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

A law firm’s entity choice sets three things: who is liable for whose malpractice, how much of each owner’s income carries self-employment or FICA tax, and whether any of the 20% qualified business income deduction survives. Solo and small firms usually run a PC or PLLC with an S-corp election. Multi-partner firms are almost always LLPs taxed as partnerships. Law is a specified service business under IRC 199A, so the QBI deduction is gone once 2026 taxable income passes $276,750 single or $553,500 joint, which leaves the S-corp salary-and-distribution split as the one lever that reliably moves the number.

What’s the difference between a PC, PLLC, and LLP?

All three are state-law forms built for licensed professionals, and they differ on two axes: the liability shield among the owners and the default federal tax treatment. None of them protects a lawyer from their own malpractice. What they do is keep Attorney A’s negligence away from Attorney B’s house. On the tax side, a PC is a corporation, a PLLC defaults to a partnership or a disregarded entity, and an LLP is a partnership, and any of them can end up taxed as an S corporation.

Entity	Liability among owners	Default federal tax	S-corp election available?	Employment tax base	Watch for
Professional corporation (PC or PA)	Shareholders shielded from each other’s malpractice and from entity debts	C corporation, 21% entity tax under IRC 11(b), then tax again on dividends	Yes, Form 2553	FICA on W-2 salary only	Corporate formalities; the only choice for lawyers in California
Professional LLC (PLLC)	Members shielded from each other’s malpractice and from entity debts	Partnership if two or more members; disregarded (Schedule C) if one, under Reg. 301.7701-3(b)(1)	Yes, Form 2553 alone; the corporate classification is deemed under Reg. 301.7701-3(c)(1)(v)(C)	Without the election, all net income is self-employment income; with it, FICA on salary only	Not available to lawyers in every state
Limited liability partnership (LLP)	Partners shielded from each other’s malpractice; scope varies by state	Partnership, Form 1065 and K-1s	Technically yes, rarely practical for large firms	Each partner’s distributive share is self-employment income under IRC 1402(a)	The 100-shareholder and one-class-of-stock rules in IRC 1361(b)(1) don’t fit tiered partner compensation

• A PC is a corporation for federal purposes because the state statute calls it one (Reg. 301.7701-2(b)(1)). Left alone it pays 21% and the shareholders pay again on dividends, which is why almost every law firm PC files the S election in its first year.
• California bars the LLC form for professional services outright. Corporations Code 17701.04(e): “Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services.” California law firms are PCs or LLPs. Other states condition the PLLC form, so check the bar’s rules before the articles are filed.
• In an LLP, IRC 1402(a) counts a partner’s “distributive share (whether or not distributed)” of partnership business income as net earnings from self-employment. The carve-out in 1402(a)(13) for “a limited partner, as such” is contested ground for professionals who actively practice, and it’s not a position to build a firm’s payroll tax around. The partner compensation guide covers guaranteed payments and the K-1 mechanics.
• An LLP could elect S status, but IRC 1361(b)(1) caps a small business corporation at 100 shareholders, bars nonresident alien shareholders and allows only one class of stock. A firm with tiered equity, origination credits and non-pro-rata draws can’t live inside those rules.

Why does the S-corp election save tax for a law firm?

Because only the salary carries employment tax. Without the election, a sole practitioner or partner pays self-employment tax on the whole net income: 12.4% Social Security up to the wage base ($176,100 for 2025, $184,500 for 2026), 2.9% Medicare on all of it, and 0.9% Additional Medicare on the part above $200,000 (single) or $250,000 (joint). With the election, FICA applies to the W-2 salary and the rest comes out as a distribution with no employment tax at all. For a high earner the whole saving sits in the Medicare layers, because the salary alone clears the Social Security base.

