Reply to Professor Gilson

Abstract

In replying to Ronald Gilson's comment (this issue), we first state points of agreement; we then examine points of disagreement. We agree with proposition that a major reason motivating states to allow incorporation of law and other professional service firms was to offer to these firms advantage of superior tax benefits from corporate form. These tax advantages were related to areas of pension and profit-sharing plans, group term life insurance, health and accident insurance, medical reimbursement plans, wage continuation plans, and keyman insurance (see Hayes 1978). While tax motives were important, they are not end of story. In particular, we do not agree with Gilson that for period under consideration the pattern of law firm incorporation . . . is income tax, not liability, driven (p. 421). As this is a factual issue, we illustrate our understanding with a sample of lawyers who have written on this point. Rotgin (1980), a specialist on professional legal corporation, states that one of principal advantages of corporate business entity is concept of limited .... While professional legal corporation also offers attorneys limited liability, this form of limited is not as broad in scope as general corporate limited liability (p. 634). Paas (1986) argues that the most significant non-tax reason for incorporating a professional is to obtain limited liability. Attorneys who incorporate attempt to insulate their personal assets from claims arising in two kinds of cases. First limited insulates personal assets from claims arising under ordinary business debts of professional corporation .... Second, limited bars claims arising out of professional malpractice of a fellow attorney (p. 374). Shores (1974) also argues that it would seem that most significant non-tax factor in favor of incorporating is substantial reduction in exposure to malpractice which normally results in case of incorporating a group practice (p. 711). As judged by these legal analysts, issues are important for practices in deciding on their corporate structure.