Whether you have just graduated from law school or have been working at a law firm for decades, starting your own practice is always an option. Although it is scary to consider putting on the pilot's hat and flying your own plane, if you follow some of these guidelines, there is no reason why you cannot learn to fly successfully.
Have a Plan
When pursuing any dream, patience and persistence are necessary. Instead of diving straight into the deep end, you must come up with a well-thought-out plan that will carry you through the first year, the "hardship year."
Most businesses fail in the first year. A big reason is not having enough startup capital to survive what will most likely be a difficult financial time. It is tough to generate revenue right away. No matter how thorough your business plan, there's a good chance you'll overestimate your revenue and underestimate your expenses.
You'll need at least half a year of capital expense to cover start-up costs. If you have no existing clients you can bring with you, ideally you'd have even more capital. Of course, few attorneys just starting out on their own have that kind of money. You may need to consider opening a line of business credit, raising capital from angel investors, or even getting support from friends and family.
How Much Cash Do I Need to Open My Own Law Firm?
Your budget outflow will depend on your geography, practice area, and level of competition. But start-up costs always include office space rental, stationery, and marketing. In some cases you can get creative to reduce expenses, such as by opening an online-only law firm in states that allow it.
Once you've established essential costs, calculate billing rates according to the number of billable hours you want to have. This is a rough estimate, so be sure you have some financial leeway if you don't immediately get the cash flow you were hoping for. The idea, of course, is that your inflow will meet or exceed your outflow. If it doesn't even in planning stages you'll need to rethink everything from the beginning.
It's all about cash flow that first year. A good idea is always to minimize expenses at first. While a nice office with expensive furniture can make a good impression, it may not be the wisest choice when just starting out. Consider an office sharing arrangement or some other way to minimize expenses until you have a steadier stream of income.
Create a Budget
Creating a long-term budget for your business is the next big step in starting your own law firm. This will include both start-up costs and ongoing operational expenses. While fairly self-explanatory, it is still important to make a line-item budget that allows you to have a good idea of what exactly you're getting into. Think of everything you'll need to start your law firm, such as furniture, office equipment, access to a law library, malpractice insurance, even a coffee machine for your clients (you'll need coffee too, with the amount of work it takes to start your own practice).
If you have the initial capital to cover start-up expenses, you'll have to create a thorough budget for operational expenses. These include:
- Answering Service
- Bank Charges
- Bar and Other Organizational Dues
- Continuing Legal Education
- Interest Expense
- Investigators and Process Servers
- Employee Benefits
- Equipment Maintenance
- Law Books and Periodicals
- Office Lease
- Office Supplies
- Online Services
- Staff Salaries
- Social Security and Medicare Matching
- Unemployment Tax
While the list of expenses is daunting, there are ways to cut costs. Consider working with more established firms. Just ask if they have an office you can work out of for a reduced amount of rent. You may also be able to pick up a client or two you otherwise wouldn't have this way. The good news is that it's your business, so you get to decide what is and is not essential.
Saving for a Rainy Day
Having a bundle of "safety cash" in the bank is important if your client list is not as robust as you'd like it to be. While risky, you may consider getting a home equity loan prior to leaving your current job - you can loan yourself money this way.
And spring for a business credit card. While you don't want to use it for everyday expenses, you'll need a source of emergency funding as you wait for clients (and client payments) to come in.
Going solo means being a little bit of everything all at once — lawyer, accountant, small business owner, administrative assistant, marketer . . . you get the idea. When starting out on your own, don't forget that these activities will take up a significant portion of your time. Schedule accordingly and wait for the day when you can finally hire out some of these essential duties.
After dealing with the short- and long-term cost-related crises, it is time to take into account some post-launch issues such as marketing. Marketing is key in attracting clientele, which is why getting the word out is so important. Join organizations that could lead to clients, network to get referrals, speak at CLEs or other events, send out mailers, create a brand, and otherwise put yourself out there as much as possible.
You can't plan for everything that will come up in your first year opening your firm. You'll make mistakes, you'll learn a great deal, and it may not work out. But if you plan and budget well, you give yourself the best opportunity to create a law firm that represents your values, goals, and where you are the main beneficiary of all of your hard work.