My last article looked at how to pick a practice area for your new law firm. But today, we’ll be diving into the part of starting a firm that many attorneys may not love so much:
The business side of things.
The weird thing about this area is that lawyers will readily admit that they need help, yet do little to actually improve their business. Which is why most attorneys’ businesses are about as organized as this guy is:
The good news?
Doing just a few simple things will put you well ahead of your competition. And that head start on your competitors will help you look a little more like this guy instead:
Attorneys will openly admit they are bad at business. They’ll usually justify this with the classic line:
“I’m a lawyer, not a business person.”
Often these types of lawyers will just hang their shingle out front and refuse to acknowledge reality.
And even with the knowledge that most law offices are notorious for being mismanaged and inefficient, guess what most lawyers starting their shops doing?
They model their business after every other law firm out there.
You know, the ones we mentioned that had bad business models…
Call me silly, but I don’t think it’s the best strategy to model your new enterprise after someone who’s admittedly bad at running their enterprise.
So to help you out, here are a few tips that will put you ahead of the game.
Attorneys Lose Money by Misunderstanding Small Business Taxes
Starting a new business is hard enough, so you’ll probably want to keep as much of your earnings as possible, which is why donating extra money to the taxman doesn’t help much.
Electing to tax your business as an S-Corp can save you quite a bit on that front.
I previously wrote about the Sub S election benefits when I discussed four ways for law firms to improve their finances. But I won’t dive back into that discussion here as I previously went over it at length.
To keep it short, I suggest that:
1) You read this article.
2) You understand that the tax collectors are coming for you
You’ll know them when they show up — they probably look like these two:
Another significant benefit of setting yourself up as an S-Corp is that you are an employee and the pass-through business owner.
This means that you get the best of both worlds when it comes to retirement planning. You can set up an IRA SIMPLE or a 401(k). You’ll get the tax benefits of your employee contributions, and you’ll also save the taxes from the employer contribution.
These avenues can allow you to save more, with a tax benefit, for retirement, than you would if you simply set up an LLC and let all the income flow through to you personally.
Keep in mind: I’m not a tax professional and don’t hold myself out as one. Talk to your accountant more about these issues.
Lawyers Need to Perform Bookkeeping for Their Practices Regularly
I shake my head at how many attorneys don’t regularly keep the books. (Again, yes, your law firm is a legal practice, but it’s also a business.)
Most lawyers can’t even tell you what their profit and loss was for a given month. The simple truth is that a business isn’t going to be successful when the owner doesn’t have a grip on the finances of said business.
Just a heads up: “I have more money this month than last month, so I must be doing ok” is not a reliable way to gauge your financial health.
This leads to attorneys to:
- Think that they can afford to hire additional help that they can’t afford,
- Spend extra money on advertising that they can’t afford
- Completely misunderstand as to how their business is actually doing.
There’s a simple cure for this: Do your bookkeeping!
Doing your books does not consist of sitting down at the end of the year and trying to reconcile all of your transactions for the last twelve months.
It also does not mean merely handing your accountant a pile of bank statements and telling them to figure it out.
I say this even though these seem to be the two most popular bookkeeping methods in many law firms. Keeping things in order takes a few minutes a day. Yes, really. If you stay on top of it, that is.
Before you do anything else, each morning, perform your accounting for the day before, and life becomes super easy.
The two best solutions for a lawyer to keep the books are Quickbooks Online (my choice) or Freshbooks.
Quickbooks Online is a fantastic product, but many feel intimidated by it because the program largely assumes that one has an accounting background.
Freshbooks, on the other hand, can be seen as “accounting for non-accountants.” It allows you to categorize expenses quickly and makes it easy to track what’s going out each month.
I wrote more on these options when I discussed how to improve law firm accounting.
Want to be more successful in your new practice? It requires you to choose the right law firm business structure and to keep the books in order.
If you choose to take these steps, then you’ll be ahead of the game in no time.
Want to learn another way to keep your law firm in order? Read our article on How to Use Google Keep for Lawyers.