Law Firm Structures 2 — Questions and Answers
Question 1: In a general partnership law firm, how is each partner typically liable for the firm's debts and obligations?
- Jointly and severally liable for all firm obligations (Correct answer)
- Liable only up to their capital contribution
- Not personally liable for any firm debts
- Liable only for debts they personally authorized
Correct answer: Jointly and severally liable for all firm obligations
In a general partnership, partners share joint and several personal liability for the firm's debts and malpractice.
Question 2: What is the primary reason many modern law firms organize as a Limited Liability Partnership (LLP) rather than a general partnership?
- To shield partners from personal liability for other partners' malpractice (Correct answer)
- To avoid paying any business taxes
- To eliminate the need for a partnership agreement
- To allow non-lawyers to become equity owners
Correct answer: To shield partners from personal liability for other partners' malpractice
The LLP form protects each partner from personal liability arising from the negligence or misconduct of other partners.
Question 3: In a typical law firm partnership, what distinguishes an 'equity partner' from a 'non-equity partner'?
- Equity partners hold an ownership stake and share in profits (Correct answer)
- Equity partners are barred from supervising associates
- Non-equity partners must be more senior than equity partners
- Non-equity partners always earn more than equity partners
Correct answer: Equity partners hold an ownership stake and share in profits
Equity partners own a share of the firm and share in its profits and losses, while non-equity partners are usually salaried.
Question 4: Which firm structure issues stock and is owned by lawyer-shareholders while still limiting personal liability?
- Professional Corporation (PC) (Correct answer)
- Sole proprietorship
- General partnership
- Unincorporated association
Correct answer: Professional Corporation (PC)
A professional corporation is owned by lawyer-shareholders and provides liability protection similar to a regular corporation.
Question 5: What is the simplest law firm structure, typically used by a single attorney practicing alone?
- Sole proprietorship (Correct answer)
- Limited liability partnership
- Multi-tier partnership
- Professional corporation
Correct answer: Sole proprietorship
A sole proprietorship is a single attorney practicing alone with no separate legal entity.
Question 6: A central ethical rule shaping law firm structure prohibits which of the following ownership arrangements in most U.S. jurisdictions?
- Non-lawyers holding an ownership interest in the firm (Correct answer)
- Two attorneys forming a partnership
- A solo attorney incorporating as a PC
- Partners sharing profits among themselves
Correct answer: Non-lawyers holding an ownership interest in the firm
Most U.S. jurisdictions prohibit non-lawyer ownership of law firms to protect professional independence.
Question 7: In a 'two-tier' partnership model, what is the typical relationship between income partners and equity partners?
- Income partners hold the title but lack an ownership share that equity partners have (Correct answer)
- Income partners own a larger share than equity partners
- Income partners cannot bill clients
- Income partners must approve all equity partner decisions
Correct answer: Income partners hold the title but lack an ownership share that equity partners have
Income (non-equity) partners carry the partner title but do not hold the ownership stake that equity partners do.
Law Firm Structures 2
In a general partnership law firm, how is each partner typically liable for the firm's debts and obligations?