1 THE DO S AND DON TS OF STARTING YOUR OWN PRACTICE Strategic Solutions for Solo & Small Firms August 2009 Prepared and Presented by: Leonard B. Segal *These materials are provided for educational and informational purposes only. They are not intended to constitute legal advice in any particular situation.
2 TABLE OF CONTENTS Page I. Overview...1 II. Structure...1 III. Budgeting/Sufficient Reserves...1 IV. Staffing...2 V. Professional Liability Insurance...2 VI. Office Space...2 A. Fixed location office...3 B. Home office...3 C. Hybrid...4 VII. Equipment and Supplies...4 A. Needs...4 B. Wants...5 VIII. Technology/Computers/Software...6 IX. Advertising/Marketing...7 X. Earning a Living...7 A. Rates to Charge...7 B. Billing & Collections...8 XI. Back-up/Support...8
3 THE DO S AND DON TS OF STARTING YOUR OWN PRACTICE I. Overview Starting your own law practice can be frightening, exhilarating, challenging and fun all at the same time. It is, however, a business. This session is intended to help you think about some of the challenges in getting your new business up and running. II. Structure How will you be organized? This is a critical decision that can impact how you pay yourself, your potential liability, tax consequences, and others. Do you want to be an S-Corporation? Limited liability Company? Partnership? Sole Proprietorship? Other? Find a good accountant or business lawyer (if that is not what you do) to advise you on the different ways you can structure your law firm. Establishing a corporation, for example, is relatively inexpensive, yet can give you the limited liability protections necessary to protect your personal assets. The decision on how to structure your firm should be made prior to opening your new firm. Once you are up and running, be sure to comply with any corporate formalities or other legal requirements that may apply to your business. In addition to the legal structure, give some thought as to your firm name. Do you want to go the traditional route and use the last name of the lawyers? Do you want a more descriptive firm name that tells people what you do? 1 III. Budgeting/Sufficient Reserves You likely will have a lot of start-up expenses. Those expenses will probably outpace your revenues for some period of time. Be sure you have sufficient reserves to cover your expenses. 1 If you want to use the phrase & Associates in your firm name, you should first carefully review the Lawyers Professional Responsibility Board s recently adopted Opinion No. 21.
4 Prepare a budget. Preparing a budget will help you better set your billing rates, know how much business you need, and find areas in which you can better control your expenses. Review your budget on a regular basis and stay within your budget. IV. Staffing If you need a secretary or other staff, be diligent in your search and try to hire the right person(s) the first time. The people you hire should make your job easier and allow you to focus on what you do best practicing law. V. Professional Liability Insurance Nobody likes to think about the possibility of being sued for malpractice, yet many lawyers find themselves having to defend such claims. After all, it only takes one disgruntled client to find yourself the defendant in a malpractice action meritorious or not. Sadly, each new client means one more client who may potentially sue you! As such, I highly recommend obtaining professional liability insurance. Rates can vary depending upon the practice area, the number of hours you work, the length of time you have been practicing, and other factors. Even if you think you are judgment proof and do not need such insurance, think again. You likely are not judgment proof and, even if you are today, hopefully you won t be tomorrow! VI. Office Space Many factors will influence your decision regarding your office space. How much can you afford? Will your target market consist of individuals or businesses? Will you be practicing law full-time or part-time? What image do you want to give to the public and potential clients? Will you be meeting clients in your office? Will you have a staff? Where do you want to be located? Depending on the answers to these questions and more, you will likely choose one of the following:
