The form of legal practice determines taxes, accounting and the business model

An advocate’s choice of business structure between a solo practice, a law firm, or a law partnership affects taxes, accounting, teamwork, and scalability. This topic was discussed at a specialized webinar hosted by the UNBA NextGen in the Kharkiv region.

The speaker was advocate Iryna Shramko.

A solo practice implies the status of a self-employed person or a person engaged in independent professional activity. This model is often chosen at the start of a practice to build a client base and determine whether a partnership, law firm, or bar association is needed in the future. At the same time, this model falls under the general taxation system: the advocate pays personal income tax, the military levy, and the unified social tax on net income.

According to the speaker, the main practical risk lies in substantiating expenses, as the list of eligible expenses is limited, and the tax authorities may even question office rent. Therefore, an advocate should assess in advance whether they will be able to document expenses related to their professional activities.

A law firm is a legal entity established by a single advocate. In such cases, the law firm not the individual advocate acts as a party to legal services agreements. The firm may engage other advocates on a contractual basis if a case requires the participation of several specialists.

Compared to a solo practice, a firm may opt for the third single-tax group, but the tax is paid on the total revenue deposited into the firm’s account. Among the restrictions, I. Shramko cited the requirement that the firm’s name be linked to the founder’s last name and the full-scale procedure for liquidating a legal entity.

A law partnership is established by at least two advocates. It offers freedom in choosing a name, the opportunity to build a brand, scale the practice, and form specialized teams. Like a law firm, a bar association may operate under the third group of the single tax system. At the same time, the presence of multiple members requires the partnership relationships to be regulated in the bylaws: the distribution of shares and profits, as well as the procedure for new members to join and for members to leave the association.

After establishing a law firm or association, the regional bar association must be notified within three days of entering the information into the Unified State Register. This is necessary so that a record of the advocate’s activity as part of a legal entity appears in the register and the advocate can issue invoices on its behalf.

Separately, the speaker noted that an advocate may simultaneously operate as a sole proprietor for other business activities or services that do not constitute legal assistance. However, defense in criminal proceedings or representation in court cannot be carried out under a contract on behalf of a sole proprietorship.

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