OTLA Trial Lawyer Winter 2021

33 Trial Lawyer • Winter 2021 straightforward obligations such as fol- lowing the dictates of the secretary of state and statutory law, maintain general liability insurance (in addition to profes- sional negligence insurance) and gener- ally maintain your financial obligations so that a claimant may not “pierce the corporate veil” and pursue your indi- vidual assets. Furthermore, there is an exception to the liability protection available for law- yers under ORS 58.185(3) and ORS 63.074(2). Lawyers may be personally liable for their professional negligence or the negligence of those under their direct supervision and control. Lawyers within a firm may also be jointly and severally liable for the professional negligence of another lawyer in the firm up to an an- nual statutory limit. 1 Hence, PLF cover- age. Regardless of the exceptions and ad- ministrative hurdles, I recommend set- ting up your law firm as an LLC, PC or another entity with liability protections. Managing the inevitable Taxes may be inevitable but you can manage the magnitude. The type of en- tity you select and how that entity is taxed can have a profound impact on your personal finances. The key termi- nology surrounding taxation involves C-corp taxation and S-corp taxation, i.e. , whether the business is taxed at the en- tity level (C-corp) or as a “pass through” (S-corp) to the owners. In an informal survey among legal business owners, when asked why they chose the entity they did, the resounding response was “well, my accountant told me to…” A C-corp is so named because, hold on to your hats, a C-corp is taxed subject to subchapter C of the Internal Revenue Code. A C-corp is the default designation for an LLC or PC that has not elected S-corp status. Its main distinguishing characteristic is its “double taxation.” Essentially, the income and deductions of the LLC or PC are reported and taxed on the corporate level tax returns. In most cases, the owners will pay income tax and social security on most of their income through regular payroll with- holdings. Then, the firm is liable for the matching of social security tax and the payment of unemployment taxes. In ad- dition to the corporate level tax, the re- maining net income taxed at the corpo- rate level is taxed again on the owner’s individual tax return when distributed to the owner as a dividend or distribution (“double taxation”). In this taxation scenario, owners and employees are treated the same and, with limitations and exceptions, profits can be distributed in the form of payroll/ 4bonuses to minimize or avoid double taxation. Note, however, that bonusing profits makes these sums subject to the employment taxes whereas dividends are not. One benefit to a C-corp is the ability to treat health insurance and long-term disability premiums as deductible busi- ness expenses. In this scenario, retained earnings of the business do not impact the owners, as opposed to an S-corp, as described below. In this scenario, I have advised certain clients to become a C- corp because they or someone in their family has expensive medical issues. An S-corp is an LLC or PC that has qualified, is timely elected and has been approved by the IRS to be treated as an S-corp. The taxable income and deduc- tions of the S-corp are reported on the S-corp return and then “passed through” Taxes may be inevitable but y o u c a n ma n a g e t h e magnitude. The type of entity you select and how that entity is taxed can have a profound impact on your personal finances. See Business Structure p 34