Starting a Law Practice on a Tax Return and a Credit Card

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In my last blog entry, I discussed the reasons why lawyers make the jump from firm life to solo practice and also the reasons that hold them back.  Many lawyers I have talked to have cited the start-up costs as a prohibitive barrier to entry.  They also talk about the income they are giving up.  I will briefly discuss the income issue and then focus on the startup costs.

Say you are earning $100,000 a year at your current firm job.  If, as a solo, you bill at a very competitive rate of $150 an hour, you would need to bill and collect 667 hours in the course of a year to make $100,000.  That translates to 13 hours a week. 

If you bill at $200 an hour, you’re down to 10 hours a week.  Even if your firm picked up health insurance and now you have to pay the COBRA you are still only adding 1-2 hours a week of billable time to the equation.  Both a lawyer friend of mine and my accountant told me that $90,000-$100,000 of gross revenue was a realistic goal for the first year, and I tend to agree, although I should warn you that this is only based on a very limited amount of anecdotal evidence, and of course there are no guarantees. 

Back to the topic at hand, when you are running your own business, you obviously don’t get to keep everything because of the overhead you need to pay.  So let’s talk about what you need to pay for overhead the first year.  I think a practical approach is to “front” the overhead costs and pay yourself most of what you make the first year.  In other words, have your first year of overhead in hand on day one.  This will eliminate a large amount of stress because from day one you will only be going in an upward direction.  By the end of the year, you should be able to know enough about your practice to set up a budget and take a draw.

I am listing what I believe to be the essentials to have a professional, polished look but not break the bank.  These are rough numbers, but they are pretty consistent with my experience.

The self explanatory bare essentials, and what you can expect to pay for them:

  1. Business cards and stationary:  $1000
  2. Laptop: $1000
  3. Printer/Fax/Copy machine combo: $500
  4. Cell phone service:  $500
  5. Paper, folders, general office supplies: $1000
  6. Malpractice insurance: $2500
  7. Dedicated fax line: $500
  8. Internet Access: $1000

The bare essentials that require some explanation:

  1. Corporate formation set-up documents and associated legal work: $1000 (unless this is the type of work you do).  I don’t recommend doing this on your own if you are, say, a criminal defense attorney.
  2. Office Space:  Some people try to get away without having an office at first.  Other people sign on to a multi-year high-end office lease.  I think both approaches are unwise.  For a number of reasons, your best bet is to office share with another firm the first year.  First, the firm will probably let you sign up for something noncommittal like a month-to-month or a one-year sublease.  Second, you may have access not only to an office, but a conference room and practitioner books as well.  Third, after the members of the firm get to know you, they will likely send business your way.  Given the current market, you should be able to find a lot of suitable options for $500 a month or less.  So over the course of your first year, you should plan on spending $6000 on office space, but no more.  Again, I would not commit to more than a year because you do not know what your space needs will be after the first year.
  3. Software:  It is well worth your money and time to invest in accounting software and to learn how to use it.  For $500, you should be able to get a program that does your books and also allows you to make time entries, and then creates bills.
  4. Website:  I think this is well worth the money.  Clients expect you to have them, and having one sends a message that you are established, professional, and in this for the long haul, all things clients want to know.  They are excellent marketing tools as well.  I wouldn’t count on a website to get you clients, but instead, website content can help a client make a final decision about whether or not to hire you.  Also, with a website package, you can get an email address like mine, bnistler@nistlerlaw.com, as opposed to bnistler at yahoo or hotmail dot com.  Again, it’s a more professional and polished appearance that clients and other lawyers will take note of.   Finally, websites are like cars — you can spend a lot of money on them if you want to, but the most important thing is that they work.  I would start with a brochure-type website, and not spend more than $2000 on it.

When I tally the numbers, this comes to about $17,500 in start-up costs.  That may sound like a lot of money, but by comparison it’s about the current cost of one semester of law school at most private universities.  In short, it’s the kind of money you can put together with a tax return and a credit card.

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4 Responses to “Starting a Law Practice on a Tax Return and a Credit Card”

  1. Tom Kamenick Says:

    Interesting post! I’m going to take a stab at pulling down some of your numbers, though. I’ve just started my own solo practice (more or less out of law school), and some of your numbers seem geared toward a lawyer who’s going to be working a fairly high volume right from the start.

    Here are some lower numbers — some may be only appropriate for smaller practices, but some can help any lawyer.

    Laptop — You probably have one from law school. If not, spending $600-$700 should be fine. I would avoid $400-$500, as laptops in that range start to really suffer from poor quality parts and fail more frequently.

    Multi-function printer — You should be able to get a good one in the $200 range, although if you are printing a lot, you’ll have to spend more to get your page-per-minute at a workable rate.

    Dedicated fax line — I’m paying $10/month for unlimited outgoing and incoming through Vonage, so $120/year.

    Internet access — should be closer to $500/year, you don’t need the kind of speed that an $80/month internet connection will get you.

    Business cards & stationery — print your own. You can find nice snap-off business cards at Target that don’t leave perforations, and all kinds of free card-building software/websites.

    Corporate documents — A sole proprietorship, where appropriate, will be much cheaper.

    Office space — Definitely based on appropriateness to the work you are doing, but you can renovate a room in your house for less. Alternatively, why have an office? Provide an extra service by meeting your clients at their house or place of business. When needed, reserve a conference room at a library, government building, or another law firm.

    Software — Varies wildly based on your own computer proficiency and accounting background. I’m a huge spreadsheet fan myself, and learning how to export data from a spreadsheet into a blank template for a bill should only take a few hours.

  2. All I can say is I wish I were Brent Nistler.

    For instance, the state public defender will pay criminal defense attorneys 40 bucks an hour, so that 100K is a mere 2500 hours a year.

    On the plus side, he’s paying way too much for malpractice insurance, but forgetting about gas, parking, coffee, books, antacids, and flowers for the wife if your billing 2500 hours a year.

    The advice Brent’s leaving out, but not leaving out at all, is if you want to start out with 100k in billings, it’s better to start somewhere else and bring a bunch of client with you.

  3. Great information…the $90k-$100k first year gross fees estimate is a fairly reasonable expectation, as that is approximately what I did my first year as a solo. At the time I had only been an attorney about six months so really did not have any contacts or referral sources, so I am sure someone starting a practice with more experience than I had can reasonably expect to generate a bit higher first year number.

  4. Vincent Heine Says:

    What about health insurance? Huge portion of income.

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