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Law Corporations
Lawyers usually begin their professional experience as employees of a law firm. At that stage of their career, they are learning – and have no option of incorporating.
Things change when they become associates, partners, principals, or whatever term is given them once they go “off payroll”. It is at that point that lawyers’ incomes can increase significantly, and also at that time when they can make excellent use of a corporation.
Corporations can help lawyers in a number of ways
- First, corporations can have a fiscal year that is different from the calendar year – and that can be a great boon when it comes to managing tax burdens. Lohn Caulder can show you why.
- Associates or principals who incorporate themselves can invoice their law firm for services rendered. Such invoices are not subject to BC sales tax, so there is no cost to setting up such a structure. And since the associate law corporation would not, absent the company, be an “employee” of anything, nor is the corporation a partner of anything, their allocated income is generally not subject to limitation as to the amount of low-rate tax they can pay in a year – they can still get the $500,000 per year, at 13.5%.
- The relationship that a particular lawyer, practicing through a corporation, has with the business can be very nuanced. If the corporation is made a full partner of the business, then its entitlement to the low-rate of tax is pro-rated, based on the percentage share of $500,000 that the particular person’s share of the income may be. Thus, in a large partnership, a partner could make $500,000, say, but only a very small portion of that income is eligible for low rates, simply because of the number of partners in that firm.
- It is possible, sometimes, to change the contractual relationship that the partner has with his firm. In such circumstances, entitlement to the low rate of tax could be unrestricted. We have seen many instances of this being done (with or without paired corporations), and can advise you on the advantages, vs. the costs.
Management-Fee Structures
At Lohn Caulder we are well aware of several different approaches taken to generate income somewhat outside of the main stream. That might be a regular source of cash to finance a lawyer’s household that is not paid to him or her directly, but rather indirectly, via a limited partnership or other structure. Sometimes, this type of structure can provide almost as much tax savings as a traditional corporate structure, at considerably lower cost, and a much lower level of complexity.
Contingency Arrangements
Some lawyers run litigation practices that are based on contingency fees. Such arrangements, while potentially lucrative, carry with them significant financing issues while the case runs its course. Lohn Caulder can assist lawyers who may need to work with bankers to provide the financing for this particular activity.
Valuation of the “work in process” account for contingent files can also be much more of an art than a science. We’ve seen this before, and can advise you.
Credit and Receivables
Clients of lawyers would almost certainly want the easiest credit terms conceivable, while the lawyers themselves need to finance the payroll, office costs, expert witness fees, and other overheads, so they’d rather like the opposite. It can be challenging balancing these opposing motivations, and we can help, with suggestions as to credit management, receivables control and collection, and regular review of accounts.
Entry and Exit
Legal professionals tend to have a high frequency of career change – especially in the earlier years, and again, as retirement looms. Thus, the typical firm sees lawyers coming, and going, all in differing circumstances. There are a host of issues relating to this, and we’ve seen it all.
