Thinking of Going Solo? Be Prepared to Practice Law and Run a Business

Business Of Law
By Deborah E. Kaminetzky

A frequent mistake we lawyers make when starting out on our own is that while we may know a lot about the practice of law, we don’t necessarily know a lot about how to run a business. We may also fail to recognize that a law practice is a business. No matter how good an attorney you are, without that recognition, your fledgling practice is not going to thrive.

This article is written for new solo attorneys, those who are thinking of hanging out a shingle and those who were dismayed when they saw their tax return for the first time after beginning practice on their own. It is solely about your law firm’s business accounting – trust accounting is a whole other topic.

Many lawyers know that they should write a business plan prior to opening and, of course, obtain malpractice insurance. Hopefully you took into consideration the costs of rent, telephone, office supplies, etc. when figuring out your business plan. However, there are some expenses you may not be able to predict, like how much your malpractice insurance will go up each year, so you should definitely factor in a bit of a cushion.
Hire a CPA

My first suggestion is that if you do not have a CPA to help you out, get one. Then, once you have one, don’t treat them as merely a tax preparer, visiting them in February and handing them what is essentially a done deal – the records of what happened with your firm all year. At that point, all they can do for you is calculate how much tax you owe and make suggestions for next year, and one of those suggestions will very likely be to check in with them toward the end of the following year when you can still do something proactive.

For example, let’s say that you received a $10,000 retainer on a divorce in early December, and you deposited the retainer in your operating account. After you’ve set up the file, the client calls and tells you they are getting cold feet and don’t want to file or serve the spouse just yet, but that you should feel free to hold on to the retainer until they make up their mind after the holidays.

Let’s assume your firm is on a cash basis since you’re a solo (larger firms and corporations usually use the accrual basis). You may be thinking, swell, what a great way to end the year with an extra $10,000! If you don’t understand what will happen to that $10,000, a call to your CPA may be in order. That $10,000 will result in extra tax to you for the year. If the client calls back in January after reconciling with their spouse and you refund the money in January, you will still owe taxes on that $10,000. Granted, the following year it will be accounted for, but you are still out the money in the meantime. A call to your CPA would have filled you in, and you could have returned the retainer and told the client to call you when they’re ready to proceed.
Invest in Bookkeeping

My second suggestion is that you either hire a bookkeeper (if you want your books done the old-fashioned way), or get a software program to keep the books for you (some sort of system for tracking and generating reports). I happen to use QuickBooks, but there are many others, such as XERO and FreshBooks. There are several reasons for this suggestion. First of all, we lawyers tend to prefer doing legal work over administrative tasks, and we might be a bit slow in recording our financials when there is a motion to draft. Hiring a bookkeeper or obtaining a software program that uploads your banking information automatically will give you a much better chance of having accurate records, and more important, will allow you to have your finger on the pulse of your business and to know what your law practice is worth. What does that mean, you ask?

Well, for instance, a profit-and-loss statement tells you whether your practice was profitable during a particular period of time such as a month, quarter, or year. A balance sheet tells you what your practice is worth. Both are useful pieces of information. Considering how often we are bombarded with offers for software, equipment, and books that promise to make our lives easier and our practice more successful, wouldn’t you want to base your decision on more than just whether you like the new software? Wouldn’t you want to know whether you can afford to lay out the extra money? Imagine being able to push a button and get a year-to-date profit-and-loss statement that tells you whether your practice is profitable. Wouldn’t that information be good to have?

Without accurate, up-to-date information, many of your business decisions will be made in a vacuum based on your feelings, and then, at the end of the year, you will find out how you did. That is no way to run a profitable business. What’s more, having a bookkeeper or bookkeeping software will ensure that when year-end does come, your books will be ready to send over to your accountant. You have enough stress running a practice – your books should be the least of it.
Know Your Numbers

Suggestion number three is to run a profit-and-loss statement and a balance sheet monthly or to ask your bookkeeper to create one for you. These come in handy for several reasons:

  • Dread making collection calls or going to networking events? One look at your numbers may be just the motivation you need.
  • Didn’t realize your phone bill was so high? Call the provider now and see if you can renegotiate.
  • Taking in way more than you realized? Maybe it’s time to give yourself a raise! (Call the CPA first).

A profit-and-loss statement can tell you if particular expenses are getting out of control. You will also want two other documents – a balance sheet, and a general ledger. The balance sheet shows what the business is worth. The general ledger contains every transaction in double entry form, which means that for each transaction, there are two entries. For example, should a client pay a bill, the payment goes into the income column, and the amount comes out of the liabilities column. This is how accountants record transactions according to generally accepted accounting principles.

Once you have been up and running for more than a year, you can run a comparative profit-and-loss statement comparing last year to the current year. This is especially helpful when making business decisions. After a while, you may even start to see patterns that will help you plan for the future. Some attorneys realize that their work is seasonal and that they have slow periods that can be filled by offering a new practice area, or if they are satisfied with the overall income, can be filled with a vacation or continuing legal education classes or seminars.

Should you decide you want to get a loan for expansion purposes, a banker may require some or all of the aforementioned documents. For example, some banks will base a loan approval and interest rate on your income as shown on your return; others will use your balance sheet. A potential partner may want to see these documents as well.

Finally, if you get audited by the IRS, having an organized system set up will go a long way toward reducing the stress of the audit. Every single transaction will have been recorded and accounted for. You won’t have to go back and create your firm’s books; they will already be audit ready.

With your bookkeeping in place, you will be in a much better position to make decisions that will help your firm thrive. Utilizing either a bookkeeper or a bookkeeping program should mean that some of your time formerly spent on administrative tasks should be freed up as well. Use the time wisely; continuing to read and learn about business concepts such as marketing, how to grow a company or manage effectively will help you turn your law practice into a business that suits you.

DEBORAH E. KAMINETZKY is the founding member of Kaminetzky & Associates, P.C. located in Cedarhurst, New York. Ms. Kaminetzky is a member of the American Bar Association (General Practice, Solo and Small firm Division and Law Practice Management Sections), National Association For Community Mediation, New York State Bar Association (Estate, Family Law, ADR and General Practice Sections), The New York State Council on Divorce Mediation, Nassau County Bar Association (where she served as Chair of the Technology and Practice Management Committee, and is active in the Community Relations and Education Committee, and General and Solo Committee) and The Nassau County Women’s Bar Association. Ms. Kaminetzky serves on the Committee on Law Practice Management of the New York State Bar Association and has also been a speaker at their CLE’s. Ms. Kaminetzky has spoken to various groups on topics including matrimonial law, technology and social media use, fee arbitration and disaster preparedness for business.