By R. Cooper Shattuck
You’re thinking about it.
Or maybe you have done it. Regardless of the circumstances or basis for the decision, most lawyers at one time or another think about starting their own firm, but “hanging a shingle” isn’t what it used to be. Though it may be easier today to practice on your own than it was 10 years ago, there are a lot of decisions to be made before launching your new venture. No matter how many years you have or haven’t practiced law, establishing a new firm or solo practice is challenging. Like most things in life, challenges can be more easily overcome with a little forethought and planning. This article provides an outline of issues you should address in your planning process. Please recognize that each of these topics could be an article by itself. I have simply attempted to hit the highlights for each.
1. Develop a strategic plan.
Developing a strategic plan for your firm or practice is imperative. Your strategic plan will (and should) inform every decision you make. Most importantly, it will guide you through the difficult and challenging days. It is hoped that you have the basis of it floating around in your head, but you should formulate your thoughts into a written version. The time invested in developing a strategic plan now will save you time and money in the long run.
Here are the steps to developing your strategic plan:
a. Establish a mission statement.
What is the purpose of your firm? What do you want to do? Making money should not be part of your mission statement. Effectively following your mission statement should generate revenue and a profit, but that is not your mission. If making money is your sole focus, you won’t–at least not for long. The following is an example of a simple law firm mission statement: “To render efficient and reasonably-priced legal services to people with whom I enjoy working.”
As you create your plan, you can explore each adjective, further define the types of legal services you will provide and specify the people for whom you will provide them.
b. Define your core values.
What are your core values? Why do they matter to you? When it comes to hiring staff and other lawyers, articulating (at least for yourself) those core values will be of great benefit. While it isn’t necessary to communicate these values to potential hires, you should look for them in new team members. If your teammates do not value, understand or respect your core values, trouble is around the bend. For example, do you value pro bono work? If you do, but your teammates don’t feel the same way, dealing with those clients may drive them nuts.
c. Conduct a SWOT analysis.
To think strategically and plan accordingly, conducting a SWOT analysis is beneficial. A SWOT analysis involves assessing your strengths, weaknesses, opportunities and threats.
What are you good at? What do you enjoy doing? Chances are you are good at what you enjoy and vice versa. There are a variety of assessments which can help you determine your strengths.1 Your strengths are not what types of legal work you do, but how you do them. Thinking more broadly than just what type of work you currently do will illustrate opportunities.
Why identify them? So that you can find some way to make up for them or avoid them. For example, you may need to hire team members with strengths which compliment yours. Or, perhaps you should consider developing strategic alliances or partnerships with other firms, attorneys, consultants or advisors who can help make up for these weaknesses.
What opportunities exist for you? What opportunities could become a niche for you? These could be opportunities for everyone, but if everyone is pursuing them, are they really opportunities? Unique opportunities are more fruitful. Focus on those that are consistent with your strengths, mission statement and core values.
Who else is pursuing the same opportunities? What else threatens your success? It doesn’t have to be a competitor. It could be a change in the economy or some segment of it. Or, it could be some factor or condition involving you individually.
Once you have identified your strengths, weaknesses, opportunities and threats, the remainder of your strategic plan should more easily fall into place.
d. Set your goals.
You should set measurable, quantifiable goals for your practice. They could be measured in countless ways such as clients, cases or dollars. You should set goals for different time periods, e .g. six months, one year, three years, five years. Interim goals should lead to ultimate goals. Your overall goals should be in your strategic plan.
e. Identify tasks.
Your strategic plan should identify the tasks necessary to accomplish your goals. In other words, if you follow through on your tasks, your goals should be more easily accomplished. Tasks are action items or to-do lists entries with verbs. For example, schedule five speaking engagements this year; conduct 10 more prospective client conferences this month; schedule five networking lunches per month. Each goal should have its own tasks which-if done successfully-should result in accomplishing that goal.
f. Draft the plan.
Now that you have established your mission statement, defined your core values, outlined a SWOT analysis, set your goals and identified tasks to reach them, put all of it in a document. When you are faced with a decision, refer to your strategic plan. Does this further my goals? Does this help me accomplish a task? Your tasks should work their way into your to-do lists. You have to-do lists, right? A topic for another day...
2. Determine your entity type.
Once you have given serious thought to what you want to accomplish and how you are going to accomplish it, then you need to determine the entity through which you are going to do so.
a. Entities generally
So, why create an entity? You covered this in law school, didn't you? Well, the advice that you would give a client applies to you and your practice too.
b. Limited liability
Most legal entities offer some measure of protection from liability generally, though they won't necessarily protect your individual assets from professional malpractice claims.2 That is why you need insurance (discussed below). They can protect your personal assets from other liability, however, and they may help protect firm assets from personal liability.
c. Tax treatment
One of the biggest differences between entity types is how they are taxed. Generally, the income and expenses of the business either flow through to you as the owner of the entity or the entity is taxed separately. There are advantages and disadvantages to each. What's the key here? Form a strategic alliance. Enlist the expertise of an accountant to help you make an informed decision.
Whatever entity you choose, there is a certain amount of maintenance involved-things that must be done (usually on a recurring basis) to ensure that the entity's existence is continued and recognized. Some entities are easier to maintain than others. Some must have documented meetings of their shareholders or owners. Most have reporting requirements to state and other governmental entities. Again, your accountant can help you with this.
e. Entity types
I am not going to try to repeat what you supposedly learned about organizations in law school or in preparing to take the bar exam, but here are a few quick reminders for your consideration. Remember, these are just the highlights.
A corporation is a creature of state law.3 Corporations provide limited liability for their owners (shareholders),4 but from a tax standpoint, they are generally one of the following two types: "C" corporations and "S" corporations. C corporations are "typical" corporations. C corporations pay taxes on their income, and their shareholders pay income taxes on any dividends. S corporations h ave a limited number of shareholders and are taxed differently.7 S corporations are generally “flow-through” entities whose income and losses flow through to their shareholders’ tax returns.8 Corporations are generally more high-maintenance than the other entities, requiring such things as annual meetings of shareholders, election of officers and meeting minutes.9
ii. Professional corporations
Professional corporations are creatures of state law, as well.10 They can be a “C” or an “S” corporation for tax purposes. However, state law limits those who can be shareholders. Lawyers are one of the recognized shareholders.12 There are a few more restrictions as to how these organizations are established and maintained because of their special shareholders.13
iii. Limited liability entities
In addition to corporations, there are other entities which can be created under state law to provide limited liability to their owners, such as limited liability companies (LLCs).14 These entities are generally treated as flow-through tax entities, but don’t have to be.15 Their annual maintenance is a little less burdensome than that of a corporation. An LLC can have many members or just one member.16
This is the basic form of business when there is more than one owner. No formalities are required, but if you are going to be in business with someone, a written agreement obviously makes sense.17 Partners are generally jointly and severally liable for partnership debts and obligations.18 There is no limit of liability, unless the partnership is a registered limited liability partnership.19 Income for these entities is not taxed...