• The rates come from IRC 1401: “12.4 percent” for old-age, survivors and disability insurance, “2.9 percent” for hospital insurance, and the “0.9 percent” additional tax above the thresholds. The 2026 wage base is from IRS Publication 15: “The social security wage base limit is $184,500.” The 2025 figure is in the Schedule SE instructions: “For 2025, the maximum amount of self-employment income subject to social security tax is $176,100.”
• Net earnings from self-employment are 92.35% of net profit under IRC 1402(a)(12), which is the statute’s stand-in for the employer half of the tax.
• The election adds a payroll service and a separate corporate return, and it puts the salary figure in front of the IRS every year. For a solo netting well into six figures the arithmetic still favors it.

When is Form 2553 due, and what if you missed it?

By the 15th day of the third month of the tax year the election is meant to cover, so March 15 for a calendar-year firm, or any time in the year before. That’s IRC 1362(b)(1): the election is made “at any time during the preceding taxable year, or … at any time during the taxable year and on or before the 15th day of the 3d month of the taxable year.” File it later and 1362(b)(3) treats it as made for the following year. A new entity’s first year starts when it’s formed, so the same two-and-a-half-month clock runs from formation.

• Late relief exists. IRC 1362(b)(5) lets the IRS treat a late election as timely where “there was reasonable cause for the failure to timely make such election.”
• Rev. Proc. 2013-30 is the simplified route. The election form can go in with the S corporation’s return as long as that return “is filed within 3 years and 75 days after the Effective Date,” and the return must state at the top “INCLUDES LATE ELECTION(S) FILED PURSUANT TO REV. PROC. 2013-30.”
• If you only just learned the election existed, file for relief now. Waiting for next March costs another year of self-employment tax that didn’t need to be paid.
• A PLLC doesn’t need a separate Form 8832 first. Under Reg. 301.7701-3(c)(1)(v)(C), an eligible entity that “timely elects to be an S corporation under section 1362(a)(1) is treated as having made an election under this section to be classified as an association.”

What counts as reasonable compensation for an attorney-shareholder?

What an unrelated firm would pay someone to do that lawyer’s work. The IRS can recharacterize distributions as wages when the salary is set too low, and the leading case involved an accountant, which should make lawyers pay attention. In Watson v. United States (8th Cir. 2012), the shareholder took $24,000 a year in salary while his PC received $203,651 and $175,470 in profit distributions; the court upheld the IRS expert’s $91,044 as the value of his services and affirmed the deficiency for unpaid FICA, penalties and interest.

• The court’s factors in Watson: his advanced degree and nearly 20 years of experience, 35 to 45 hours a week as a primary earner, a firm with earnings well above comparable firms, and a salary that was “unreasonably low compared to other similarly situated accountants.” Swap “accountants” for “attorneys” and the analysis is the same.
• For a lawyer: billing rate, hours billed, revenue the lawyer personally generates, comparable salaries in the same market and practice area, years of experience, and management or business development duties on top of billable work. A partner who bills $600 an hour and brings in $800,000 can’t defend an $80,000 salary.
• There’s no safe-harbor percentage. The IRS has never published one. What holds up is a file: the survey data you relied on, the hours, the comparison firms, updated each year.
• If distributions are reclassified, the firm owes both halves of FICA plus penalties and interest on every year that’s open, and the saving from the low salary reverses.

Does the QBI deduction apply to law firm income?

Only below the income threshold, and it phases out fast. IRC 199A(d)(2)(A) defines a specified service trade or business through IRC 1202(e)(3)(A), which names “the fields of health, law, engineering, architecture, accounting” and the rest. For 2026 the threshold is $201,750 single and $403,500 joint, phasing out over the next $75,000 or $150,000, so it’s gone at $276,750 and $553,500. For 2025 returns: $197,300 and $394,600, gone at $247,300 and $494,600.

