This is the next post in my series on starting a law firm in 2015. My last article looked at how to go about picking a practice area for your new law firm. In this post I’m going to dive into the part that attorneys love soooooooooooo much – the business side of things. This is an area in which lawyers will readily admit to needing assistance and, yet, tend to make little effort at improving. This is why most attorneys’ business affairs are about as organized as those of this guy:
The good news is that doing just a few simple things will put you well ahead of your competition. This head start on your competitors, therefore, will help you be a money magnet like this guy:
Attorneys will openly admit they are bad at business. This is usually justified by stating “I’m a lawyer and not a businessperson.” The person who tells you that became a business owner when they hung out their shingle and they are just refusing to acknowledge reality. In spite of the fact that law offices are notorious for being poorly run, mismanaged, and inefficient, guess what most lawyers starting their own shop do? THEY PATTERN IT AFTER EVERY OTHER LAW FIRM OUT THERE! Call me silly but I don’t think it’s the best strategy to model your new enterprise after someone who is admittedly bad at running their own enterprise. Here are a few tips that will put you ahead of the game.
Attorneys err by not understanding the tax implications of owning a small business
Starting a new business is hard enough and you need to keep as much of your earnings as possible. It doesn’t help if you’re donating extra money to the tax man. Electing to tax your business as an S-Corp can save you quite a bit on that front. I previously wrote about the benefits of the Sub S election when I discussed four ways for law firms to improve their finances. I won’t dive back into that discussion here as I previously went over it at length. I suggest that 1) you read that article and 2) you understand that the tax collectors are a’ coming for ya’. You’ll know them when they show up – they probably look like these two:
Another big benefit of setting yourself up as an S-Corp is the fact that you are an employee as well as 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 then you would if you simply set up an LLC and let all the income flow through to you personally.
Keep in mind that I’m not a tax professional and don’t hold myself out as one. Talk to your accountant more about these issues.
Lawyers err by not regularly performing bookkeeping in their law practice
I shake my head at how many attorneys don’t regularly keep the books. Most lawyers can’t 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. The method of “I have more money this month than last month so I must be doing ok” is not a reliable way to gauge the health of your company. This leads to attorneys thinking they can afford to hire additional help that they can’t afford, to spending additional money on advertising that they can’t afford (and don’t need – as I’ll talk about in a future post), and a general misunderstanding as to how one’s business is doing. There’s a simple frickin’ cure this – do your bookkeeping!
Doing your books does not consist of sitting down at the end of year and trying to reconcile all of your transactions for the last twelve months. It also does not mean simply 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 literally takes a few minutes a day, and that’s it, if you stay on top of it. Each morning, before you do anything else, 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 an amazing product but, that being said, 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 easily categorize expenses 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 business structure and to keep the books. It’s not that attorneys can’t do these things – they simply don’t. If you make the choice of saying that you will take these steps then you’ll be ahead of the game.