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Most attorneys don't spend much time thinking about their firm's entity structure after it's formed. You form the PLLC, and from then on it's a line on the return rather than a decision anyone revisits.
The problem is that law firms evolve much faster than their entity structures do.
I've seen solo practitioners operating under structures that made perfect sense when they were generating $100,000 of revenue but became expensive once they reached $500,000 or $1 million. I've seen multi-partner firms using compensation arrangements that nobody could explain other than, "That's how the previous accountant set it up." How long a structure has been in place says nothing about how well it fits now.
Beyond Deductions
When law firm owners think about taxes, they often focus on deductions. Some of the biggest tax savings have nothing to do with deductions at all. They come from how the business is structured and how money flows from the firm to the owners.
Questions such as:
- Should we remain a PLLC or elect S corporation status?
- How should partners be compensated?
- Are guaranteed payments appropriate?
- Should compensation be distributed through draws instead?
- Is a pass-through entity tax election available in our state?
These decisions can have a meaningful impact on taxes, cash flow, and partner economics. I've found more unclaimed tax savings in these conversations than in most searches for additional deductions.
Law Firms Tend to Outgrow Their Original Structure
Many firms start simple. A solo attorney launches a practice, revenue grows, an associate becomes a partner, more attorneys join, and the firm expands into new states. Compensation gets more complicated along the way, while the entity structure stays exactly as it was.
What began as a straightforward setup can become increasingly inefficient as the firm grows. Entity planning works better as something you revisit periodically, checking the current structure against the firm's size, profitability, ownership model, and long-term goals.
What a Good CPA Should Be Talking About
One of my favorite questions to ask a prospective client is how recently their CPA has brought up their entity structure.
Most firms don't need a change, and the right CPA should still be evaluating the issue. They should be asking about owner compensation, profitability, state tax exposure, partner arrangements, and where an election or a structural change could improve the firm's tax position.
When the topic never comes up, it usually means nobody is reviewing it, and that's where the surprises start.
The Question to Ask
Ask them: “If you reviewed our firm’s current entity structure today, what specific areas would you evaluate to determine whether we’re paying more tax than necessary?”
The answer should be a process rather than a pitch. A CPA who regularly works with law firms can tell you what they’d review, why they’d look there, and where they usually find opportunities or risk.
If you’ve been following this series and have questions about your own firm, let’s talk . Entity structure is one of the first places I look.
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