Nowadays, it’s really easy to form a Limited Liability Company (LLC). A simple Google search leads you to a bunch of websites that — apparently — will fill out and file all of the forms for you in a few minutes for a low flat fee. I’ve not used any of those sites before so this is absolutely not an endorsement of any of them. Perhaps I’m old-fashioned in this regard, but I still form all of my California LLCs by hand myself with the California Secretary of State’s office.
In this post, I’m going to go over a little bit about what California law allows an LLC to be used for. As it is me, I’m going to specifically answer whether an LLC can be used to form a law firm. If you’re a lawyer or law student in California, you probably know that the answer to that question is “no” but I’ll describe the specific statute(s) involved that support that answer.
To answer the first question of what an LLC can be used for in California, the answer to that question is in the California Corporations Code, and specifically Section 17701.04. In short, an LLC can be used for a wide variety of purposes — assuming it is lawful, of course — in California, with the exception of a few purposes that are explicitly prohibited. For example, section 17701.04(b) says:
“A limited liability company may have any lawful purpose, regardless of whether for profit, except the banking business, the business of issuing policies of insurance and assuming insurance risks, or the trust company business. A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act, if the applicable provisions of the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act authorize a limited liability company or foreign limited liability company to hold that license, certificate, or registration.”
The portion I’ve bolded and underlined says that any lawful purpose is allowed. It’s common that the purpose be to make a profit somehow, but that is not required.
The remaining text of Section 17701.04(b), though, describes some of the exceptions to this rule. For instance, an LLC cannot be used in (1) the banking business, (2) the business of issuing policies of insurance and assuming insurance risks, or (3) the trust company business. If that particular business requires a California license of some kind, then an LLC cannot be used… unless the California statutes describing those licenses actually allow that profession to be done using LLCs. As an example, a contractor required to have a license by the California Contractor State License Board (CSLB) can under Section 7065 of the Business and Professions Code operate their business using a Limited Liability Company.
The exceptions mentioned under Section 17701.04(b) aren’t the only exceptions. Section 17701.04(d) goes over the limited instances where an LLC can be used to run a “health care service plan”. If you want to know more about health care service plans, see Sections 1340 to 1399 of California’s Health and Safety Code.
Section 17701.04(e) is the other major exception to the rule that an LLC may be used for any lawful purpose. That actually leads into the second question I posed above: can an LLC be used to form a law firm in California? The short answer to that question is no.
Here’s the longer answer:
First, we have to look at the text of section 17701.04(e) which says:
“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”
By itself, this text doesn’t really help a whole lot. We need to look at additional code sections — specifically section 13401 of the California Corporations Code for further guidance. Section 13401(a) says:
“Professional services” means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.”
This helps a bit. If you combine section 17701.04(e) and 13401(a), the basic idea is that California doesn’t allow an LLC to render services that may only be rendered lawfully by someone with, for instance, a license provided for by the California Business and Professions Code. Do lawyers fall into this category of professions? The answer is yes. Section 6125 of California’s Business and Professions Code says:
“No person shall practice law in California unless the person is an active licensee of the State Bar.”
The eligibility requirements for a license to practice law in California are described in Section 6060 of California’s Business and Professions Code. Section 6060 is really long so I’m not going to quote it verbatim, but here are a few of the requirements:
- Be at least 18 years of age,
- Be of good moral character,
- Completed one of several possible prescribed educational regiments, and
- Passed a general bar examination as well as an examination on professional responsibility.
If I combine all of these code sections together and read them as one, practicing law or being a lawyer is a “professional service” under California law because you have to have a state license in order to do it, meet various eligibility requirements in order to get that license, etc. and no LLC can be used to provide professional services.
I hope this was helpful. Usual disclaimer, of course, in that this post was meant to be a quick survey of the law and was not meant to be an exhaustive discussion of all of the law that might apply to the particular topic that was discussed. If you do have a situation involving using an LLC to form a law firm in California, hopefully the code sections I link above will be a good starting point for any further research you need to do. If you do ultimately find that you need help dealing with your situation, I would encourage you to find an attorney in your area with whom you can work with to handle the specifics of your particular case.
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