the buyout payment for those items falls under 736(a) or 736(b) has a real dollar impact on both the departing partner and the ones who remain.

Section 754 elections. When a partnership interest is purchased or inherited, the new partner’s outside basis (what they paid) may differ from their proportionate share of the partnership’s inside basis in its assets. Without a Section 754 election, that mismatch is ignored, and the new partner may end up paying tax on income that economically just returns their purchase price. A Section 754 election allows the partnership to adjust the inside basis of its assets to match the new partner’s outside basis, eliminating the phantom income problem. The election is irrevocable once made and applies to all future transfers, so the firm should weigh the long-term administrative burden before filing.

Updating the operating agreement. When a partner joins or leaves, the partnership or operating agreement must be amended to reflect the new ownership percentages, capital account balances, and allocation provisions. Failing to update the agreement is more common than it should be, and the consequences compound. If the K-1 allocations don’t match the agreement, the IRS can reallocate income under the substantial economic effect rules of IRC 704(b). The fix is simple (amend the agreement), but every year the amendment is deferred adds another year of mismatched allocations that could be challenged.

What should I do next?

Start with the entity form your state allows and the number of owners the firm has. If you’re a sole practitioner or a two-attorney firm, the default in most states is a PLLC with an S-corp election (or a PC with an S-corp election in states like California that don’t authorize PLLCs for attorneys). If you’re a multi-partner firm, the LLP is almost certainly the right structure, and the planning focus shifts to retirement plan design, partner compensation structuring, and the PTET election.

Whichever structure you choose, avoid these common mistakes:

• Not filing the S-corp election on time (Form 2553 is due by March 15 for existing entities, or within 75 days of formation for new ones)
• Setting the shareholder-attorney’s salary too low, inviting reclassification and back taxes
• Not maintaining corporate formalities for PCs (minutes, resolutions, separate bank accounts)
• Not updating the operating agreement when partners join or leave
• Ignoring state-specific requirements for professional entities (annual bar filings, malpractice insurance mandates, professional entity registration renewals)

If you already have the entity in place but haven’t evaluated the S-corp election, that’s the first conversation to have with your CPA. If you’re above the QBI phase-out threshold and not maximizing retirement contributions, that’s the second, because retirement plan contributions are the most direct way to reduce taxable income when the QBI deduction isn’t available.

Related guides in this series:

• Partner compensation, guaranteed payments, and self-employment tax
• Law firm bookkeeping and chart of accounts
• Retirement plans for law firms: Solo 401(k) and defined benefit
• IOLTA trust accounting and compliance
• Law firm tax deductions: malpractice, CLE, and marketing
• Law firm succession planning, buy-sell agreements, practice valuation, and the IRC 736 rules for partner buyouts
• Restaurant entity structure: LLC vs S-Corp (parallel entity structure guide for another industry)

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.