Law Firm Series Archives - Tax Matters by Aronson

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What does a business plan for a law firm look like?  Simply stated, a business plan describes how your company will conduct the business of practicing law. It considers such matters as the practice areas to be handled by the firm, what structure it will use, where it will be located, how it will market its services, and how it will be funded.  The following is a non-exhaustive list of the points to consider when developing a business plan for a law firm:

• Practice Area(s) – For many new firms this will be self-evident from the experience of the attorney(s) forming the practice. This is also the logical starting point for new law school graduates or attorneys early in their careers looking to start their own firm.  This step involves not only identifying a practice area, but determining the demand for these services in your location and whether those forming the practice possess the skills to serve these clients or if those skills must be obtained.

• Location and Presence – Will the firm be located downtown, or in the suburbs? Will it be near the courthouse, or in the heart of the business district? Is prestige a priority?  Or efficiency? Will the office be virtual? Must the space have room for growth, or will a sublease work to start?  There are no right or wrong answers here, but the decisions are binding for the length of the lease term.

• Structure – How will the firm be structured? Who are the owners and how will they share the net earnings of the practice?  What will the management of the firm look like and how much authority will be vested in the managing partner (if there is one)? What legal structure will the firm adopt and what will are the pros and cons of the choices available? Consideration of these issues can be described in summary in a business plan but should be considered in depth and will likely give rise to other documents and agreements. Important considerations:

• Ownership – Will the firm be a solo practice or will there be more than one owner? If there is more than one owner, how will you share management authority, set compensation, resolve differences? Such matters should be considered, agreed upon, and then formalized in writing.

• Entity Formation – There are a number of choices available for the creation of the legal entity that will afford you protection and liability. The choices available are the subject for a later article.  For now, all you need to know is DO NOT operate your practice as a sole proprietor or a general partnership – there are better options.

• Management – Firm management will need to establish policies that will guide the firm (e.g., client acceptance criteria, compensation matters, admission of new partners, etc.). Management will also need to make the numerous, often mundane, decisions that accompany the day-to-day operation of a business.  Recognizing that establishing strategic policies and operating a business often involves two very different skill sets can save you possible headaches down the road.

• Accounting/Reporting Systems – When it comes to accounting and reporting systems, the simpler and more transparent the better off you will be. The overwhelming majority of firms (95% according to ABA technology surveys) use QuickBooks as their accounting software. Some time and money spent up front with a CPA to get the right accounts and safeguards in place will be well worth the effort and expense.

• Tax Compliance Calendar – A CPA can also help you establish a compliance calendar to make sure that your various tax returns are filed timely.

• Capitalization – How long it will be before the firm begins to bill clients for its services? How long until the cash invoiced on those bills is received, and at what point those receipts will be enough to pay the bills? A detailed cash flow forecast is essential for understanding the level of capitalization required to give the practice a chance for success. This is where it is important for you to be as objective as possible and view this with an entrepreneur’s critical eye.  You will likely be investing (or putting at risk) most of your accumulated resources, and it is essential that you ask yourself if you can reasonably expect to return a profit on that investment with your plan.  If the answer is no, you are better off staying where you are and investing in something else. Aronson has developed realistic cash flow models that takes into account billing rates, realization, fixed and variable costs to help you with such an assessment.
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