by Michael Djavaherian
So, you want to work for yourself, control your own destiny? You may be an experienced attorney looking to leave your firm. Or a new attorney just starting out. Or returning to law practice after being inactive for a period of time. There are many considerations to take into account before you start the process.
Before beginning the process, you need to ask yourself some preliminary questions:
Am I ready for this? Do I want to leave my current situation, am I prepared for the risk and possible pressure of working for myself with no employer to fall back on, am I sufficiently trained for the kind of work I want to do, and will I have enough legal work to survive on my own?
It’s not easy to take that leap, and some people just prefer to not deal with running a business, they just want to handle the tasks that they are assigned. There is nothing wrong with that. But I believe that anyone who wants to, can be successful at running their own office. Hopefully, this will help those people who believe in themselves and want to be their own managing partner.
Considerations for all attorneys in starting a new office.
Before you can decide how to run your practice, you need to have an idea of the amount of net income you can expect to earn from your practice and then budget accordingly.
To determine your expected income, you need to make a decision about your hourly rate. You will want to set that at a rate that is commensurate with your experience, expertise, and the type of law you practice. There is some room for adjustment. A lower rate may be more attractive to clients, but it will obviously generate less revenue and might undervalue your time compared to your peers. There is a balance that has to be carefully considered.
At a basic level, your gross income is simply the number of hours of work you expect to have when your new office is open multiplied by your hourly rate. Don’t forget to discount that gross amount billed somewhat, to account for clients that are slow to pay or who don’t pay, for credits and discounts you might provide, and so on. Based on your type of practice, collection for your work might average anywhere from 70 percent of billings to closer to 100 percent. For contingency lawyers, such as plaintiff’s personal injury lawyers, you will have to calculate gross income based on the expected number of cases you think you might obtain initially, and the expected recoveries you will average from those cases. That is probably a harder figure to estimate.
Also, don’t forget about taxes. Lawyers who practice as sole proprietors pay a self-employment tax that equals about 14% of all net income from their law office on top of their regular income tax. Reduce your budget by an amount sufficient to cover taxes.
To determine the amount of work you think you will have when you start, determine whether you have any clients who will, a) move with you to your new office, and b) have ongoing legal matters that you will be able to work on immediately. Estimate the number of hours their matters will generate per month, and you have a baseline. Everything after that is a bonus. You will probably have some clients who you are not sure about, but that you think may stay with you. If they do, and you earn more than your baseline, you can always adjust your budget accordingly. The main thing is, be able to survive and get by while you are building your practice.
Finally, in looking at your budget, you need to be aware of the amount you have available from savings or ability to borrow. Ideally, you have some source of funds that can pay your living expenses and your business expenses if things do not go as planned. The more of a cushion you have, the more debt you can take on to support your practice, the more long-term your planning can be, and the more selective about your clientele you can be. If you don’t have any cushion, you will have to spend less, be more willing to take any kind of work, and be willing to accept more risk.
Make a budget that covers all of your living expenses — rent or mortgage, student loans, cars, credit card and other loan debt, food, entertainment, and all other fixed living expenses — so that you know how much you need every month. Try to cut these expenses down as much as possible before the jump. The difference between this amount and your baseline legal income is the amount you have available to spend on your office. As mentioned above, having savings or loan resources available (or a spouse who makes sufficient income to cover living expenses) can impact your calculation.
Now that you know how much you have available, let’s look at the things you might need for your practice:
- Physical space needed.
In the past, having an office was an absolute necessity for a lawyer. Clients expected their lawyer to have a nice, fancy office, and lawyers believed they needed one to be respectable. In recent years, this has become less the case. Now, especially after the pandemic has taught everyone the benefits of working virtually, office space is becoming a waste of money for many solos and small firms. If you believe you need a physical storefront somewhere in town, just figure out your needs in terms of space, location, and quality, and then find an office that fits within your budget.
For lawyers who want to continue to have a physical office available, there are two main alternatives to a traditional office. The first is an office in a professional suite. This is a dedicated office that is leased by an attorney that is theirs alone. They can bring their own furniture, set up their own phones and use the included internet access. Most provide a receptionist and conference room availability.
