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Last reviewed May 2005 How-To Kit: Open a Law Practice When to Use | Main Checklist | Forms Main Checklist Step 1: Determine whether you are ready to start your own practice.
Step 2: Decide on your legal structure. Before starting to practice (or advertising your practice), you must choose an organizational structure for doing business: (1) sole practitioner, (2) general partnership, (3) professional corporation, or (4) professional limited liability company (PLLC). Consider using the services of a professional accountant to determine which organizational structure is best for your new firm. Step 3: Comply with governmental registration, deposit, and filing requirements. As an operating business, a corporation, and/or an employer, you must satisfy several governmental filing requirements related to startup and taxes. See the Business Filing Requirements Checklist. To avoid inquiries from the IRS, it is important to reconcile your tax records. If you have employees, you must also file documents for new hires. Step 4: Establish a reliable accounting system. An accurate accounting system is important to determine the profitability of your business, to set fees, to control costs, and to file employment and other tax returns. Step 5: Open bank and trust accounts. A key task in starting a practice is opening the bank accounts and trust accounts that the firm will use. Step 6: Purchase insurance. Types of insurance you should consider purchasing for your new practice include malpractice, business, health, life, vehicle, liability, property, and disability. You should purchase malpractice insurance immediately. Step 7: Outfit your office. You will need to select your office space and purchase furniture, office equipment, and supplies. You will also need to furnish your library. Step 8: Market your practice. Whether you work in a law firm or on your own, the ticket to success is the ability to attract new business. It is important to develop a marketing strategy. Step 9: Establish a docket control system. In many legal malpractice insurance application forms, attorneys are asked to explain their internal docket control system. This is done for good reason—a poor docket control system can lead to missed dates and liability exposure. Step 10: Establish your billing methods and develop fee agreements. By and large, charging an hourly fee for time expended on handling a matter is the most common billing method. However, there are various other billing methods that lawyers use as marketing tools or in response to client demand. Step 11: Staff your office. Hire the best qualified staff possible at the most reasonable salaries. Step 12: Develop standard office procedures. The more systematized your office is, the smoother it will run and the less time it will take to perform repetitive tasks. Create standard office procedures for as many tasks as possible. Step 13: Develop a document retention policy. A law firm, including a solo practice, is ethically obligated to have a document retention policy or plan. Step 14: Screen for client conflicts. You are ethically charged to avoid client conflicts. Step 15: Keep refining your practice. Once you are settled and your firm begins operating smoothly and profitably, continue thinking of ways to improve your practice and the quality of service being delivered to your clients. When to Use This How-To Kit explains how to open a new law practice, whether you are a recent law school graduate or a seasoned veteran going out on your own. The Kit includes valuable planning and business filing checklists, sample fee agreements, and links to pertinent online resources. Using these materials is not a substitute for the lawyer’s independent judgment, drafting, and research. Other Resources
Research Cutoff This How-To Kit is current through 2005 PA 20 for Michigan statutes, and through May 11, 2005, for Michigan Court Rules and cases. Additional Practice Guidance To determine your start-up expenses, first determine how many months it will take before you begin earning income. An average business plan will require at least six months of income reserve to cover all overhead expenses and any costs advanced to clients. Calculate your monthly overhead and multiply it by the number of months you believe it will take until you start receiving a stable attorney fee income. Monthly overhead expenses should at least include the following:
In addition, your initial expenditures should cover outlay for office furniture, office equipment, and start-up supplies. You should also be prepared to have additional financial resources available if unforeseen expenses arise. This is the simplest structure; one lawyer practices on his or her own without the benefit of any other legal entity. Taxes and financial reporting are done on an individual basis. Federal tax returns will change only by filing a schedule C on your individual tax return. The disadvantage to this structure is that you may well be subject to personal liability, without any of the protections afforded under a corporation or PLLC status. A sole proprietorship is required to file an assumed name with the clerk of the county in which it does business. Two or more attorneys may form a general partnership. The advantages to a partnership include the simple, easily understood structure of the business and possessing individually owned assets. The primary disadvantage is the personal liability of the general partners for the acts or omissions of the partnership, including vicarious liability for the acts of other general partners. A partnership is required to file an assumed name with the clerk of the county in which it does business. Professional corporations operate under MCL 450.221 et seq. and are designed for professional/service groups. The main advantage to this structure is that the shareholder is not liable beyond the assets of the professional corporation for acts or omissions that he or she did not commit or allow. A corporation must register with the Michigan Department of Labor and Economic Growth, Bureau of Commercial Services. Professional Limited Liability Company A PLLC, which may operate with only one member, is formed with an operating agreement much like corporate bylaws. However, equity owners are members or principals as opposed to shareholders. The structure allows for limited liability as in professional corporations, but it is taxed as a partnership, thereby allowing the flow-through of income, losses, deductions, and credits. A PLLC must register with the Michigan Department of Labor and Economic Growth, Bureau of Commercial Services. See Michigan Limited Liability Companies, Second Edition for a more detailed discussion of PLLCs. Initial Registrations and Filings To begin operating a business, you will need to do the following:
As part of an ongoing business, your new firm must make the following fund deposits for state and federal taxes: (1) FICA (Social Security and Medicare) and income tax withholding; (2) state sales and use tax and state income tax withholding; (3) federal unemployment deposits (form 940); and (4) corporate estimated tax deposits (if you anticipate a profit). Federal deposits may be made electronically by way of the Electronic Federal Tax Payment System.
