There always seems to be room for one more law firm in our world today and starting up your own law firm out of your own home, or as a small business, is certainly a viable business idea. There are some concerns and things to think about, like there are in any business, but it is best to be aware from the start of the law firm accounting concerns your business will need to manage.
First of all, there are the taxes. The home office deduction allows you to deduct a portion of your mortgage or rent and related costs as it is used for the business, based on the amount of space used. The self-employment tax is the social security and medicare taxes that businesses traditionally deducts from their employees and contributes extra on their behalf. If there is just you working for yourself, you are both employee and employer and have to pay both portions. It is usually estimated on anticipated income, and adjusted the next year if you are making more or less than expected. The benefits are the deductions. In your law firm accounting practices, almost everything can be a business related expense.
Another law firm accounting expense is insurance. Malpractice insurance or responsibilities can be very expensive. Coverage and the costs depend on the location of the firm, the type of firm and the age and experience of the lawyers. California law does not require malpractice insurance however you may want to have some protection. If you are working out of your own home, consider that strangers, as well as clients, may appear at any time. You may want to carry extra home insurance.
Business development costs such as advertising, web sites and networking, meetings that may be too large for your home will require management, and so will the operating expenses. These kinds of things are the specific paper flow, management and law firm accounting concerns you can expect and should, if possible, hire someone to handle them. You will need to manage things like income, expenditures, billings and reimbursements. Although time consuming, it is manageable with the help of spreadsheets and specialized computer programs. You will require the full range of technology to manage your business. Computers, wireless networking, cell phones, faxes and printers, data storage and paper storage will be expected and necessary to ensure full capabilities.
Small business law firm accounting lives or dies on the basis of cash flow and collections and is concerned more with cash accounting, than with accruals. Cash accounting is based mainly on a money-in and money-out method. You will need to have enough cash to support the business through the dry spells and make sure all the above mentioned concerns are taken care of. That is, the rent, taxes, utilities, equipment, insurance and purchases. However, after all that, there should still be enough room for the biggest expense – the lawyer’s salary, including set amounts for savings and retirement. Don’t forget the main purpose for this business.
This article was written by Rickie Chico, on behalf of RBZ, LLP, offering specialized consulting, tax, and accounting services to the legal profession. To know the responsibilities of an accountant, you may visit Wiki.answers.