The second alternative is for a shared office space. These offices provide office space on an as-needed basis to attorneys who may only need to use the office a few hours at a time, or who host meetings in a conference room occasionally. These types of offices typically have either a monthly plan that allows a certain number of hours, or an hourly or daily rate for the use of space. Either way, it can be an economical alternative for a lawyer who mainly works from home but occasionally needs an office or conference room for meetings or depositions. Just be aware that the office won’t be yours; you won’t have the ability to store anything or keep your family pictures on the desk. You should be able to receive mail and deliveries at the location, however, and the receptionist will be able to take your messages.
More and more lawyers have ditched the office entirely and moved to a virtual office practice, operating out of a home, a detached guest house, or even a coffee shop. With a laptop, video conferencing, email, digital file storage and a myriad of online resources available, lawyers now, especially lawyers on XIRA, have all the tools they need to handle any matter without need of an office in a building. When starting your practice, especially if the budget is going to be tight, take a good hard look at whether you require an office. If you don’t, then save the money for things you do need. If you do need an office, look at some of the less expensive alternatives before entering into a lease.
You next need to determine whether you will need staff in order to run your office. If so, this will have to come from your budget. There are fewer lawyers who require a secretary to write a letter or to type up a legal brief than there used to be, so if you want to be lean and mean, try to avoid carrying that overhead. If you require a secretary, see if you can find one you can hire hourly as needed, instead of as a permanent employee.
Do you require another legal professional to conduct your practice? If so, you are going to need to be able to budget their expense. If you only need part-time help, or help in connection with a specific task or case, there are many paralegals and attorneys who will work on a contract basis, typically for much less than you can bill them out for.
With respect to staffing, whether professional or clerical, always look for part-time hourly help before adding a full-time employee and the attendant regulatory and economic burden that goes along with it. Recent California law changes have given certain types of outside-contractors employee status, so be aware of that when you do hire part-time help.
FYI, XIRA is building a system that will allow you to create staffing for specific cases, where you can work with other lawyers and paralegals in a virtual law firm.
- Administrative help needed — Accounting and Banking.
Most lawyers are terrible at accounting. Our lives are on the go, and we are often too busy to deal with entering expenses, income, mileage, and so on. It’s just a pain! But it is one of the most important things to set up properly. It is best to have a CPA assist in setting up your system of accounting, and I do not profess to have any expertise in that area. They may set you up with QuickBooks or some other software to help keep track of things. You might also need to have someone who keeps track of your books, or find the easiest way to do it yourself.
You will need to have a business checking account. All the income you earn from your practice, and only your law office income, should be deposited here. All office expenses should be paid from here. That will make it much easier to keep track of revenue, expenses, and net income. You should have a credit card that is only used for business expenses and pay the card from the business bank account.
If you accept deposits from clients, you will be required to set up a trust account. You will need to find a bank that is approved by the bar for IOLTA accounts. For convenience, it probably makes sense to have your trust account at the same bank you use for business checking.
There are many lawyers these days who are set up so everything runs automatically — billing, collection, payment of expenses, accounting. You should aspire to such efficiency.
And of course, every quarter and every April 15, you will need to satisfy the IRS. If you are small enough, a tax software program like Quicken or H&R Block may be good enough. Otherwise, consult a tax professional.
- Obtaining clients.
When you open your office, your goal will be to grow until you have as much work as you want. And then, maybe add some partners or associates and grow some more. To do that, you will need clients. And to obtain clients, you will want to have a plan for how you want to market yourself. It can consist of being involved with professional organizations, being listed at online directories, being active in the community, or advertising, among other marketing options.
How you market yourself will depend to a great extent on your practice, and cannot be detailed at length here. Just be aware that you should have a good understanding of how lawyers in your practice area obtain clients, and have a plan for how you are going to work to obtain some of those potential clients.
Note that XIRA is built specifically to help you meet new clients, and help with your marketing, so you can focus on serving your clients.
Business license and Fictitious name. Depending on your city or state, you may need to obtain a business license to operate your law office. If your office operates under a DBA, like “Consumer Law Offices”, you will likely need to file a Fictitious Name Statement with the County Recorder.