The following tax-related information must be filed quarterly:
The following tax-related information must be filed annually:
The federal unemployment tax is 6.2 percent of the first $7,000 of wages paid to each employee. A credit against this tax is allowed for unemployment payments paid to the state. The maximum credit is 5.4 percent. Therefore, if you have filed and paid state unemployment taxes on time, your federal rate will be 0.8 percent. If you paid your state unemployment taxes late, you will be entitled to only 90 percent of the amounts paid late. The IRS performs a number of computer reconciliations on your returns. To avoid inquiries from the IRS, it is important that you reconcile the following:
If you advance client costs (as most personal injury practices do), the IRS will treat them as loans to the clients so that a deduction is not allowed until client reimbursement is received or the case ends and the amount is uncollectible. A helpful guide on what the IRS looks for when auditing attorney returns is a 1994 report called IRS Market Segment Specialization Program Guide. It is available from many tax services or from the IRS under a FOIA request mailed to IRS, Disclosure Office, Stop 11, PO Box 330500, Detroit, MI 48232. You may also request this report by writing the IRS at the following address: Reading Room, PO Box 795, Ben Franklin Station, Washington, DC 20044. All employers must complete Immigration and Naturalization Service (INS) Form I-9, Employment Eligibility Verification, within three days after hiring a new employee. The form must be retained for three years after the employee’s hire or for one year after employment is terminated, whichever is later. 8 USC 1324a(b)(3). The I-9 form is available from the U.S. Citizenship and Immigration Services (a division of the Department of Homeland Security) Web site. Information about new hires must also be reported to the Michigan New Hire Operations Center to aid in the collection of child support. The New Hire Reporting Web site has more information on the process, and a downloadable version of the reporting form. Basic law office record keeping should include the following:
Keep records in an organized fashion and store accounting records by year. Separate employment records in a three-ring binder in three sections: individual employee wage records, quarterly summaries, and year-end reconciliations. Start a new notebook for each year. File bills by vendor; box and store them at the end of each year as well. Several software packages are available for accounting, tax returns, payroll, and billing. The first time you use a computer program for any record keeping, also do a set of manual records to verify that you are using the software correctly. Law firm bank accounts are the subject of intense scrutiny and must be given serious consideration. Generally speaking, lawyers must segregate client funds from the firm’s general account. MRPC 1.15(a). Commingling client funds or third-party funds with lawyer funds will amount to professional misconduct. You should set up the following accounts for your practice:
When making disbursements from a trust account, make sure that (1) deposited funds being drawn from have cleared, (2) the disbursement has been authorized by the appropriate person, (3) the disbursement has been posted to the client’s trust account and the client’s file documents the disbursement, and (4) the client has been notified of the disbursement and has been given sufficient time to object. Most professional liability policies are written on a claims-made rather than on an occurrence basis. A claims-made policy covers all claims when made, while an occurrence policy applies when the act or omission occurs during the policy period. When purchasing a claims made policy, obtain full prior acts coverage, which will cover acts and omissions that occurred before the inception date of the policy. Do not allow your malpractice insurance to lapse. If there is a gap in coverage, even for a few months, most carriers will not insure on a full prior acts basis. You should consider the type of office space you will need, the location, and the square footage requirements (typically 400–600 square feet). Your office type should also reflect your clientele. For example, a business law clientele may expect more elaborate space and furnishings than a juvenile law clientele. Your office should be easily accessible to your clients and should allow you easy access to the courts if you are a litigator. Parking availability should be considered for both staff and clientele. If you are starting out as a small firm or as a sole practitioner, consider sharing office space. Your space considerations should include the following:
