Choice of Entity for New Lawyers

coffee-cup-and-docs-bought-at-ssChoosing a legal structure and entity type for your law firm seems like an easy decision. But is it? Consider the following scenarios:

New lawyer establishes law practice with the goal of becoming an associate

If this is you, being a straight-up sole proprietor may be the best choice, assuming you have no employees.

A sole proprietorship is the simplest and most common structure chosen to start a business:

  • No formal action is required to start your business
  • It’s inexpensive
  • No papers to file
  • Nothing to dissolve
  • Simple tax preparation

When you’re ready to make the move from running your own practice to becoming an associate, the transition couldn’t be any easier.

On the downside, sole proprietorship means you have unlimited contractual liability and potentially higher taxes.

But how significant is the liability exposure?

Lenders, property managers, and others with whom you do business will typically require a personal guarantee for loans, leases, or other business transactions.  A personal guarantee means YOU are on the hook, even if you form a professional corporation or single-member limited liability company. As a result, contractual liability protection doesn’t count for much in evaluating whether to form an entity.

The real choice between sole proprietorship and forming a PC or single-member LLC comes down to taxes and the trade-off between potentially saving money (with entity formation) and simplicity (going with the sole proprietorship model).  Talk to a CPA so you can make an informed decision.

What if I’m planning to practice business law or intellectual property?

Why would your area of practice make a difference?  And didn’t we just say entity choice is driven by risk aversion – wreaking whatever benefit you can from contractual liability protection – and saving money – courtesy of a lower tax burden?  So what difference could practicing business and IP law possibly make?

If your goal is to help clients form entities and protect intellectual property, it could look a little odd that you haven’t followed the usual formalities in establishing your own business.

Fair or not, client perception counts.  So does marketing.  And part of marketing is how you brand your law firm.  Appending a PC or LLC designation to your business name may actually be an important part of how you choose to present yourself to potential clients.

If you plan to have employees …

This is an entirely different ballgame.  Without a doubt, form an entity. If you are a solo, choose a PC or single-member limited liability company (LLC).

Both entity types offer liability protection for non-professional torts committed by your employees.  The contractual liability protection discussed above will also kick in.  Talk to a CPA, but the likelihood is that forming an entity will also result in a noticeable tax savings.

If you plan to practice with others …

This is another occasion when forming an entity is a no brainer.  Do it for the avoidance of liability discussed in the preceding paragraph and for the limitation on vicarious liability.  The ideal structure may be to form a sole owner PC or single-member LLC that belongs to the firm’s entity. This may allow you, as the individual lawyer, to completely escape personal vicarious liability.

Multi-tier entities are complex, administratively messy, and no longer have the tax benefits they once enjoyed.  BUT avoiding vicarious liability is a big plus.  To learn more about this strategy, read Choice of Entity for a Legal Practice and Lawyers as PCs, LLCs, & LLPs in Oregon, referenced below.

Being fully informed in the premises

This post skates over some pretty significant content that deserves more in-depth thought.  Do your homework.  Recommended reading includes:

  • Sole Proprietorship as a business structure choice, courtesy of the Small Business Administration.  While you’re on the SBA site, poke around.  There is a ton of great content here.  And don’t forget about the help and resources available from the Small Business Development Center.
  • Law Firm Choice of Entity, from the ABA Young Lawyers Division.
  • Choice of Entity for a Legal Practice in Oregon, available on the PLF website. Select Practice Management > Forms > Entity Formation for Lawyers.
  • Lawyers as PCs, LLCs, & LLPs in Oregon, available on the PLF website.  Select Practice Management > Forms > Entity Formation for Lawyers.
  • Tax Considerations for Choice of Business Entity, Chapter 3 of the OSB CLE Seminar Handbook Broadbrush Taxation: Tax Law for the Nonspecialist (2015). Available in BarBooks behind the member login on the OSB website.

Most importantly

Talk with a CPA.  I can’t say this enough.  This is one of the best investments you can make in getting your practice up and running.  A CPA can help you determine whether forming an entity will result in tax savings.  He or she can also help you select an entity type – which is highly driven by tax considerations.

You’ll also learn about property tax, business income tax, business licensing, and other obligations you may not be familiar with – all of which are determined by where your business is located.

All Rights Reserved 2017 Beverly Michaelis

To Boldly Go Solo

How do you know if solo practice is right for you?  Do you have what it takes to organize, manage, and assume all the risks of running a law practice?

solo-with-laptop-cropped

As Bill Nye would say, please consider the following:

Independence

Solos get to call all the shots: client selection, case selection, setting fees, choosing a practice location – every decision that goes into running a practice.  The responsibility rests on your shoulders.  Do you find that appealing, daunting but doable, or overwhelming?  If you answer is appealing or daunting but doable, please proceed.

