How to Start a Law Firm: An Ultimate Guide
April 26, 2023
Starting a law firm is an impressive and important undertaking! Like so many entrepreneurial endeavors, success depends on preparation and dedication, and many other things. This guide will explore what you need to know to start your own law firm.
Smokeball offers tools and resources to support you and your law office. Our award-winning law practice management system was thoughtfully designed and specifically created for smaller law firms. Even if you will be a solo practitioner, when it comes to running your business, you will never really be alone.
Step 1. Create a Law Firm Business Plan
Before you do anything or spend any money - you need to draft your business plan. This is your personal roadmap for your law firm. Your business plan should tell anyone reading it what you’re doing and why you will be successful. According to the U.S. Small Business Administration, “A good business plan guides you through each stage of starting and managing your business.”. Of course, as your firm grows and your goals change, so will your business plan.
1. What Are Your Goals?
Start with the big picture, and consider why you wanted to start your own law firm, and what you want to achieve. What will being successful look like for your law firm? While some attorneys will take months to create a business plan, it is possible to draft one up in a short period of time. Your business plan, at minimum, should:
- Identify why you want to start a law firm;
- Identify revenue you need to make ( do not forget after your expenses, you need to pay yourself a salary);
- Identify what you’ll charge your clients;
- Determine how many clients / cases you will need.
Once you’ve thought about the basics, let the planning begin.
2. Consider How Much Revenue You Will Need
The reality is, you will have to take off your lawyer hat and put on your business owner hat - at least at first. Financial difficulty is a common denominator in many law firms that go out of business. Many lawyers who set out to start a law firm set themselves up for failure by not coming up with the actual compensation they need to cover their own personal expenses AND the initial and ongoing costs of their business (including any employees). The revenue you will need should pay you and your staff, cover all the expenses of your business, and generate profit for the law firm.
3. Setting Your Fee Structure
When setting your fees, do your research, and don’t sell your legal services short. It may be tempting to offer prospective clients a deal because they are taking a chance on you, but keep in mind the value of your services, and what your clients would pay if they went somewhere else. Understand what your competitors are charging, and how they’re charging. For some types of legal matters, fixed-fee or flat-rate charges may make sense.
4. Calculate How Many Cases You Will Need
Remember that success of your law firm comes down to dollars brought in, not you personally staying busy. Based on your calculations of how much revenue you will need, determine how many cases or clients you need. If the average client pays a flat fee of $4,000, and you wish to make $200,000 a year, you will need more than 4 clients a month to reach your revenue goal. Of course, you have to also track your time and ensure that your goals are realistic and attainable.
Step 2: Find a Budget to Start Your Law Firm
Although it’s possible to operate a business without a budget, reaching financial goals and anticipating challenges is difficult without a budget. If you are operating a business without a budget, you are much more likely to overspend, which could lead to cash flow problems, debt, and ultimately, failure. If you wish to have a successful law firm, you should have a budget. Why? Budgets hold you accountable. A budget helps you determine if you are making enough money and if you have enough money to spend.
It costs money to make money, and this is true with your initial start up costs of your own law firm. The more cash you have upfront to get started, the better. Most experts recommend having funds for six months to stay in business.
Office and Supplies
You do not need to sign an expensive lease at a high end office, if you will not be meeting with clients. In today’s post-pandemic workplace, it is completely normal to meet with clients virtually. You can work from your kitchen, garage, or even a quiet coffee shop. Consider the type of law you will be practicing and if an office is necessary immediately. Not renting an office can also save you thousands of dollars in office furniture and supplies. If you do need a physical space, shared office space
If you are the only employee initially, your start-up hardware costs will be minimal. The basic hardware to get going should include:
- An external monitor;
- External harddrive;
A tablet may be helpful, depending on the type of work you will be doing.
Software purchases and subscriptions are an investment in your productivity, but they are not insignificant. Some purchases to consider for your team include:
- Microsoft Office;
- Law practice management software;
- Accounting software;
- Timekeeping software;
- Legal research tools.
Most legal software services are subscription based, with varying rates depending on the number of licenses or subscriptions you need.
Most attorneys need to invest in marketing to generate future cases. Depending on the type of law you practice, and where you are located, and how much competition you have, your marketing investment may vary widely. Your initial marketing budget should include development of your website (including content for all your practice area pages, etc), set-up of accounts on social media platforms, and listing in legal directories. Although it is possible to create your own website, hiring a professional can save you time and deliver a more-professional, less-amatuer result.
With your initial marketing budget, it is also important to consider how you will market cases in the future. Some lawyers focus on organic search engine marketing, and hire a full in-house team of writers to generate organic content and post on social media accounts. If you do set up a blog or social accounts, remember they need to be updated regularly, if not frequently. Nothing will send a potential new client running to your competition than seeing your law firm’s Facebook account hasn’t been updated in 18 months.
Don’t forget about your bar association fees, continuing legal education, professional memberships, license fees, and conferences you wish to attend.
