Starting your own law firm, for all of its difficulties, has its rewards, not the least of which is the challenge itself—and the learning that comes out of it. Taking on the ownership role pushes you to grow in ways that aren’t possible when working for someone else. There’s also the benefit of working how and when you like—and earning the respect that comes with owning your own company.
In fact, one study that surveyed satisfaction among 197,000 people in 70 economies found that those who start their own businesses tend to find more happiness and fulfillment than those who do not.
But, for any lawyer, new or experienced, navigating the challenges of business management can be a daunting task. The best way to handle this is to segment the endeavor into the foundational principles that any lawyer can build upon.Forming a business entity might be your first step (but not always)
Forming a Business Entity Might Be Your First Step (but Not Always)
For example, one of the first things is to determine is what sort of business structure will be ideal, as this will inform other considerations. Most lawyers are eager to form an entity. But, it’s not always a requirement.
Whether your law firm should be attached to an entity depends on your circumstances. Start by having a conversation with an accountant who can advise on whether it is tax-advantageous to form an entity. If it isn’t, solos or partnerships can register a law firm under a “Doing Business As” certificate with a local city or town. Not all states require you to register a legal company name, however, so check with local authorities for details. Registering under these circumstances won’t foreclose later forming an entity.
Know Your Liability Requirements
Entity formation, beyond tax considerations, does discourage commingling of funds between businesses and individuals, and may create a small liability buffer for lawyers—which, in turn, will affect your insurance.
Most smaller practice groups will select between a professional corporation (PC) and a limited liability company (LLC)—with many states offering single-member LLCs. PCs have different filing and maintenance requirements than LLCs, and are also subject to double taxation (taxation at both the personal and corporate level), unless a subchapter S election is made. LLCs are generally simpler to construct and maintain, and feature pass-through taxation (where taxes are paid at the personal level only).
Lawyers Need Insurance
Once you know what type of business structure you’ll be running, the next step is to buy insurance. Though some states don’t require lawyers to maintain malpractice insurance, it’s certainly a good idea to get it regardless. Most attorneys intuitively know this and understand the cost of litigating a malpractice claim. Of the 73,469 malpractice claims made in 2015, 20,536 of them resulted in payouts between $1,001 and $200,000.
For new attorneys, malpractice insurance is relatively inexpensive with short terms for payout. That said, certain practice areas will yield higher rates than others. Claims are more common against personal injury and family law attorneys, so policies for those attorneys cost more. Attorneys should shop around and get multiple quotes to get the best rate. Bundling malpractice insurance with other products, such as commercial liability insurance, may also yield cost savings.
Next Steps to Starting Your Practice
Interested in learning more about how to start your own law firm? This free report, How to Start Your Own Law Firm, authored by Jared Correia, outlines 10 essential steps for new and experienced lawyers:
- Create a business entity—if necessary
- Get malpractice insurance
- Find your first clients
- Plan your marketing strategies
- Download now for the full list!