Nonwindow office space will be considerably cheaper than window space. Attempt to negotiate a short-term lease with a renewal option because the growth of your practice may require moving in the future. Do not underestimate the impact a neat and well-furnished office will have on your clients, no matter what your specialty area. All clients expect a certain degree of professionalism from their lawyer. Further, your office personnel expect a pleasant work atmosphere. If your office is not attractive, you may not attract the type of clients or staff you desire. High-quality used furniture is often your best bet. Look in the classified ads of your local newspaper under “Office Equipment/Furnishings” for used equipment, or locate used furniture outlets in your area. Also, check into estate sales, bankrupt or closing businesses, and legal publications for furnishings. Your start-up office equipment will include computer hardware and software, a printer, a telephone system, a copier, a fax machine, and dictating equipment (as necessary). Given the changes in computer technology, you may wish to consider initially leasing your computer equipment until you refine your computer needs. Here is a checklist of recommended computer equipment. Many attorneys are replacing their paper-based organizers with handheld or “Palm” devices. About the size of a deck of cards, Palms include their own operating system and come in several models varying in features and ranging in price from about $100 to $500. New combination devices that work as a Palm organizer and a cell phone are available. Useful Palm Web sites for lawyers include Handango, pdaJD.com, and PDA Buzz. Supplies ordered by mail catalog or on the Internet are usually cheaper than those bought through a local office supply store. Start-up supplies should include file folders and notebooks, stationery, envelopes, legal pads, pens, pencils, highlight markers, hole punches, staplers, staple removers, tape and tape dispensers, paper clips, copying machine dry ink, copy paper, printer cartridges, diskettes, divider tabs, address labels, telephone message pads, and rubber stamps. Your library should initially include the minimal amount of research materials necessary to practice your area of law effectively. If you are located close to a law library, you should consider ordering only those materials you frequently need. Your local bar association may also have a library you can use.The Internet is, of course, an extremely valuable research tool. The Michigan State Bar, in conjunction with ICLE has created Michigan Law Online (MLO), a free Michigan primary law resource for Michigan State Bar members. Michigan Law Online includes the following:
Your marketing plan should include the following:
See Ethics Opinion RI-276 (July 11, 1996) for a discussion of Michigan’s rules regarding advertising and solicitation on the Internet. Another issue relates to e-mail communications with clients. The American Bar Association has issued a formal opinion stating that e-mail “affords a reasonable expectation of privacy from a technological and legal standpoint,” ABA Committee on Ethics and Professional Responsibility, Formal Opinion 99-413 (1999); but states vary on what attorneys must do to protect client confidences. Take referral attorneys, business contacts, and other possible clientele to lunch. Plan to take them to lunch periodically throughout the year. Make sure that you know what type of law your referral attorneys practice, and refer business outside your practice area to your referral attorneys first. Schedule regular contact with past and present clients who will continue to direct business to you. Send them magazine or newspaper articles that you think would be of interest to them. For further discussion, see course materials on Tools and Techniques for Marketing a Law Practice presented by Julie I. Fershtman at Foundations: Earning a Living; The Business of Practicing Law on February 6, 2001. A good docket control system consists of checks and balances. This may include recording a date in two or more places, such as in a desk calendar and in a computerized docket program. When mail comes in, all calendar dates should be immediately noted in all places where entries are made. The pleading, correspondence, or other calendaring data sheet should then be stamped and initialed to show that the calendaring entry system has been made and by whom. Highlight or emphasize important dates, such as statute of limitations dates. Prepare a list of crucial dates on all cases and make it available to all members of the firm. If your firm handles cases with complicated calendaring dates, prepare a calendar worksheet that ensures all dates are being correctly entered into the calendar by all personnel in your firm. Use a tickler system to remind yourself and all firm personnel of important upcoming dates. For example, tickle an expiration of a summons two weeks, one month, and two months before the expiration. It is too late if you remember an expiration date on the day it occurs if service has not yet been made. Do not rely entirely on office staff to be aware of important dates and to enter them into the calendar. If an important date is missed and you are sued for it, it will be no defense that your office staff made the mistake. The bottom line rests with you. When scheduling appointments, court appearances, or other attorney activities, calendar the time of the appointment separately, and then calendar travel time and the expected time period the appointment will take. This allows other staff personnel to know the length of time you will be unavailable when scheduling other appointments and handling phone calls. There are now many good docketing software packages on the market. Determine which of the following features are suitable for your practice:
