The Function of CRCP 265: Rendering Legal Services through a Professional Company, 0518 COBJ, Vol. 47, No. 5 Pg. 25
| Author | DAVID C. LITTLE AND CHRISTOPHER B. LITTLE, J. |
| Position | Vol. 47, 5 [Page 25] |
WHOOPS—LEGAL MALPRACTICE PREVENTION
DAVID C. LITTLE AND CHRISTOPHER B. LITTLE, J.
During the 1960s, changes began to appear in the composition of legal professional organizations in Colorado. For more than 400 years, to the middle of the 20th century, the delivery of legal services in the United States was essentially an individual, personal activity of a lawyer on behalf of a client, and the legal ramifications of the delivery of such services reflected the intimacy of this process.1 Te fees the lawyer earned for rendering legal services were currently and directly taxed for income tax purposes as personal income to the lawyer.
While lawyers continued to be subject to current personal income taxation on income earned from the furnishing of legal services, service providers in other professions—such as accountants, doctors, and engineers, who could render their services from within professional companies—were beginning to enjoy more liberal tax treatment for the income they derived from their practices, including being able to establish tax-deferred pension and profit-sharing plans. Te law of personal income taxation was changing by virtue of the opportunities created by state legislatures and the federal income tax laws and regulations for those other service providers to incorporate and provide their professional services as a function of their “professional corporations.” They were thus able to take advantage of various characteristics of tax and tax accounting processes.
Those benefits were not available to lawyers because the prevailing constrictions on the practice of law did not allow the delivery of legal services through entities such as corporations for which tax advantages were provided by the tax laws, and state entity-formation laws provided limitations on the liability of each owner for the entities’ commercial obligations as well as for the professional misconduct of their fellow owners and their employees. From time immemorial to the middle of the 1900s, the practice of law was limited to individuals practicing alone or as employees or partners in general partnerships. Corporations and other organizations providing limited tax liability to their owners could not “practice law.”2 More specifically, lawyers could not practice law from within entities that were privileged, by state statute, with the attribute of limited liability.
During the second half of the 1900s, bar associations began suggesting, to the courts and other relevant bar regulatory systems, the notion of authorizing the delivery of legal services through corporate vehicles—that is, enabling corporations to practice law. In response, in 1961 the Colorado Supreme Court issued the first of a number of relevant court rules, Colorado Rule of Civil Procedure (Rule) 231.3 Tis Rule essentially permitted corporations to practice law. More precisely, it permitted lawyers to practice law with other lawyers with the protections of corporate limited liability. And it enabled the lawyer–shareholders of corporations that were organized to practice law to participate in the tax-planning opportunities that were available to other professional practitioners such as accountants, doctors, and engineers. Under Rule 231, lawyers could incorporate under applicable corporate statutes and avail themselves of the tax opportunities of qualified pension plans and deferred profit-sharing plans, while limiting their personal liability for the commercial obligations of their corporations other than those for...
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