![\"law](\"https:\/\/i0.wp.com\/www.attorneyatwork.com\/wp-content\/uploads\/2022\/04\/aw-firm-profits-770x495.jpg?resize=770%2C495&ssl=1\" "\\"\\"")
Table of contents<\/h2>\n\n- \u2019Tis the Season for Tax Payments<\/a><\/li>\n
- What Counts as Profit?<\/a><\/li>\n
- How Should You Divide the Rest of Your Law Firm Profits?<\/a>\n
\n- Filling the Firm\u2019s War Chest<\/a><\/li>\n
- Paying Out Law Firm Profits<\/a><\/li>\n<\/ul>\n<\/li>\n
- Total Owner Compensation Is the Number to Watch<\/a>\n
\n- OWNER COMP PERCENTAGE OF REVENUE<\/a><\/li>\n<\/ul>\n<\/li>\n
- Four Ways to Manage Your Law Firm Profits<\/a><\/li>\n
- More on End-of-Year Tax Implications for Law Firm Owners<\/a><\/li>\n
- Read \u201cFrom Panic to Profit\u201d Tips on Law Firm Finances<\/a><\/li>\n<\/ul>\n<\/div>\n
\u2019Tis the Season for Tax Payments<\/h2>\n
Lawyers are often caught off guard when the accountant comes to them in March or April and says, \u201cYou owe $$$$.\u201d The question that goes through their head is, \u201cHow can I owe money if there wasn\u2019t any cash left in my account at the end of the year?\u201d<\/p>\n
This is usually followed by some concern about where they are going to get the money.<\/p>\n
Let\u2019s focus on the first question: Why do you owe taxes when there wasn\u2019t much cash left in the firm\u2019s business account at the end of the year?<\/p>\n
What Counts as Profit?<\/h2>\n
Total Profit <\/strong>is the number the Internal Revenue Service uses to calculate your annual taxes. Here is the equation for calculating your law firm profit on your year-end profit and loss statement.<\/p>\n\n![\"revenue](\"https:\/\/i0.wp.com\/www.attorneyatwork.com\/wp-content\/uploads\/2022\/04\/PL-Profit-Equation-e1650313641126.jpg?resize=705%2C612&ssl=1\" "\\"\\"")
<\/a><\/figure>\n<\/div>\nWe suggest looking at your profit number each month <\/em>and setting aside a percentage of that money for taxes. The IRS is always going to get its pound of flesh, so you might as well plan for it.<\/p>\nYour tax accountant can tell you what percentage you should tuck away for tax payments, and when to make estimated tax payments throughout the year.<\/p>\n
How Should You Divide the Rest of Your Law Firm Profits?<\/h2>\n
Once you set aside money for taxes, that leaves the rest of the profit to be divided. Part of your law firm\u2019s profits needs to be segregated into an account set up as a \u201cwar chest,\u201d while the rest gets distributed to the owner or owners.<\/p>\n
And that\u2019s a fine balance.<\/strong> There always seems to be one partner who wants to plow all the money back into the firm to grow, while another partner always wants to distribute all the profit. Neither is wrong \u2014 the answer is somewhere in the middle. <\/p>\nFilling the Firm\u2019s War Chest<\/h3>\n
Your firm is probably the biggest asset and definitely the biggest wealth creator you have in your life. Having money sitting in an account, ready to deploy as opportunities arise, will help create that wealth.<\/p>\n
If you work on contingency, you can use your war chest to fund cases. Another good use might be marketing initiatives. (Read \u201cA No-BS Way to Tell If Your Marketing Is Working<\/a>.\u201d)<\/p>\nIf you mostly work on an hourly basis, contingency cases that can secure your retirement probably only come along a few times in your career.<\/p>\n
I ran my family\u2019s law firm before I started my company \u2014 I was basically the CFO. My father had a few of these big contingency cases come along \u2014 it\u2019s why he holds the highest jury verdicts ever awarded in multiple counties in Texas. As a corporate litigator. But financing those cases, which can take years \u2014 especially when you factor in all the appeals \u2014 is really hard. So, having cash in a war chest to cover the loss of hourly billing is huge.<\/p>\n