• The 2026 figures are in Rev. Proc. 2025-32 section 4.26; the 2025 figures in Rev. Proc. 2024-40 section 2.27. The One Big Beautiful Bill Act widened the phase-in range to $75,000 and $150,000 for tax years beginning after 2025, which is why the 2026 range is wider than the 2025 one.
• Below the threshold the deduction is 20% of qualified business income. A solo filing single with $180,000 of taxable income keeps it; a partner with $500,000 of K-1 income gets nothing, whatever the firm’s W-2 wages or property.
• No entity move fixes this. A construction company owner at $600,000 still has a deduction (subject to the wage and property limits); a lawyer at $600,000 doesn’t. Splitting the practice into pieces or relabeling legal fees is the arrangement the anti-abuse rules under 199A were written for.
• What does work near the threshold is lowering taxable income. The 2026 401(k) deferral is $24,500 with an $8,000 catch-up at 50 and over, and the total defined contribution limit is $72,000 ($23,500 / $7,500 / $70,000 for 2025) per the IRS COLA table. A defined benefit plan goes well past that for an older partner. The law firm retirement plan guide runs the numbers.

How do state entity taxes and the PTET election change the answer?

They can shrink the S-corp saving, and the PTET can add a federal deduction the owners lost to the SALT cap. California taxes S corporations at 1.5% of net income on top of an $800 minimum franchise tax, which a partnership doesn’t pay. Illinois charges its 1.5% replacement tax on S corporations and partnerships alike, so the election is neutral there. New York’s entity-level charge on an S corporation is the fixed dollar minimum, from $25 to $4,500 depending on New York receipts.

• California. The Franchise Tax Board: “We tax every S corporation that has California source income 1.5%” and “S corporations are subject to the annual $800 minimum franchise tax.” On $400,000 of net income the state charge is $6,000 plus the $800, which eats into the federal FICA saving without usually erasing it.
• Illinois. The Department of Revenue: “Subchapter S corporations and partnerships pay replacement tax of 1.5 percent (.015).” Same rate both ways, so the choice turns on federal factors.
• New York. Form CT-3-S pays “the fixed dollar minimum tax imposed under section 210.1(d),” per the CT-3-S instructions, on a receipts table that runs from $25 at $100,000 or less of New York receipts to $4,500 above $25,000,000. New York City layers its own corporate tax on top.
• The PTET election. The individual SALT cap under IRC 164(b) is $40,000 for 2025 and $40,400 for 2026, phased down by 30% of modified AGI above $500,000 ($505,000 in 2026) to a floor of $10,000, and it reverts to $10,000 in 2030. IRS Notice 2020-75 confirmed that a state income tax paid by the partnership or S corporation itself is “deductible by partnerships and S corporations in computing their non-separately stated income or loss” and “is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership or a shareholder of the S corporation.” For partners in New York, California, New Jersey or Illinois whose state tax runs past the cap, the entity-level election restores a deduction the personal return can’t take. Mechanics differ by state (annual elections, estimated payments, eligible entities), so it’s a state-by-state decision.

What should I do next?

Start with what your state allows and how many owners the firm has. A solo or two-lawyer firm in most states lands on a PLLC with the S election (a PC in California). A multi-partner firm is an LLP, and the planning shifts to the partner compensation formula, retirement plan design and the PTET election. If the entity exists and the S election was never evaluated, run the arithmetic above with your real numbers first. If it was filed, pull the salary file and make sure it would survive the Watson factors.

• Partner admissions and departures bring their own rules on buyouts and basis adjustments; the succession planning guide covers buy-sell design and the IRC 736 treatment of retirement payments.
• Partner compensation, guaranteed payments and self-employment tax, how the K-1 actually flows for an LLP partner
• Law firm retirement plans: Solo 401(k) and defined benefit, the largest deduction left once QBI is gone
• Law firm bookkeeping and chart of accounts, the books the entity sits on
• IOLTA trust accounting, the obligations that apply whatever the entity
• Law firm tax deductions: malpractice, CLE and marketing
• The One Big Beautiful Bill Act, summarized, for the SALT cap and the other 2025 changes in one place

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