Protecting Your Practice: Organizing as a limited liability entity under Indiana A&D Rule 27

March 9, 2016

By Neal Bowling and Dina M. Cox

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bowling-neal-mug Bowling

Practicing law with partners can bring tremendous benefit to you and your practice. Partners can provide intellectual collaboration, moral support, camaraderie, and help with business development.

However, partnership carries risks as well as benefits. Under the law of partnership, every partner is jointly and severally liable for obligations incurred by any partner in the course of the partnership’s activities. Ind. Code § 23-4-1-15. This means that if a law partner commits legal malpractice and incurs a judgment, you can be jointly and severally liable for the amount of the judgment, even if you had nothing to do with the matter in which the malpractice occurred. See, e.g., Monon Corp. v. Townsend, Yosha, Cline & Price, 678 N.E.2d 807 (Ind. Ct. App. 1997).

Fortunately, there is a way that you can enjoy the benefits of having law partners without exposing yourself to potential liability for their malpractice. Indiana Admission and Discipline Rule 27 permits lawyers to organize themselves as professional corporations, limited liability companies, and limited liability partnerships, and thereby limit their personal exposure for their partners’ obligations. Complying with Rule 27 will not limit your liability for your own acts or omissions; however, strict compliance with the rule will eliminate the risk of liability for the acts or omissions of your partners.

First, Rule 27 requires that the public must be put on notice that it is dealing with a limited liability entity. Specifically, the name of the firm must contain the surnames of at least some of its owners, followed by language indicating that the firm is organized as a limited liability entity, such as “professional corporation,” “P.C.,” “LLP,” or “LLC.” Admis. Disc. R. 27(a).

Furthermore, the firm must be solely dedicated to the practice of law. Admis. Disc. R. 27(b). For instance, you can’t organize as a professional corporation some of whose members practice law and some of whose members engage in the sale of insurance. Rather, every owner of the entity must be engaged in the practice of law through the entity.

Moreover, in exchange for the benefits of organizing as a limited liability entity, the firm must protect its clients by maintaining a minimum required level of professional liability insurance or other funds dedicated to satisfying any obligation arising from the rendering of legal services. Admis. Disc. R. 27(g). In lieu of insurance, Rule 27 permits a firm to commit certain funds, such as certificates of deposit or United States Treasury obligations, toward covering any obligation arising from the rendering of legal services. However, most firms will find it much more practical to satisfy their financial responsibility obligations through insurance.

Rule 27 requires insurance or dedicated funds in the amount of $50,000 per claim and $100,000 for all claims during the policy year, times the number of lawyers practicing in the firm, in excess of any deductible. Maintaining the required level of insurance or other financial responsibility is an indispensable prerequisite to enjoying limited liability for the obligations of the firm, as the partner-owners of the firm are personally liable for all such obligations up to the amount of the required level of insurance or other financial responsibility. Admis. Disc. R. 27(h).

By way of illustration, a firm with 10 lawyers would need insurance providing coverage of at least $500,000 ($50,000 x 10) to satisfy individual claims, and $1 million ($100,000 x 10) in the aggregate for all claims during the year, in order to satisfy Rule 27(g). Suppose the firm satisfies every other requirement of Rule 27 for organizing as a limited liability entity, but carries only $200,000 of insurance coverage. If the firm had a legal malpractice judgment rendered against it for $2 million, each partner-owner would be jointly and severally liable for the remaining $1.8 million, notwithstanding its organization as a limited liability entity. By contrast, if the firm carried the full amount of insurance mandated by the rule, no partner-owner would face any personal liability for the malpractice judgment simply by virtue of being a partner-owner. (Note, however, that nothing about the limited liability entity insulates a partner-owner from a judgment rendered against him or her personally for his or her own acts or omissions. Rule 27(f).)

To organize as a limited liability entity, you must submit an application at the Indiana Board of Law Examiners along with the organizational documents for your planned entity as well as filing fees for the Secretary of State. At the time you file, all owners of the entity must have an unrestricted license to practice law in the state of Indiana, and there should be no pending discipline against any lawyer who is going to be an owner of the entity. Admis. Disc. R. 27(i).

Fortunately, today there is a way to enjoy the benefits of practicing law with partners without one of the most concerning downsides, that is, liability for the acts or admissions of your partners. The price of that benefit is strict compliance with the requirements of Rule 27.•

Neal Bowling and Dina M. Cox are attorneys with Lewis Wagner LLP in Indianapolis. Bowling focuses his practice on complex business litigation as well as the defense of lawyers in malpractice and disciplinary matters. Cox’s practice areas include professional liability defense, consumer class-action defense, and insurance bad-faith defense litigation. The opinions expressed are those of the author.