5 A. Fixed location office: A fixed office location is your most expensive option, although the cost will vary significantly depending upon location, class of office space, and other factors. If you will have a staff of people working with you, this might be your only realistic option. Likewise, if you plan to meet clients, opposing attorneys, and others at the office, a fixed location allows you to do that. Many solo and small firm attorneys utilize the services of an executive suite, which gives them a fixed location, conference room, and other amenities but without some of the headaches of having your own office space. If you want a fixed location but do not want to pay for your own space, you may want to consider subleasing space. If you choose to do so, be aware that your name may not appear on the door, your phone number may not be transferrable if you decide to leave, and if your landlord decides to move or hire lawyers for his/her firm, you may lose your space. You should also address any malpractice/ethical issues that might exist (after all, you do not want to be named as a defendant in someone else s malpractice claim simply because you are sharing space). B. Home office: A home office is the least expensive option, but comes with various drawbacks. If you are someone who is easily distracted by the refrigerator, the TV, or the dog, this option probably will not work for you. A home office also can be challenging if you plan to meet with clients, opposing counsel, vendors or others. You may not want others to have your home address and may not want to let them into your home. You also may not want your business mail sent to your house. Of course, you can get a P.O. Box or make some alternate arrangement for your mail delivery, but then you have to leave your office to pick it up even in January! A home office creates other issues as well. You may need additional insurance (workers compensation, liability, etc.). You may be exposed to liability if, for example, a client slips and falls on your front step. You also may have additional tax issues that need to be addressed. If you have a home office, do you have adequate storage space for your files? If you choose a home office, I highly recommend having a separate office space within your home with its own phone line and fax machine and that you go to your office during your working hours. Conversely, when you leave the office at the end of the day, try to avoid the temptation to answer the office phone or return to work after hours.
6 C. Hybrid: This includes arrangements such as a virtual office or mobile office. It gives you a place to pick up your mail, gives you an address to use, but does not have the cost associated with your own office space or the drawbacks of having a home office. VII. Equipment and Supplies Like any business, starting a law office requires some up-front expenditures. I recommend that you make two lists. The first list should contain your needs: what you will need to run your law office. The second list should contain your wants: what items you would like to have (but do not need to run your practice). You will need to purchase (or rent) some items although the amount you spend can vary. Shop around, and understand what you are getting and, perhaps more importantly, not getting. You do not need to get the most expensive item or the latest version. You do need to get the product that will allow you to practice law. A. Needs Letterhead, business cards, other stationary Supplies (paper, pens, pencils, notepads, etc.) Printer (and maybe a fax machine) Copier (probably) Scanner (possibly) Computer/I.T. Consultant Telephone (and telephone line) Internet access address Billing/Accounting software Other software (e.g., case management software)
7 Bank account (and possibly an IOLTA account) Mobile phone Furniture File cabinets Postage/Postage meter Website/Marketing materials While these are items you need to run a law office, you do not need to spend a fortune to obtain them. How much should you spend? It depends on your budget, your practice areas, and the image you want to send to the public and potential clients. For example, you could print your own business cards and have a Microsoft Word template for your letterhead. The cost would be low, but does it send the right message? I have seen self-made business cards that look good. I have seen others that look self-made crooked on the page, fading print, etc. If your practice is not paper-intensive, an all-in-one copying, printing, faxing and scanning machine may be a good option. Of course, an all-in-one can do many things well, but nothing great. So, speed will probably be slower than if you have a stand-alone printer, copier, etc. Should you buy or rent? It depends on your budget and needs. For example, you may be able to rent a copier/printer/scanner/fax machine. Before doing so, however, consider the cost and the length of the contract that you will be required to sign. B. Wants When starting your own practice, there may be many other items that you would like to have. Be careful, however, not to overextend yourself, especially if you do not know how much if any business you will actually have when you open your doors. In my opinion, costs are easier to control than revenues. I recommend waiting to purchase wants until you have the cash flow to do so. Once you establish a consistent revenue stream, you can always make additional purchases; but, make sure you have the funds to do so first.