And those huge cases bring me to what you do with the rest of the money.<\/p>\n
Paying Out Law Firm Profits<\/h3>\n
We advise our clients to keep half the profit in their war chest and distribute the rest. Keep in mind that what gets distributed doesn\u2019t show up on your P&L.<\/em> Distributions pass through to the owners\u2019 individual tax returns.<\/p>\nEspecially with those big judgments, you need to take care of yourself and your family. Pull the money out of the firm and invest it. Use it for retirement.<\/p>\n
That brings me back to my family\u2019s story. When my father and brother won that big case and it paid out, they took cash OFF THE TABLE. It means my brother can retire \u2014 and he\u2019s only 45. He has secured his future.<\/p>\n
As the firm\u2019s owner, you should be properly compensated for the time, energy and risk you put into it.<\/p>\n
Read (\u201cBuilding a Law Firm That Pays You First<\/a>.\u201d)<\/p>\nTotal Owner Compensation Is the Number to Watch<\/h2>\n
Be aware that there is a difference between the profit you distribute and total owner compensation.<\/p>\n
Total owner compensation is all the benefit you get from your firm \u2014 and that<\/em> is the most important number<\/strong>.<\/p>\nYour total owner comp for the year is made up of a few categories:<\/p>\n
\n- The salary you get for working in your firm.<\/li>\n
- All the personal expenses you run through the firm. (No judgment, we all do it. As long as your CPA is fine with it, so are we.)<\/li>\n
- Any profit that is distributed.<\/li>\n<\/ul>\n
Read \u201cThe Best Law Firm Compensation Plans Follow the Rule of Thirds<\/a><\/em>.\u201d<\/p>\n\n![\"total](\"https:\/\/i0.wp.com\/www.attorneyatwork.com\/wp-content\/uploads\/2022\/04\/Total-Owner-Comp-Formula.jpg?resize=940%2C788&ssl=1\" "\\"\\"")
<\/a><\/figure>\n<\/div>\nDepending on the size of your firm, you want total owner compensation to be between 35% and 70% of firm revenue. See the chart below for exact percentages.<\/p>\n
Are you getting that much? Do you even know?<\/p>\n
OWNER COMP PERCENTAGE OF REVENUE<\/h3>\n\n
- \n
- Filling the Firm\u2019s War Chest<\/a><\/li>\n
- Paying Out Law Firm Profits<\/a><\/li>\n<\/ul>\n<\/li>\n
- Total Owner Compensation Is the Number to Watch<\/a>\n
- \n
- OWNER COMP PERCENTAGE OF REVENUE<\/a><\/li>\n<\/ul>\n<\/li>\n
- Four Ways to Manage Your Law Firm Profits<\/a><\/li>\n
- More on End-of-Year Tax Implications for Law Firm Owners<\/a><\/li>\n
- Read \u201cFrom Panic to Profit\u201d Tips on Law Firm Finances<\/a><\/li>\n<\/ul>\n<\/div>\n
\u2019Tis the Season for Tax Payments<\/h2>\n
Lawyers are often caught off guard when the accountant comes to them in March or April and says, \u201cYou owe $$$$.\u201d The question that goes through their head is, \u201cHow can I owe money if there wasn\u2019t any cash left in my account at the end of the year?\u201d<\/p>\n
This is usually followed by some concern about where they are going to get the money.<\/p>\n
Let\u2019s focus on the first question: Why do you owe taxes when there wasn\u2019t much cash left in the firm\u2019s business account at the end of the year?<\/p>\n
What Counts as Profit?<\/h2>\n
Total Profit <\/strong>is the number the Internal Revenue Service uses to calculate your annual taxes. Here is the equation for calculating your law firm profit on your year-end profit and loss statement.<\/p>\n
\n<\/a><\/figure>\n<\/div>\nWe suggest looking at your profit number each month <\/em>and setting aside a percentage of that money for taxes. The IRS is always going to get its pound of flesh, so you might as well plan for it.<\/p>\n
Your tax accountant can tell you what percentage you should tuck away for tax payments, and when to make estimated tax payments throughout the year.<\/p>\n
How Should You Divide the Rest of Your Law Firm Profits?<\/h2>\n
