Tips

So You Want to Start a Law Firm — Practical Tips
By:  Bethany Peterson

Running a law firm can be overwhelming, especially for a new practitioner. Building clientele while growing professionally often means that the internal business is neglected or organized in a haphazard manner. When setting up a practice, the internal business structure is extremely important to keep the firm organized and in compliance with the law.  

Choose Your Entity
Often one of the first decisions after deciding to form a law firm is to choose the type of entity it will be. The form of the entity will determine everything from who can own the business to how the firm’s profit will be taxed. A sole proprietorship is an attractive option since it just requires a practitioner to open shop, but the downside is that the practitioner is open to unlimited personal liability. Other entity forms commonly used are limited partnerships, limited liability companies, corporations, and professional corporations. Each will limit liability in varying degrees. Prior to launching a new firm, types of entities should be researched to make an informed decision.

Bookkeeping
Internal bookkeeping is important to keep track of client billing as well as the financial health of the business. Regular bookkeeping is important to avoid mistakes in billing as well as waiting too long to bill a client for services rendered. Chances are new attorneys will be in charge of their own bookkeeping at first. Although it is tempting to put off recording client billing and business expenses, make sure those are recorded. You should consider buying a more robust bookkeeping software and begin building good business recordkeeping habits in the early days of opening your firm.

Make sure that personal expenses are kept separate from firm expenses. If you need to pay a personal expense and are able under the form of entity to pay yourself extra, pay yourself. Never pay for personal expenses out of the business account. This keeps the books in order and prevents the firm from being used as a personal bank account, which could lead to loss of limited liability protection, called piercing the veil.  

Bank Accounts
Create a separate bank account for the firm. One of the biggest mistakes a new attorney can make is not establishing separate business accounts for the firm. Even if the firm is operated as a sole proprietorship, a separate business account should be created to keep revenue and business expenses separate from personal finances. This measure helps prevent confusion over business expenses deducted on the firm’s tax return if they are challenged. It also makes the firm’s financial condition more apparent.  

Overhead
A new firm should keep overhead low to avoid overextending itself. Consider malpractice insurance, health care insurance, and office expenses. Although an attorney hopes to never need it, malpractice insurance ensures that a mistake will not sink the firm or the attorney. Be sure that you understand what is covered under the malpractice plan.

Under the ACA, all individuals should have insurance coverage. An attorney may be insured through a spouse or through a privately purchased policy. Remember that the Texas Bar does have a private insurance exchange that may lower premiums for both an attorney and his or her dependents.    

Finally, a new attorney should consider the expense of opening an office or even the cost of a home office. Make sure to budget for office supplies and equipment, such as a printers and scanners. Consider parking fees, postage, continuing education, and filing fees that will have to be met as well. These expenses may seem small, but they will add up.  

Although overhead should be kept low, know when you need to spend a little more to get the resources you need. Look into software, like bookkeeping or case management; build a quality website; and invest in research tools that are essential to your field of practice.

Building a successful law practice is a difficult, rewarding experience. Taking the time to make sure that the internal business of the firm is properly organized will prevent many beginning mistakes. 

Bethany Peterson is an attorney with Scharar Law Firm, P.C. in Houston, Texas.