Are You a Decider?

Some people are decisive, others are not.  If you agonize over choices and normally poll multiple friends and family members before making a decision, solo practice will be difficult.

Solos need to make business and practice decisions every day.  Some of these decisions must be made under pressure with little time to reflect. The reward, of course, is that you get to decide.  You have the freedom and independence to use your creativity, knowledge, and skills to solve problems.

Are You a Self-Starter?

Solo practitioners must be self-regulating. Can you get the work out without someone supervising?  Give regular attention to administrative tasks like billing and bookkeeping? It will be up to you to meet deadlines, organize your time, and follow through on details. If you are a good planner and organizer, your solo practice will be successful.

Are You a Marketer?

All lawyers in private practice are expected to develop business, but in a solo practice the pressure is greater.  You’re it.  Can you create your own networking opportunities and business contacts?   Devote time to blogging or updating your website?  Post to social media?  Speak at CLEs?  Write articles for bar publications?  Build business referral relationships?

Financially Speaking

What resources are available to you?  What financial demands and commitments do you have?  Is it possible (or desirable) to apply for a micro loan, regular loan, or line of credit?  Are you up for crowdfunding?  Start by reviewing your expenses, then prepare a start-up and monthly budget.  Read about other business/financial essentials here.

Drive, Stamina, and Work-Life Balance

Can you practice law, run a business, and keep it all in balance with your personal life? Are you strongly motivated?  Healthy?  Is your family supportive of your efforts?  These are all good markers.  Nonetheless, make a plan to care for yourself and manage stress.  If you are looking for ideas or resources, contact the attorney counselors at the Oregon Attorney Assistance Program.  Services are confidential and free to Oregon attorneys.

Final Thoughts

Solo practice requires a lot of time and work, but it also has benefits: no one looking over your shoulder, no pressure to take a particular client, freedom to work in the areas of law that you prefer, and complete flexibility in deciding when, where, and how to work.  Is it a match for you?

All Rights Reserved Beverly Michaelis 2017

Market Research for the Legal Industry

Last week’s guest post examined profitability of lawyer marketing ventures by using a cost-per-case analysis:

Total dollars spent
÷
New clients signed on because of the marketing effort

Another piece of the puzzle is understanding what market research tells us about our potential clientele. But where can we find this information?  Data about demographics, employment, supply, and demand can hard to find – especially in one convenient location.  But thanks to the hard work of Annette Shelton-Tiderman we have a resource!

In her post, Problem Solvers: Offices of Oregon Lawyers, Annette reports on the following topics:

  • Offices of Lawyers Reflect Oregon’s Diverse Population and Geography
  • Supply and Demand: Employment Reflects Changes in the Economy
  • Marshalling Problem-Solving Resources
  • Projected Demand Shows Change and Overall Growth

She includes interesting infographics on the statewide marketplace for legal services, employment growth rates, employment projections, and breakdowns on areas of practice.  Because the report relies in part on the bar’s 2012 Economic Survey, the data is a bit aged, but still helpful.

I first shared this resource three years ago.  Unfortunately, it was relocated on the Employment Department website.  It took some time to dig back up again, thus the repost.  If you’re looking for other ideas on market and economic analysis, read on.

More Resources for Market and Economic Analysis

Lawyer billing practices

Lawyer Demographics – County, Population, Age Group, and Trends

  • OSB 2012 Economic Survey – the main survey includes data on the future plans of survey participants (leaving the practice of law or retiring).  The Addendum has additional demographic data.
  • Learning the Ropes 2016 Program Materials from the Professional Liability Fund.  Locate page 264, “PLF Covered Lawyers — by County, Population and Age Group.”  From the PLF home page, Select CLE > Past CLE and find “Learning the Ropes 2016” in the alphabetical list of Programs.  Click the program link.  On the description page, locate QUICK LINKS (top right of screen).  Select the PROGRAM MATERIALS link.
  • Are you a member of the OSB Lawyer Referral Service (LRS)?  They gather data on supply and demand for all their programs.

Market Research Databases

Economic Forecasting

Occupational data and job listings (including Lawyers)

  • The State of Oregon provides data and occupation profiles on all occupations, including lawyers and legal staff, at this link.   You can also display statewide job listings. Alternatively, start at this location, then select the “Wage Data Tool” in second column under Workforce.  To give you a better idea of how this tool works, here is a snapshot from a recent search:

wage20tool

As you can see, it is possible to print a full report, custom report, or summary.  If you want to find career pathways, wage range data, or occupations with similar skills just be sure the appropriate boxes are checked.