Once you set aside money for taxes, that leaves the rest of the profit to be divided. Part of your law firm\u2019s profits needs to be segregated into an account set up as a \u201cwar chest,\u201d while the rest gets distributed to the owner or owners.<\/p>\n
And that\u2019s a fine balance.<\/strong> There always seems to be one partner who wants to plow all the money back into the firm to grow, while another partner always wants to distribute all the profit. Neither is wrong \u2014 the answer is somewhere in the middle. <\/p>\n
Filling the Firm\u2019s War Chest<\/h3>\n
Your firm is probably the biggest asset and definitely the biggest wealth creator you have in your life. Having money sitting in an account, ready to deploy as opportunities arise, will help create that wealth.<\/p>\n
If you work on contingency, you can use your war chest to fund cases. Another good use might be marketing initiatives. (Read \u201cA No-BS Way to Tell If Your Marketing Is Working<\/a>.\u201d)<\/p>\n
If you mostly work on an hourly basis, contingency cases that can secure your retirement probably only come along a few times in your career.<\/p>\n
I ran my family\u2019s law firm before I started my company \u2014 I was basically the CFO. My father had a few of these big contingency cases come along \u2014 it\u2019s why he holds the highest jury verdicts ever awarded in multiple counties in Texas. As a corporate litigator. But financing those cases, which can take years \u2014 especially when you factor in all the appeals \u2014 is really hard. So, having cash in a war chest to cover the loss of hourly billing is huge.<\/p>\n
And those huge cases bring me to what you do with the rest of the money.<\/p>\n
Paying Out Law Firm Profits<\/h3>\n
We advise our clients to keep half the profit in their war chest and distribute the rest. Keep in mind that what gets distributed doesn\u2019t show up on your P&L.<\/em> Distributions pass through to the owners\u2019 individual tax returns.<\/p>\n
Especially with those big judgments, you need to take care of yourself and your family. Pull the money out of the firm and invest it. Use it for retirement.<\/p>\n
That brings me back to my family\u2019s story. When my father and brother won that big case and it paid out, they took cash OFF THE TABLE. It means my brother can retire \u2014 and he\u2019s only 45. He has secured his future.<\/p>\n
As the firm\u2019s owner, you should be properly compensated for the time, energy and risk you put into it.<\/p>\n
Read (\u201cBuilding a Law Firm That Pays You First<\/a>.\u201d)<\/p>\n
Total Owner Compensation Is the Number to Watch<\/h2>\n
Be aware that there is a difference between the profit you distribute and total owner compensation.<\/p>\n
Total owner compensation is all the benefit you get from your firm \u2014 and that<\/em> is the most important number<\/strong>.<\/p>\n
Your total owner comp for the year is made up of a few categories:<\/p>\n
- \n
- The salary you get for working in your firm.<\/li>\n
- All the personal expenses you run through the firm. (No judgment, we all do it. As long as your CPA is fine with it, so are we.)<\/li>\n
- Any profit that is distributed.<\/li>\n<\/ul>\n
Read \u201cThe Best Law Firm Compensation Plans Follow the Rule of Thirds<\/a><\/em>.\u201d<\/p>\n
\n<\/a><\/figure>\n<\/div>\nDepending on the size of your firm, you want total owner compensation to be between 35% and 70% of firm revenue. See the chart below for exact percentages.<\/p>\n
Are you getting that much? Do you even know?<\/p>\n
OWNER COMP PERCENTAGE OF REVENUE<\/h3>\n
\n
- Four Ways to Manage Your Law Firm Profits<\/a><\/li>\n
- Paying Out Law Firm Profits<\/a><\/li>\n<\/ul>\n<\/li>\n
![\"\"](\"https:\/\/i0.wp.com\/www.attorneyatwork.com\/wp-content\/uploads\/2023\/06\/AttorneyatWork-Logo-%C2%AE-2021-1.jpg?resize=372%2C106&ssl=1\" "\\"\\""){kind=logo}
<\/a><\/figure>\n