Step 3: Choose Your Law Firm’s Name
Naming your law firm is an important decision. Consider the name of your law firm on letterhead, on a business sign, and being mentioned by judges, clients, your peers, and your competition. It should be professional. The American Bar Association used to have a Model Rule of Professional Conduct Rule 7.5. which established law firm name rules. This rule was withdrawn in 2018 but the general guidelines are still useful and relevant (and common sense):
- Don’t say you are in a partnership if you aren’t.
- Don’t use another lawyer’s name - or a celebrity’s name - if they aren’t involved in the firm.
- Don’t imply you’re the best - e.g. “The Best Criminal Defense Law Firm in San Francisco”.
- Don’t use derogatory, demeaning, or degrading language - e.g. “Bad *** Texas Lawyers”.
Many lawyers do consider SEO marketing in choosing their firm name, and name their firm after their local area and practice area, such as “Lake Tahoe Personal Injury Law Center.” Keep in mind potential growth of your law firm, or expansion to other cities or practice areas.
Before deciding on a name, check Google, social media platforms, and web domain providers for any competition in the results. If there is another law firm or business entity with the same name in another market, you may be better off choosing a unique law firm name vs. constantly explaining to prospective clients that you are a different business.
Step 4: Legal Entity Formation
Before starting a law firm, you need to consider what type of business structure you want to use. Because this can have lasting tax implications for your business, attorneys are always well-advised to seek legal advice and consider future plans for growth, such as taking on additional partners and hiring more employees. Below are some common options for forming a law firm.
- Sole-proprietor – A “sole prop” or sole proprietorship is the simplest business structure for a solo-practitioner who is just starting a law practice for the first time and has no employees. This can be a risky setup as you have no shield from liability, and it may be more difficult to raise capital or get a business loan.
- Corporation – If you set up your own law firm as a corporation, your firm will be treated as a unique entity separate from the owners. Some states allow certain professionals, such as doctors, dentists, and lawyers, to create professional corporations.
- Partnership – If you will be working with another attorney, setting up a partnership may be a better option. When you’re setting your law firm up as a partnership, you must have a clearly defined agreement regarding responsibilities and how profits will be split. Make sure you have an exit plan if one partner decides to leave the firm.
- Limited Liability Company (LLC) – If you are setting up your law practice as an LLC, you must file a membership agreement with your state. A law firm set up as an LLC can choose to be taxed as a corporation or a partnership.
When deciding on which business structure you will choose for your law firm, consider your future plans for adding new partners or employees. Structure your law firm in a way that gives you the flexibility to grow and change.
Step 5: Open Your Law Firm Bank Account
Like any other business, your law firm will need a bank account for your business operations. Law firms are subject to strict laws regarding commingling clients funds. If you will be handling client funds, you may need a Client Trust Account (CTA) aside from your operating account. You cannot keep interest, even for small amounts of funds. For those smaller amounts, and funds that are held too briefly to earn any net income for a client, lawyers participate in pooled Interest on Lawyers’ Trust Accounts (IOLTA) programs. Banks forward interest to state IOLTA programs, which exist in all 50 states.
Step 6: Think of Insurance for Law Firms
Businesses need insurance, and your own law firm will be no exception. Legal services are not without risk. You may need different kinds of insurance depending on the type of law you practice, how many employees you have, and your client type:
- Professional liability / legal malpractice insurance: Mistakes happen, from missed deadlines to misfiled documents, to errors in communication. No matter what type of cases you handle, legal malpractice is necessary to protect your firm if your actions result in losses for your clients. In some states, if you do not carry professional liability insurance, you must inform our clients in writing when you onboard them.
- Cyber liability insurance: This protects you if you are a victim of hackers or a data security breach. Although cyber liability insurance cannot prevent cybercrimes.
- Property Insurance: This covers you from damage caused by weather events, natural disasters, or property damage from vehicles.
- General Liability insurance: This is basic insurance that covers you if someone other than your employees is injured at your law firm or suffers property damage due to your negligence. If you have a commercial lease, your landlord and lease agreement may mandate that you have general liability insurance.
- Workers’ Compensation Insurance: This is required in every single U.S. state but Texas, and covers you if your employee is hurt on the job or experiences a work-related illness.
Be sure to check with your state bar for specific insurance requirements for attorneys in your state.
Step 7: Start Marketing Your Law Practice
Using your initial marketing budget, research the best use of marketing funds before you start spending money. When starting a new law firm, there will be some up-front marketing costs as you must build out your initial website and draft content for your practice areas. Don’t overspend. It is important to be strategic and consider potential and actual ROI when making initial investment decisions and considering future budget decisions - especially to market your law firm online.
Set Marketing Goals
Like any other goal you set, set SMART goals (Specific, Measurable, Achievable, Relevant, and Time-Bound).Think about what you want to accomplish with your law firm, and clearly define the parameters. For example, if you are a personal injury law firm and want to generate more leads, a SMART goal would be “Generate 10 car accident leads from the website each month this year.”
