Opening a Small or Solo Law Firm in Texas: Choosing an Entity Structure and Other Requirements

Opening a Small or Solo Law Firm in Texas: 
Choosing an Entity Structure and Other Requirements 

The State Bar’s Law Practice Management Department often receives questions about starting a small or solo law firm in Texas. The most common questions include whether there are specific requirements for opening a law practice in Texas, what entity type to choose, and whether a law firm from another state can open a law office in Texas if the owners do not live and are not licensed in Texas. 

1. Are there any specific requirements for opening a small or solo law practice in Texas? 

If you’re licensed and in good standing in Texas, technically, no. However, keep a few things in mind when opening a law practice in Texas: 

• IOLTA Account: An attorney who handles client funds must open and maintain an IOLTA (Interest on Lawyers’ Trust Accounts) account and participate in the IOLTA Program, which was established by the Supreme Court of Texas in 1984 as a mechanism for funding civil legal services to low-income Texans by collecting interest on client trust accounts. Rule 1.14 of the Texas Disciplinary Rules of Professional Conduct is often called the “trust account” rule as it governs the safekeeping of property. Trust account errors are a common cause of disciplinary action, so it’s important to understand your responsibilities. Also note that ethics opinion 611 makes clear that the duties imposed on attorneys by rule 1.14 cannot be avoided by including a “non-refundable retainer” clause in a fee agreement. The State Bar’s website provides more information on IOLTA accounts as does the Texas Access to Justice Foundation’s website. 
• Marketing: If you plan to have a website, advertise, or conduct other solicitation efforts, you must file them with the State Bar’s Advertising Review Committee in accordance with part VII of the Texas Disciplinary Rules of Professional Conduct. Attorneys can complete an advertising review application, upload media files, pay the review fee, and receive status notifications through their My Bar Page. 
• Firm Name and Trade Names: In the past, law firm names were limited to the names of the lawyers in the firm. Now, rule 7.01 of the Texas Disciplinary Rules of Professional Conduct allows lawyers to practice under a trade name if it is not false or misleading. Trade names can be helpful if you want to build a trademark or goodwill to increase the potential for selling the entity in the future. If you choose to use a trade name, it is important to know that rules regarding trademarks, intellectual property, and the like come into play. 

1. Do I need to incorporate or form an entity? Does the Bar need to approve what I decide? 

It is not necessary to form an entity and register it with the secretary of state to start a law firm, but you may if you wish. Deciding on whether to form an entity depends on several factors, including your individual circumstances and the level of risk you’re willing to tolerate. Tax ramifications, liability protection, management issues, and transferability of ownership interests are usually the primary considerations in determining what type of entity, if any, the firm should be. Seek the advice of an accountant and an attorney who specializes in this area to determine what is best for you. The State Bar of Texas does not need to approve your decision, and its staff cannot advise you on what is best for your individual circumstances. 

Sole Practitioners 

A sole practitioner who chooses not to form an entity will be deemed a sole proprietorship by default. The main advantages of a sole proprietorship are that it is easy to form and does not need to be registered with the secretary of state unless the sole proprietor wants to operate under an assumed name. If so, an assumed name certificate can be filed with the secretary of state. It is the simplest business structure because only one person owns it. Its assets and liabilities belong exclusively to the sole proprietor and are freely transferrable. Income is reported on the sole proprietor’s income tax return under their social security number, or a tax ID can be obtained. The main disadvantage is that there is no liability protection. A sole practitioner is personally liable for all debts of the business as well as their own self-employment taxes.ⁱ 

Sole practitioners who choose to form an entity can do so as a professional corporation or a professional limited liability company. 

Partnerships 

If you practice with one or more attorneys and decide not to form an entity, your firm will be deemed a general partnership by default. Like a sole proprietorship, the main benefits of a general partnership are that there is no state filing requirement, and they provide a lot of flexibility in terms of how profits can be divided. However, the general partners must assume liability for the firm’s obligations.ⁱⁱ 

General partnerships are typically governed by a partnership agreement that dictates how profits will be divided and what the obligations and responsibilities are for each partner. A general partnership can be formed by express or implied agreement. There is also no requirement that the partnership agreement be in writing. It is prudent to address any issues that may arise during the course of the general partnership in the partnership agreement, such as what will happen when a partner dies or wants to leave the firm.ⁱⁱⁱ 

Partners who want to form an entity can form a professional corporation, a professional limited liability company, a limited partnership, or a limited liability partnership. 

Entities Registered with the Texas Secretary of State 

• Professional Corporation (PC): 

Certain professionals, like lawyers, who wish to form a corporation or company to offer their services are required to form a professional entity.^iv 

A professional corporation is a corporation formed to provide certain professional services by filing a certificate of formation with the secretary of state.^v A corporation is owned by its shareholders, managed by its board of directors, and administered by officers.vi When a law firm forms a PC, all shareholders, officers, directors, and employees who do not work under the supervision of a lawyer must be lawyers.^vii 

A PC is taxed as a C corporation unless it meets the criteria to be taxed as an S corporation and timely files an election to be taxed as an S corporation with the Internal Revenue Service.1 If it is taxed as a C corporation, the firm is taxed on its profits, and the shareholders are taxed on what they personally receive. This double taxation can be a significant downside unless the firm has distributed its profit to its shareholders and little profit remains to be taxed. The S corporation eliminates the double taxation issue by passing the PC’s income, losses, deductions, and credits to its shareholders.^viii 

