Taxes 101 for New Law Firm Owners

After years of hard work and sacrifices, your top associates have made it to owner status. While focusing on the responsibilities of being a new owner and taking care of clients' affairs, the last thing on a new law firm partner's or shareholder's mind may be how this promotion will affect his or her personal taxes; that is, until mid-March rolls around. By that time it may be too late to take the sting out of any resulting tax surprises. This article addresses the key items a newly promoted law firm owner should know regarding his or her changed individual tax situation. Understanding how one's tax status has been altered can assist in a smooth transition from being solely an employee to being both an employee and owner of the enterprise.

Whether the firm is formed as an LLP, LLC, PLLC, PC, or other legal structure, it most likely is taxed as a partnership or S corporation. (A small number of law firms are taxed as C corporations, and this article does not address this tax structure. A professional services firm that does not qualify for and make a valid election with the Internal Revenue Service to be treated as an S corporation under Subchapter S of the Internal Revenue Code is taxed as a Professional Service Corporation (“PSC”), where the entity pays tax on its income, as compared with the income flowing out to the shareholders on their respective Schedule K-1 forms.) If the firm operates as a tax partnership or S corporation, owners will receive a Schedule K-1 (“K-1″) from the firm. However, the personal tax ramifications of receiving a K-1 from a partnership versus an S corporation are quite different.