Build a Client-Centered Law Firm
You can increase your chance of repeat business, referrals, and positive reviews by building a law firm that works for your clients. Make technology easy for your clients, communicate in ways that work for them, and improve your processes based on your clients’ feedback. Little things, like promptly acknowledging receipt of emails, offering electronic document signing, and providing postage-paid return envelopes show that you care about your clients services. Although these are not direct marketing tools, they can contribute to a stream of return paying clients and referred business in the future.
Unfortunately, marketing a law firm to prospective clients is not something lawyers learn in law school. If you previously worked for a law firm, marketing legal services might not be something you even thought about. But the truth is: Even if you are the most talented lawyer, you will not be successful with your own law firm if you do not have cases. If you are in a saturated area like Los Angeles or New York City, you may be competing for cases with a lot of law firms.
Remember, not every legal marketing tool is right for every law firm. Where and how you market your business will depend on your location, who your target customers are, and who your competition is.
Step 8: Set Up Your Internal Processes
Internal processes and policies may not seem that critical if you are a solo law firm, but if you have any employees, or plan to have employees, take the time to document your internal processes, policies, and procedures. Why is this important? If you don’t have rules in place, people will create your own. Without documented processes and policies in place, your employees’ actions may be inconsistent, and may even expose you to liability. At minimum, your internal processes should cover:
Office manual/operating procedures manual: An office manual should provide direction for anyone working in your office, including temp employees and contractors. This can cover things like opening and closing procedures, how to access case management software, and expectations for returning phone calls and responding to emails.
Standard procedures/policies for practice: Set expectations for your team by documenting how to do things. Examples include client onboarding, monthly reporting, and closing a file.
Personnel policies/benefits: Create policies for communicating with clients, using technology, and protecting client confidentiality. Also document your responsibilities to your team.
As your own law firm grows, and you improve your systems and technology, you can revise and update periodically.
Step 9: Implement Law Practice Management Software
Smokeball’s offers numerous cost and time effective tools and solutions for law firms:
Case Management System
Law firms use case management systems to manage clients and stay organized. With a legal case management system, there is one central location for:
- Client contact information;
- Client billing;
- Appointment history and scheduling;
- Client communications;
- Case notes;
- Secure document storage.
With Smokeball’s legal case management software, everyone in your law firm can collaborate on matters and work together on matters, from their own computer, tablet, or even smartphone. You can eliminate or greatly reduce the use of paper, printing, and physical storage of documents in your office.
One of the biggest time savers that Smokeball offers is legal document automation software. Document automation is your key to saving time (in some cases, hours each day) and increasing accuracy. Your client and case details are all in one location, and automatically populated in the documents or forms you prepare. The best part? Once you prepare documents, they are digitally stored, neatly organized, and easy to find. If you love Microsoft Word, Smokeball integrates seamlessly.
Automatic Time Tracking and Billing
Smokeball’s legal billing software supports every way lawyers bill clients, including flat fee, contingency, and hourly. If your law firm bills hourly, you know that billable minutes count! Billing should be intuitive and efficient, not a painful, days-consuming chore. Smokeball’s accurate, automatic time tracking allows you to invoice your clients easily, while still being able to control what goes on your client bills. Clients love Smokeball’s e-invoicing software because they can easily see what they owe, download documents, and make payments.
Practice Area Specific Legal Forms and Matters
Smokeball knows firsthand that preparing forms is an important part of many areas of law, including family law, estate planning, real estate, bankruptcy, probate, personal injury litigation, immigration and more. If you still prepare forms by copying and pasting, or having your staff re-input information, you are spending a significant amount of time on administrative tasks. You are also potentially leaving yourself vulnerable errors which at best are embarrassing, and at worst, breach confidentiality.
We have built a comprehensive legal forms library where you can find all necessary Federal, State, County or administrative forms for any legal matter, transaction, or dispute. If we don’t have it, you can easily request an addition. You can also prepare your own templates for any documents you need to prepare frequently, such as client letters or FOIA requests.
Data Driven Law Firm Insights
One of the greatest benefits of law practice management software is the information it gives back about your own law firm. Data driven law firm insights allow you to make data driven decisions. You can make decisions based on evidence and patterns reflecting the health of your law firm when you have the actual data to work with. Smokeball’s law firm insights can let your designated, admin-level users review:
- Profitability of individual matters;
- Profitability of attorneys / staff;
- Matter stage;
- Matter billing status;
- And much more.
Without data and insights, decisions are made on biases or emotion. In the long run, bad decisions can hurt your business.
Starting a Law Firm: Final Thoughts
Don’t waste time reinventing the wheel - you could be practicing law! Remember, you will not be the first law firm startup, nor will you be the last. But you can be one of the more successful law firms. One of the most important things you do to increase your chances of success as a business owner of your own firm is to use cost and time effective tools, resources, and technology available. One of the best tools you can use is Smokeball.
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