A PC protects shareholders from liability from its debts and obligations but does not shield attorneys providing services under the PC from their own errors, omissions, negligence, or malfeasance.^ix 

• Professional Limited Liability Company (PLLC): 

A professional limited liability company is a limited liability company formed to provide certain professional services by filing a certificate of formation with the secretary of state.^x PLLCs are owned by members who must be lawyers. A PLLC can have an unlimited number of owners or a single owner and can be member-managed or manager-managed.^xi A member-managed PLLC means that every member has management authority. A manager-managed PLLC means that management authority is vested in a separate group of managers who may or may not be members. Members can be individual lawyers or professional organizations as defined by the Texas Business Organizations Code, section 301.003(7).^xii 

A PLLC is not a partnership or a corporation. It is a distinct entity type that has the powers of a partnership and a corporation. It is the most flexible in terms of taxes because federal tax laws allow single-member PLLCs to be taxed as a sole proprietorship or a corporation and multimember PLLCs to be taxed as a partnership or a corporation. It also does not require that the general partners assume unlimited liability for the other partners. The PLLC assumes liability for the debts and obligations of the business, including any acts committed by attorneys it employs, while attorneys in a PLLC are only liable for their own misconduct.^xiii 

PLLCs have existed for less than 50 years in the U.S., which is relatively new for a business structure. The operating agreement, as with any partnership, is the key document for a PLLC, and it is important that it covers all issues that might arise. For example, if the operating agreement does not address how members can leave the firm, individual members may not have a way to exit, while entity members could simply dissolve the entity.^xiv 

• Limited Partnership (LP): 

A limited partnership is a partnership between two or more people formed by agreement and the filing of a certificate of formation with the secretary of state. xv An LP must have at least one general partner who manages the day-to-day operations and at least one limited partner who is not involved in the management of the firm.xvi Partners may be individuals, partnerships, corporations, or any other type of legal entity.^xvii Limited partners usually only provide funds to the partnership.xviii 

Like a general partnership, LPs have flexibility on the division of profits. Its general partners are also jointly and severally liable for the partnership’s debts and obligations. Limited partners have limited liability up to the value of their investment. Limited partners are not allowed to materially participate in the management of the firm. If they do, their liability protection is lost.^xix 

• Limited Liability Partnership (LLP): 

A limited liability partnership^xx is simply the registration of a pre-existing general partnership or a pre-existing limited partnership as an LLP with the secretary of state; however, an LLP does shield its owners from personal liability for the partnership’s debts and obligations.^xxi An LLP must have at least two owners and can have an unlimited number of ownership classes. Ownership interests are also freely transferrable unless restricted by the LLP agreement. Partners can be added or retired as dictated by the partnership agreement, but partnership status is not transferable unless all partners agree.^xxii 

1. Can a law firm from another state open an office in Texas if the firm owners are not licensed in Texas but the lawyers who will practice in the Texas office are? 

Yes, and . . . . While it is not necessary to have a firm owner in the Texas office if there is an attorney practicing in the office that is licensed in Texas, practically speaking, there are ethics issues to work through when a firm expands into another state, such as how conflicts will be addressed and what the ramifications are of merging differing disciplinary rules, like fee splitting rules or nonlawyer ownership rules. How names are presented on the letterhead for multistate practices can even be an issue.^xxiii 

1. Shane P. Landers and Kelly Norsworthy, presented by Adam W. Dietrich and Jim Mueller, The Twilight Zone: Firm Structure and Organization, State Bar of Tex. Prof. Dev. Program, Marriage Dissolution Institute at 1 (2021).
2. Id. at 2; interview with Penny Robe, Robe Law Firm (July 28, 2023).
3. Id.
4. See Texas Secretary of State, Formation of Texas Entities FAQs, https://www.sos.state.tx.us/corp/formationfaqs.shtml, and Guide for Determining Permissible Entity Types for Licensed Professions (Aug. 2017), https://www.sos.state.tx.us/corp/forms/entitychart.pdf.
5. Tex. Bus. Orgs. Code, § 301.002(3).
6. See supra, Formation of Texas Entities FAQs.
7. See supra, Twilight Zone at 4.
8. Supra, S Corporations and Instructions for Form 2553 at 1.
9. See supra, Twilight Zone at 4.
10. Tex. Bus. Orgs. Code, § 301.002(6).
11. See supra, Twilight Zone at 3.
12. See supra, Formation of Texas Entities FAQs.
13. See supra, Twilight Zone at 3–4.
14. See supra, Penny Robe.
15. See generally Tex. Bus. Orgs. Code, ch. 153, “Limited Partnerships.”
16. See supra, Formation of Texas Entities FAQs.
17. Texas Secretary of State, Form 207—General Information (Certificate of Formation—Limited Partnership) (Dec. 2021), https://www.sos.texas.gov/corp/forms/207_boc.doc.
18. See supra, Twilight Zone at 2.
19. Tex. Bus. Orgs. Code, § 153.102.
20. Tex. Bus. Orgs. Code, §§ 152.801 et seq., 153.351 et seq.
21. See supra, Formation of Texas Entities FAQs.
22. Tex. Bus. Orgs. Code, § 152.401 et seq.
23. See supra, Penny Robe.