By Alara Chilton
You are an ambitious solo-practitioner who has carefully considered the various legal entities for your California law firm. Based on your desire to avoid personal liability for your firm’s debts and in consideration of its specific tax situation, you have decided the best option is to have your firm incorporated. You have reviewed the California Secretary of State’s requirements for certification of incorporation and are ready to submit the necessary documents to the Secretary of State.
Before you submit your law firm’s application for corporate certification, however, you should also be aware the State Bar of California plays an important role in the formation of a law corporation.[1] Indeed, the State Bar is “authorized by law[2] to establish and enforce rules for corporations that practice law in California.” (Cal. State Bar Rule for Corporations, 3.150.) Accordingly, in order to lawfully exist as a law corporation in California, a law firm must be registered with the State Bar of California.3
This article will examine some of the ethical and practical considerations that arise when registering a law firm as a law corporation with the State Bar of California.
Failure to register as a professional law corporation can have serious consequences
In order to lawfully exist as a law corporation, a law firm must be registered with the State Bar of California.4 Failure to register with the State Bar can have serious consequences, including preventing the protection of shareholders from individual liability for the debts of the corporation— a benefit afforded to shareholders of a professional corporation. Currently, no California case law holds that a corporation certified with the Secretary of State, but not registered as a law corporation with the State Bar is denied the protection of conducting a law firm through a corporate entity. However, there is little attraction in testing this outcome.
Additionally, failure to register as a law corporation with the State Bar creates exposure to disciplinary action. (See Olson v. Cohen (2003) 106 Cal.App.4th 1209, 1213, as modified Apr. 9, 2003 [failure to comply with registration requirements may “result in an order to cease and desist or suspension or revocation of registration.” (citing Bus. & Prof. Code § 6169)].)
The State Bar requires specific documents and information when registering a law corporation
Pursuant to Business and Professions Code section 6161, an application to register as a law corporation must provide the State Bar all “necessary and pertinent documents and information” concerning the “applicant’s plan of operation.” (Bus. & Prof. Code § 6161.) The documents and information include certified copies of its articles of incorporation and by-laws, the name and address of the corporation, its officers, directors, shareholders, members, and employees who render professional services. (Id.)5
Additionally, an application to register as a law corporation must also provide the State Bar with proof of security for legal malpractice claims against the corporation or “any person who practices law on behalf of the corporation, on its behalf as an employee or otherwise.” (Cal. State Bar Rule for Corporations, Rule 3.158(A).) Specifically, the law corporation application includes a guarantee that the shareholders— and if more than one— jointly and severally agree to pay all malpractice claims established against the law corporation arising out of its rendering of professional services (i.e., practice of law). The guarantee must name each shareholder and be executed by each. (See also Cal. State Bar Rule for Corporations, Rule 3.158(C), referencing the California State Bar’s Schedule of Charges and Deadlines as providing the minimum amount of security for malpractice claims.)
The State Bar will issue a certificate of registration upon payment of a registration fee, as well as finding that (1) “the corporation is organized and existing pursuant to the General Corporation Law or pursuant to section 13406, subdivision (b) of the Corporations Code, that the qualifications of personnel, the ownership and transfer of shares, and the security for claims against the corporation have been satisfied,” and (2) “that it appears [from the application] the corporation will be conducted in compliance with law and the rules and regulations of the State Bar.” (Olson v. Cohen, Supra, 106 Cal.App.4th at 1213.)
If the application to the State Bar “is incomplete or otherwise fails to meet application requirements, it must provide the applicant at least sixty days to amend the application. If the applicant fails to meet application requirements within this time, the application is deemed withdrawn.” (Cal. State Bar Rule for Corporations, 3.152.)
A law corporation’s name must comply with the California State Bar Rules for Corporations and the California Rules of Professional Conduct
A law corporation’s name must abide by the California State Bar Rules for Corporations, including Rule 3.154. This rule provides a law corporation may only practice law “under the name registered with the Secretary of State and approved by the State Bar.” (Cal. State Bar Rule for Corporations, 3.154.)6 Additionally, these rules require an application to the State Bar for a law corporation to include “a designation of corporate existence [within the corporate name] such as ‘Professional Corporation,’ ‘Prof. Corp.,’ ‘Corporation,’ ‘Corp,’ ‘Incorporated,’ or ‘Inc.’” (Cal. State Bar Rule for Corporations, 3.152(B).) Moreover, a corporate name must comply with the California Rules of Professional Conduct. This requires the corporate name not be false or misleading.