8 For example, you will probably need a mobile phone, but do you need the latest PDA and its higher monthly costs right now? You will need office furniture, but do you need to buy new furniture or to have the best? Do you need to enter into a long-term contract with West or Lexis or can FastCase (through the MSBA) or a County Law Library satisfy your legal research needs? VIII. Technology/Computers/Software Your technological needs will be driven by many factors including the type of practice you have, the number of staff persons working with you, and the extent to which you will need mobile access to your files. If you are a true solo, with no staff, an individual computer is probably enough to get your business up and running. Be sure, however, to have a back-up system in place. It is also a good idea not to use your home computer as your office computer. In addition to ethical (i.e., confidentiality) concerns, you do not want your kids to accidentally delete a file! If you will need a server/network and you are not familiar with how to set up and run a server/network, it makes sense to find a good tech company/person to help you. This will involve some expense, but the frustrations of computer problems and the lost productivity will drive you crazy! Depending upon your practice area, there may be certain software that is must-have software. For example, if you are a litigator who appears in federal court, you need to have pdf capabilities in order to file documents electronically with the court. In any practice area, you need to have billing and accounting software. Many small law firms use Quickbooks, which can do many of the things that you will need. If you have the budget to do so, consider case management software. If your budget will not allow such software, your and calendar system can likely do just fine but you need to make sure to input key dates right away.
10 IX. Advertising/Marketing Many lawyers who start their own practice fail to think about marketing. Instead, they sit back waiting for the phone to ring. While that may work for some, for most lawyers that is a recipe for failure. Marketing can be hard, time consuming, and discouraging. But, don t give up. Marketing efforts today may yield fruit months or even years from now. Think about your target market, the scope of your practice, and the services you are trying to sell. How do you get in front of potential clients? Perhaps you need to write articles for a trade magazine. Or, speak at a seminar. Think about your current clients and where you found them. Ask for referrals from other lawyers, clients, friends and family. Have an elevator speech prepared that you can go to whenever the opportunity arises. Be prepared to explain why you can do a better job than your competitors. Do not huddle with your friends when you attend events even though that is much more comfortable. Instead, try to meet new people. As you develop clients, remember that it is easier to sell new services to old clients than old services to new clients. Market to your current clients, stay in front of them, and ask them for referrals. When you conclude a matter, thank the client, ask that they refer you to others who may have a need for your services, and give them extra business cards! Do you want to have promotional products? At the outset, these might be a luxury item that you cannot afford. But, when you can, consider such items carefully. Do not purchase them just to have them; rather, think about what will give you the biggest bang for the buck. X. Earning a Living A. Rates to Charge Many solo and small firm lawyers like to charge less than their big-firm counterparts. This makes sense since (hopefully) their overhead is far less than that of a large law firm. But think about the clients you want to work with, what your true value is, and charge accordingly. Do not be afraid to charge what you are worth. If you will be providing litigation services (and
11 perhaps others as well), get advance retainers and put them in your trust account. If a potential client cannot provide an advance retainer, consider whether you want to represent that client. B. Billing & Collections Bill regularly! Too often, lawyers fail to send bills to their clients in a timely manner. The result is lost time, confused clients, frustrated lawyers, and slower collections. By keeping accurate track of your time (if you bill on an hourly rate) and billing clients regularly, you increase your chances of collecting without having to go to great lengths to do so. Clients also do not like to be surprised by the amount of a bill. By billing regularly, rather than in one lump sum at the conclusion of a project, you make each bill more palatable. If you will be sending an unusually large bill, contact the client in advance and explain why that is the case. Keep track of your accounts receivable and do not let clients fall behind on their payments. If you have not been paid within 30 days, follow-up with the client. Continue to do so until you have been paid. In appropriate circumstances, and subject to any legal or ethical restrictions, withdraw from a matter rather than let an unpaid balance get out of control. XI. Back-Up/Support While running your own law office can be fun, if you are on your own you will undoubtedly face one significant challenge: how do you get away? Client problems do not go away just because you are on vacation. Have a plan in place to keep your clients satisfied while you are gone. While that might mean having to occasionally interrupt your vacation, another option is to arrange with a colleague to support each other during absences. If you can go on vacation knowing that your clients are being supported, you will better be able to enjoy your time away from the office!