Stationery. You’ll have to come up with stationery and letterhead that you will use with formal letters. This is much less important than before, but it is still needed sometimes. You can design your own using online templates, or you can order more expensive stationery.
Filing system and data. You’ll want to think through how you organize and store client files and law firm records. How you handle it will depend to some extent on what kind of office you decide to use. The more virtual your office, the more you will want to store documents in digital format, instead of keeping paper files. Even if you have an office, the more you store documents digitally, the better. Try to organize files in a name or numbering system that works for you, and if on a computer, in a way that you can access them quickly. On your computer, each client should have its own folder, and each matter for that client should be a subfolder.
Computer systems must be secure, office info that is available from the outside should be secure from hackers, and data stored on hard drives should be backed up regularly to protect from hard drive failure. The subject of data security and professional ethics is an important one and should be reviewed when you set up your system. (XIRA helps here with its free and secure document storage).
Phone Line. It will be best to have a phone line dedicated to the law office, even if you work from home. Fax lines are so 1990s, but if you find you occasionally need one, either use a scan and fax service, like FaxZero, or buy a fax machine and plug your phone line into your fax machine when you need to send a fax. If you absolutely have to have a dedicated fax, you may need a second phone line.
Computer system and other hardware. You’ll want to know going in what type of computers you want to use (Mac or PC, or both). PCs are definitely less expensive, but with computers, you should go with what you like best. Your software and some of the services you use will be dependent on which one you choose. These days, there is plenty of software for either. Just make sure that whichever you choose is recent enough to run what you need, and has a camera and audio capabilities for video conferencing.
You will need a good laser printer (preferably color, with built-in scanner and fax). These can be had for as little as $200.
Billing and collection. There are numerous software applications and online sites that handle billing. Some of them also provide services for accepting client payments. You should look carefully at your options and find one that meets your needs for an acceptable price. XIRA’s billing software, part of the GAVEL suite, is free and easy to use.
Insurance. Lawyers in California are not required to have malpractice insurance, but they must notify clients if they do not have insurance. You should make sure to have insurance. Apply before you start your office so that you do not have any gap in coverage. The amount of coverage should be commensurate with the size of the matters you are handling and the potential liability you would face from any alleged errors.
Considerations for an attorney leaving a firm:
It is generally not allowed for an attorney to solicit firm clients before leaving to create their own office. You may have a close relationship with a client, and believe they will move with you, but you are probably prohibited from broaching the subject with them. Once your relationship with the old firm is over, you can contact them. In California, you are not prohibited from using information that is in your head, such as the name and phone number of your prior client. Be careful how you handle this issue, so you avoid litigation and maintain good relations with your old firm.
Considerations for someone returning to the private practice of law after being away.
Whether you were away from law practice for family reasons, to pursue a career in a different field, or worked in-house at a business, the law may have changed, and your skills may be less sharp. Make sure to brush up on your subject matter. Take some CLE. Take a trial practice course if you are a trial attorney. Speak to a colleague. Hit the ground running.
Considerations for newly admitted attorneys.
Newly admitted lawyers have a few challenges in starting their own practice. They come into it with no clients, unless a friend or family member has promised some work. So, they usually have no guarantee of any income at all. They will therefore want to keep expenses down to a minimum. A virtual office is a very good option in this situation.
A new attorney must also overcome a lack of experience. They need to ensure that they are qualified to handle the matters they accept and learn all the ins and outs that are not always taught in law school. It is highly recommended that new attorneys practicing on their own find a mentoring program at their local bar or through their law school and consult whenever they have any questions. Learning by making mistakes is not allowed.
Considerations for attorneys joining with one or more other attorneys to create a new firm.
Attorneys forming a new firm with multiple lawyers will want to set up an entity of some kind for the firm. It can be a partnership, LLP, or law corporation. The process will mostly be the same as for solo practitioners, except that the firm will be run by its governing documents, the bank account will probably be a joint business account, and accounting will be more complicated.
In sum, opening or reimagining your law office can seem like a daunting task, but if you take the time to think it through, you will be able to build the type of law business that is right for you. XIRA is here to help you succeed. We won’t if you don’t.
For additional thoughts and tips, this article in the ABA Journal contains ideas from a distinguished group of practitioners.