A corporate name cannot be false or misleading
When selecting a corporate name, be careful it does not amount to “a false or misleading communication about the lawyer or the lawyer’s services,” as prohibited by California Rule of Professional Conduct, Rule 7.1. This rule also encompasses no false or misleading communication about the corporation’s services, pursuant to Business and Professions Code section 6167, which states, “[i]n the conduct of its business, [a law corporation] shall observe and be bound by [ ] statutes, rules, and regulations to the same extent as if specifically designated therein as a licensee of the State Bar.”
“A communication is false or misleading if it contains a material misrepresentation of fact or law, or omits a fact necessary to make the communication considered as a whole not materially misleading.” (Cal. Prof. Rule of Conduct, Rule 7.1(a), emphasis added.) Additionally, Rule of Professional Conduct, Rule 7.5 bars the use of misleading firm and trade names or other professional designation that violates rule 7.1. (Cal. Prof. Rule of Conduct, Rule 7.5(a).) And Rule 7.5(b) bars a lawyer from using “a firm name, trade name . . . that states or implies a relationship with a government agency or with a public or charitable legal services organization. . . .” (Cal. Prof. Rule of Conduct, Rule 7.5(b).)
Consider how these rules might affect the following example. An application for a law corporation is submitted which identifies three attorney shareholders, in private practice, and includes the corporate name “San Diego Marine Corps Legal Services, Inc.” Since this name suggests the corporation’s legal services are provided by the United States Marines Corps, it likely constitutes a misleading communication in violation of Rules 7.1(a) and 7.5(b). Even if the corporation was actually comprised of attorney shareholders who were former United States Marines, this violation would likely persist as “materially misleading,” since the name suggests a formal association with the Marine Corps. (See Comment [3] to Cal. Prof. Rule of Conduct, Rule 7.1.)7
This corporate name may also violate California Rule of Professional Conduct, Rule 7.5(b) which states, “A lawyer in private practice shall not use a firm name, trade name or other professional designation that states or implies a relationship with a government agency or with a public or charitable legal services organization. . . .” (Cal. Prof. Rule of Conduct, Rule 7.5(b).) Here, the private attorneys are using a firm name which may imply they have a relationship with the United States Marines Corps, beyond being former members of the United States Marines.
In summary, there are many ethical and practical considerations when applying for registration as a law corporation with the State Bar. Remember, a law corporation must not do or fail to do anything that would be a cause for discipline. This means a law corporation must follow the California Rules of Professional Conduct and the State Bar Act, as these authorities apply to both lawyers and law corporations. A law corporation must also abide by the relevant provisions of the California Corporations Code and the California State Bar Rules for Corporations. Also, make sure the corporate name does not constitute a false or misleading communication about the lawyer, the lawyer’s services, or the corporation’s services. Ultimately, keeping abreast of the requirements of the State Bar for the registration of your law corporation will help keep your mind at ease so that you can focus on managing your practice.
[1] A law corporation is a type of “professional corporation,” defined by California Corporation Code section 13401 subdivision (b) as a “corporation organized under the General Corporation Law or pursuant to [this section] that is engaged in rendering professional services in a single profession . . . pursuant to a certificate of registration issued by the governmental agency regulating the profession . . . and that in its practice or business designates itself as a professional or other corporation . . . .” (Cal. Corp. Code § 13401(b).)
2 California Business and Professions Code section 6171 authorizes the California State Bar to “formulate and enforce rules and regulations to carry out the purposes and objectives of this article, including rules and regulations” related to law corporations.
3 Business and Professions Code section 6160 defines a law corporation as one “which is registered with the State Bar of California and has a currently effective certificate of registration from the State Bar pursuant to the Professional Corporation Act . . . . Subject to all applicable statutes, rules and regulations, such law corporation is entitled to practice law.”
4 A law corporation is also governed by provisions of: (1) the California Corporations Code that refer to professional corporations (Cal. Corp. Code §§ 13400 to 13410), (2) the State Bar Act (Bus. & Prof. Code §§ 6160 to 6172), (3) the California State Bar Rules for Corporations (Rules 3.150 to 3.161), and (4) the California Rules of Professional Conduct.
5The California State Bar application for registration as a law corporation also requires providing the names and bar numbers of other attorneys including, those who are “Of Counsel,” “Contract Attorneys,” and part-time attorneys.
6 State Bar Rule 3.154 states “A law corporation must observe all rules and law that apply to a licensee of the State Bar and must not do or fail to do anything that would constitute a cause for discipline of a licensee.” (See also Bus. and Prof. Code section 6167.)
7 Comment 3 to California Rule 7.1 states in relevant part “A truthful statement is misleading if it omits a fact necessary to make the lawyer’s communication considered as a whole not materially misleading. (Comment [3] to Model Rule of Conduct, Rule 7.1.)