Whatever system you establish, make sure that all office personnel are fully trained on the system and realize how important calendaring is to your law office operation. Before you write a fee agreement, read MRPC 1.5 regarding fees. This rule governs the language of the fee agreement, your responsibilities to the client under the fee arrangement, prohibited and allowable fee arrangements, how fees may be calculated, and how payments and disbursements must be made. Always memorialize your fee agreement in a written contract or engagement letter. The engagement letter should clearly set out the method for billing and the payment terms. There are many types of attorney fee arrangements. You must choose the method that best serves you and your clients. Following is a list of attorney fee arrangements:
For past-due bills, your firm should have a system for generating reminder statements. Most work should be billed within 30 days of performance, payable in 30 days. Reminder statements should be mailed 60 days after the initial billing. For further discussion, see course materials on Setting and Collecting Fees presented by Steven A. Harms at Foundations: Earning a Living; The Business of Practicing Law on February 6, 2001, and Attorney Fee Agreements in Michigan, Second Edition. Major factors to consider in hiring an office staff will be your cash reserve, office space, and case load. If finances are limited, consider hiring the smallest number of personnel needed to operate the office. Keep in mind that if you are computer-efficient, you may be able to decrease significantly the load on your support staff through automation and generating work on your own. As a new employer, take great strides to make your firm a good place to work. Happy employees will reflect well on the firm. Treat your employees with respect, and they will do likewise. The best measurement of your success as an employer is to have dedicated employees who provide many years of service to your firm. As employees in a law firm, all professional and nonprofessional staff must be trained to maintain client confidences. See MRPC 5.3 regarding an attorney’s ethical responsibilities concerning nonlawyer assistants. The attorney-client relationship and the nature of specific legal matters must be protected from the public at all times. Needlessly discussing cases within the office should be discouraged, especially in common areas where other clients may be located. Prepare forms for routine letters, pleadings, contracts, and other often-used documents. Incorporate the forms into your computer system, and prepare them so modifications can be made to fit the particular client or legal matter. Modifiable client form letters can be prepared for almost every stage of a lawsuit, such as the following:
Create standard procedures for as many office tasks as possible. This will allow for consistent staff training and a dependable routine. Procedures may be established for tasks such as phone answering, appointment and deposition scheduling, accounting and billing procedures, interoffice memoranda and mail distribution, calendaring and docket entries, prioritizing workload, and handling emergencies. Create job descriptions for each employee in your firm. This lets the employee know what is expected and provides you with an instant training manual for new hires. Prepare checklists for such things as multidate calendaring entries, tax filing requirements, file opening and closing procedures, and office supply ordering. A document retention policy should include at a minimum (1) instructions to lawyer and nonlawyer personnel concerning their obligations under the policy; (2) information concerning the location of storage facilities; (3) methods for the eventual disposition of records and files; (4) information concerning retention periods and the establishment of retention periods; and (5) a system for monitoring lawyer and nonlawyer employee compliance with the plan. The State Bar of Michigan has created an ethics “package” on the subject of file retention, which includes several helpful articles and relevant ethics opinions. It is available on the Ethics Opinions page of the State Bar of Michigan Web site. You are ethically charged to avoid client conflicts. MRPC 1.7–.9. When screening for potential conflicts, you should examine the following relationships:
Establish an office procedure to identify conflicts:
Make sure all personnel in your office are trained in screening techniques. You may wish to develop a conflicts screening sheet that is routed to all members of the firm to complete when a prospective client first comes into the office and initial information is obtained. After your practice has been established for a while, spend some time thinking about how to improve and develop it. Here are some suggestions:
Forms
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