Postscript

The Oregon Employment Department’s Web site is a helpful resource for businesses researching economic data, business indicators, and other information. There are 13 workforce analysts spread across the state who are responsible for assisting businesses with needed labor market information. This can include the demographics of a neighborhood – very helpful when a business is looking to relocate or expand. The Employment Department also tracks education levels, income, population data, and maintains a database for occupational and wage-related information that is easily accessed via its website. Services provided by workforce analysts are paid for by business taxes.  There is no additional cost to access their expertise.

All Rights Reserved Beverly Michaelis 2017

Choosing a Practice Area

Last week I made an impassioned plea encouraging you to create a business plan.  A big part of the planning process involves selecting an area (or areas) of practice. Sounds easy enough, but is it?

wordcloud

Don’t Choose a Practice Area Because…

Someone else said you’d be good at it, a law professor recommended it, everyone else is doing it, or family members and other influencers practice in the area.

Think About the Kind of Clients You Want to Represent

This step is often overlooked, but deserves your consideration.  Take time to reflect on who you want to serve, rather than what you want to do.

  • Do you want to represent businesses or individuals?
  • Start-ups, small family operations, or evolving companies who might need help with mergers and acquisitions?
  • Individuals?
  • Low income or high income?  Elderly? Young? Vulnerable?

Consider Client Characteristics

While it is possible for any client to display these characteristics, they do appear more frequently in certain areas of law:

  • Emotional (angry, fearful, crying, upset) – Family law, criminal law
  • Impaired or mentally ill – Family law, juvenile law, criminal law, poverty law
  • Distressed – Family law, criminal law, poverty law, personal injury, workers’ compensation, social security disability, products liability
  • Confused – Elder law, estate planning, probate, poverty law
  • Vulnerable – Elder law, juvenile law, family law, criminal law, poverty law
  • Demanding – business law, corporate, real estate, intellectual property

Do You Naturally Lean Toward Litigation or Transactional Work?

If you like ever-changing clients, taking risk, working under pressure, and constant challenge > you may be better-suited to litigation.

If you prefer working with repeat clients, minimizing risk, a steady workflow, and predictability > you may be better-suited to transactional work.

Let’s Play Match Game

What is your tolerance level for working longer hours?  Dealing with gray areas of law, high stakes, or deadlines?  These can also influence a practice choice.

Long Work Days

Working longer hours is often associated with family law and criminal law where emergencies occur in the evenings and on weekends.

Gray or Concrete?

If you don’t mind dealing in gray areas, family law, litigation, trusts, estate planning or immigration may be good choices.  If you prefer things to be more concrete, then consider regulatory law, tax law, or administrative law.

High Stakes

The stakes are higher in criminal law, immigration, and family law.  You will need a reservoir of resilience to practice in these areas.

Deadline Driven

Arguably, this is just about every area of law but litigation reigns supreme when it comes to deadlines.  If you are organized, manage workflows well, and have good time management skills you’ll do well in litigation.

Other Stuff

I should also forewarn you that any area of law where your fee is contingent, like personal injury, means an unpredictable pay day.  Honestly assess whether this is something you can handle financially.

The Informational Interview is King and Queen

Doing informational interviews with other practitioners in an area of law that interests you is – without a doubt – one of the best ways to narrow down your list.  Not sure who to approach?

  • Ask for referrals or suggestions from your first level contacts – people you know personally.
  • If your first level contacts don’t know anyone in the area(s) of law that interest you, ask them for names of other lawyers who might know a practitioner in that area.  Keep asking and pursuing leads.
  • If you don’t know anyone who knows anyone who might know someone who practices in an area that interests you, start reaching out to known experts.  Bar groups – state, local, and specialized – are organized into sections and committees, usually by different areas of law or subspecialties of law.  Who are the leaders of those sections and committees?  Who speaks at CLEs for the various bar-related groups?  Who writes articles in bar group publications? Who writes chapters for OSB BarBooks?

