You have to understand business in order to run a solo practice.
Of course, I didn’t realize that at first. I would take clients without even asking for a deposit toward costs. I would take cases with poor liability and questionable damages. And sometimes I would pursue a claim after learning no insurance was available. Eventually, however, I saw that most of my mistakes were simply bad business decisions. I wasn’t bad at law; I was bad at business. I realized I needed to understand business if I wanted to run my solo practice.
So now, every week, I work on the business side of my practice. Things have gotten progressively better: My cash flow is manageable, my case load is workable, and most of my cases are worthwhile.
Here are the steps I now take in order to run my solo practice like a business:
Choose Your Entity Wisely
Think carefully about your business entity before you chose it. For example, incorporation better protects against an audit and it’s easier to hire employees. But if you incorporate you have to maintain corporate formalities (e.g. hold annual meetings), and you should have a payroll service. For a sole proprietorship, you’re more likely to be audited, but there are no formalities and you shouldn’t need a payroll service. Research and talk to other solos about the choices they made and why.
Watch Your Bookkeeping
Without much effort, financials can be overwhelming. Either hire a bookkeeper or learn to do what a bookkeeper does. You can learn what a bookkeeper does by speaking to one, reading accounting books, and researching online. I have two accounts: One for business and one for client funds such as the mandated trust account. You don’t want mistakes in your financial accounts. One mistake can multiply and turn into a real problem. Take time to reconcile your accounts. You cannot run a business for long if you don’t know how you earn your money and where your money goes. Cash is king. You need to manage cash flow or you’ll be stuck with bills and no money in your account.
Advertise With a Purpose
You have to advertise, so advertise with a purpose. In other words, know what you want, whom you are advertising to, and what you are saying. Advertising can easily become a money pit, but having a purpose helps avoid that.
Understand that some methods of advertising are better than others. I don’t rely on pay-per-click ads, but others do. I use a lot of social media and targeted advertising, but others don’t. The point is that you have to advertise, and you should do it smartly. Think about your target audience, and think about what your message is and what you want. What’s your message? What’s your best return on investment, as it relates to advertising? Don’t follow conventional wisdom. Learn what advertising works best for your firm.
Prepare For Taxes
Not only will you pay income tax, you will also pay self-employment tax. I was surprised to learn that not only were income taxes due at tax time, but so were self-employment taxes. Moreover, I haven’t found many places (for instance, bar associations, CLEs, law schools, blogs) revealing that information. So pay attention: You must pay self-employment tax. Ignore that to your own peril. If you don’t pay your taxes, the IRS can penalize you, or worse.
Also, you must pay your taxes quarterly. No one will remind you. And no one will permit you to skip a payment without penalty. Quickly learn that the Net Income on your Profit and Loss Statement is, above all, a gauge of how much tax you owe.
So find ways to minimize your tax liability, and always set aside money for taxes. Also, learn ahead of time how much your tax bill will be. Taxes and surprises don’t go well together!
Evan Walker is a a Personal Injury lawyer in San Diego. He runs a solo practice.