It’s cheaper to start your own law firm than ever before. Specifically, the technology you need is getting cheaper all the time—with a laptop, printer, scanner, and mobile phone in hand, you could be ready to strike out on your own.
However, there’s more to starting your own law firm than just having the right technology, or even practicing law. You’ll need to adopt an entrepreneurial mindset and spend plenty of time cultivating client relationships. You’ll also need to handle the day-to-day administrative tasks of running a law firm, such as billing clients, scheduling appointments, and replacing the toner in your printer (you do know how to do that, right?)
Still, more lawyers are going solo: 900 did it straight out of law school in 2015, according to the National Association for Law Placement. Also, according to a 2016 survey by Robert Half Legal, 23 percent of lawyers said they would start their own law firm if they had the necessary capital.
You can do it too. What it takes is planning—before you open your doors.
If you’re thinking of starting your own law firm, here are nine things you need to consider before taking on your first client.
The following points are based on the webinar How to Start Your own Law Firm, hosted by Joshua Lenon, Clio’s lawyer in residence.
1. Create a business plan
“The very first thing you should do is develop a business plan to help you figure out what revenue-generating activities and rates are going to exist in your law firm,” Joshua said. More importantly, you’ll need to compare these rates against the existing marketplace to see if they’re viable. (Hint: Check the average billable hourly rate for your state and practice area by looking at the Legal Trends Report.)
Make sure you have a realistic idea of how much money your firm could stand to make, and whether that amount will be enough to cover your personal and business needs.
2. Choose a business entity (and structure)
Whether you’re starting a solo practice or going into business with several partners, you’ll need to choose which type of formal business entity to establish. For a solo, you could found a sole-proprietorship, or file for a “doing business as” (DBA) trade name.
If you’re working with others, you could formulate a limited liability partnership (LLP), but at the very least, you’ll need to have a formal partnership agreement with all partners in the firm.
This is important. We’re not just talking about a boilerplate document here—this agreement needs to answer key questions to avoid serious issues in the future. For example, how will firm profits be divided? What’s the formal structure for minimizing risk?
“You need to have this conversation now, prior to opening your doors, and prior to bringing on your first client,” Joshua said, “such that when the inevitable disputes happen, you have the answers documented and agreed upon, and you can work on a resolution together.”
One other thing—once you’ve come to an agreement, get advice from an accountant on potential tax implications. It’s better to know earlier than to be surprised later.
3. Know your filing requirements
Different types of business entities will have different filing requirements in different jurisdictions. Make sure you know what your filing requirements and costs are, and check that you have enough capital for filing fees at local, state, and federal levels.
Also, you’re going to be a tax entity (congratulations!) so make sure you’re prepared on that front as well. “As a tax entity, you may be required to get a tax entity certification for things like quarterly tax estimates for solos and employee payroll withholding if you are bringing on employees,” Joshua explained.
4. Set up your bank accounts
Once you’ve got a formal business entity in place, it’s time to open bank accounts for your firm. You’ll need to open both an operating account and a trust account. Jurisdictions may have their own regulations around each type of account, so make sure to familiarize yourself with all applicable requirements.
For example, Joshua noted that many jurisdictions require lawyers to file for a special type of trust account, usually with a bank with a local presence in their state.
5. Buy professional liability insurance
You need insurance, and you need it before you bring in your first client. As Joshua explained:
This is really important because a lot of professional liability policies have disclaimers for cases that were ongoing prior to the start of the policy. So you may be really eager to bring on a new client, someone who wants to hire you in your first solo engagement, but you need to make sure that there is no formal work being done upon their matter until you have professional liability insurance in place.
The American Bar Association has a phenomenal list of per-state liability insurers that we highly recommend you take a look at.
Bonus: Signing up with a number of these insurers (for example, ALPS Insurance) will give you a lifetime discount on Clio.
6. Choose a record-keeping strategy
Many regulatory requirements state that you need to keep records—banking records, annual filings for your business entity, and more. Make sure that you know what records you need to to keep, and that you have a system for tracking them.
7. Know your ethical duties
When you’re first starting out, it’s worth familiarizing yourself with the ethical duties you have to your clients. Some of these duties may impact the way you plan to run your business.
For example, Joshua points out that, while some lawyers may start their firm as a side gig, they need to ensure they’ll have the flexibility to be diligent on behalf of their clients.
You need to make sure that your law firm is actually your primary gig, even if it doesn’t take up all eight hours of a business day. You need to have whatever flexibility is required in order to get to the courthouse, get to the hearing, get to the mediation to the exclusion of all other work. If you do not have that ability, you need to adjust your organization as much as possible to build that in.
You also need to communicate with your clients in a manner that is convenient for them. “You cannot withhold information just because it’s convenient for you, or just because it’s not a good time to call,” he added.
One solution from the Lawyerist is to use a Voice Over IP business line through Vonage or Skype. This would allow you to route business calls to your personal cell phone, effectively giving you two separate phone numbers for one phone.
Finally, be aware of your duties regarding confidentiality. “You need to be able to maintain awareness of the sensitive information that’s located in your files, and take reasonable efforts to secure it from inadvertent disclosure,” Joshua explained.
If you’re planning to use a practice management solution like Clio, you’re well ahead on that front. Still, the responsibility comes down to you—as you choose tools and services, and even as you look at potential employees, always be mindful of your duty to keep your clients’ information confidential.
8. Pick a payment method
“Most law firms get paid by check,” said Joshua. “It’s just a fact of life. But interestingly, the rest of the world is no longer using checks. It’s becoming, quite frankly, a hassle for people to pay by check.”
As an alternative, Joshua suggests that firms look at accepting credit cards as a means of payment for legal fees. And for good reason—the Legal Trends Report found that lawyers using Clio Payments to accept online credit card transactions got paid 11 days faster than lawyers accepting payment by check.
Clio Payments is powered by LawPay, a legal-specific credit card processor. Unlike more general services such as Stripe or Square, legal-specific credit card processors ensure compliance with ethics rules for lawyers.
9. Open a savings account (and plan to receive a salary)
In addition to a trust account and an operating account, you’ll need a savings account for your law firm. Why? Because you need a rainy day fund to mitigate the risk of slow periods or non-paying clients.
As Joshua explained, law firms have very little overhead compared to other types of businesses, so it’s easy to take money out of the firm as soon as it comes in. However, he suggested that it’s a better idea to put extra capital into a savings account, and to pay yourself a regular salary from there.
“It’ll make your taxes a lot easier,” Joshua said, “and it will give you something to fall back upon in the event that clients are late in paying you.”
Further reading on starting your own firm
These are the nine crucial steps you’ll need to take before opening your law firm.
However, don’t forget to do additional research to set your firm up for success. You’ll need to find tools to keep costs down (think apps for lawyers), choose the right practice area, join organizations to connect with legal mentors, and come up with a marketing strategy to connect with clients.
That might seem like a lot, but if you’ve covered the basics listed above, you’re well on your way. Good luck!
Want to shortcut past the extra research? Get the information you need in our free on-demand webinar, How to Start Your own Law Firm.
Get key data insights to drive law firm success
Learn what makes today's legal consumer hire and recommend you (and much more) in the 2018 Legal Trends Report.Get Your Free Copy