A Formula For Cold Calling

There is an art to cold calling.  (And by the way, a call is generally better.)  Here are the steps:

  1. Do your homework first.  Visit the interviewee’s website.  Look her up on LinkedIn or other social media sites.  Run a Google search.  Read what she’s written.
  2. Review steps three through six below.  If you find cold calling intimidating, rehearse a few times before you pick up the phone.  This will be helpful if you end up leaving a voicemail.  Better to spend time practicing beforehand than to fumble and mumble in your recorded message.
  3. When you reach out, be clear from the beginning that you are not seeking a job and this is not a request for a job interview.  Rather, you are interested in the area of law the interviewee practices and would like to learn more.
  4. Briefly explain why you are reaching out to this particular interviewee. For example, you read her article in the Bar Bulletin, noticed she spoke at at CLE, saw that she wrote the chapter on XYZ for BarBooks, etc.  (To state the obvious, this is where the homework comes in.)
  5. Be respectful of the interviewee’s time.  Spending 60 minutes with your subject would be optimal, but may not be possible.  Let the interviewee know that you are looking for 30 to 60 minutes of their time and stick to whatever time limit you agree upon.
  6. Consider extending a breakfast or lunch invitation. Everyone has to eat.
  7. Prepare for your informational interview.  If necessary, repeat step one in greater depth.  You should come to the meeting with a list of questions you would like the interviewee to answer.  In fact, you may want to have some questions written down before you even pick up the phone and extend the invitation.
  8. Send a handwritten thank you note by postal mail after your meeting.

If you encounter a gatekeeper – receptionist, paralegal, assistant, secretary – bend over backwards to be polite, thank them for their time, and do your best to leave a complete, but brief message.  Make sure the gatekeeper understands you aren’t cold-calling for a job interview.

You might wonder:  why can’t I just shoot off an email?  You could.  And it may work. But remember: your interviewee is busy and already buried in email.  Your message may not get read or may get caught in the spam filter.

Experience shows that calling and following up by mail is more effective.  Both are more personal than email and require more effort – which doesn’t go unnoticed. Calling means the staff person or lawyer to whom you speak can hear your tone of voice.  Your gratitude and appreciation come across in a way that email can’t match.

All Rights Reserved Beverly Michaelis 2017

Postscript

What should you do if you leave a message and don’t hear back?  Don’t be discouraged. The majority of people you reach out to will be gracious and understanding.  Move on to someone else in the same practice area.

I Don’t Want to Create a Business Plan!

I get it.  I really do.  They involve work and you’re busy.  And if you’re not trying to sell someone on why they should give you money to start or grow your law practice, why would you bother?

Because, my friends, every once in a while you should be selfish and do something for yourself.

client-meeting-cropped

Six Good Reasons Why Every Lawyer Can Benefit from a Business Plan

Everyone can benefit from the business planning process, especially startups.  But existing businesses need a vision too.  Creating a business plan will give you:

  • Clarity about what you want to do
  • Control over your own fate
  • A strategy for staying organized and on track
  • Accountability
  • A way to measure and monitor your progress
  • A path to help you move forward

For associates in law firms, creating an annual business plan is the only way to build a successful strategy for bringing in business – something all associates are expected to do sooner or later.

For partners, annual business planning is likely to be more about reflection: now that I’m an experienced lawyer with a book of business at XYZ Law Firm what do I want to do? If the answer is: make a lateral move, creating a business plan will likely be required.  If the answer is: something else entirely, then time spent reflecting and planning will help you ferret that out.

Why Lawyers Don’t Write Business Plans

Aside from the obvious excuse that creating a business plan is time consuming, you may also perceive it as too difficult.

But there is an even better reason not to write a business plan.  If you don’t put specific goals and objectives on paper you can’t fail.

Here’s What You’re Really Missing Out On

The problem with avoiding failure is that you also set yourself up not to succeed. And you miss out on the other benefits that go along with creating a business plan.

Create a Direction and Lower Your Stress

When you know what you want to do, where you want to go, and how you’re going to get there (the specific objectives included in your plan), it lowers your stress level. There is no more floundering or misdirection.  Having a plan means you’re back in control.

Doing What You Want to Do For People You Want to Work For Means Reduced Exposure to Liability and Ethics Complaints

There’s a huge difference between practicing door law because you’ve always done it versus purposefully choosing a niche.

The door law route exposes you to greater risk of malpractice claims and ethics complaints.  Keeping up with a few areas of law is hard enough.  Trying to keep up with five or ten is bordering on ridiculous.

Imagine instead that you are working in one area, or a handful of areas, that you know well or can master.  With a focus, you can target clients deliberately and work for a client base that you truly want to represent.

You’ll Also See Gains in Efficiency, Money, and Resources

You are a resource.  Your staff is a resource.  Spend your resources on meaningful, designed goals.  This is what creates efficiency.  And with efficiency you can’t help but save money.  Or at a minimum, experience a better return on your investment.  You know it, you can see it, you can measure it.

Business Plan Checklist and Resources

If I’ve convinced you, contact me.  I’m happy to send along my business plan checklist and a list of resources for creating a plan.  Do what you want to do.  I am.

All Rights Reserved Beverly Michaelis 2017