I wish I could make this more exciting than it is, but I can’t. Money makes the world go ‘round, and in order to run your own firm you have to know about money. I’m not talking about investing your paycheck, saving for a rainy day, or what percentage of your after-tax cash should go towards paying down your mortgage – although if you’re the type of person who spends every penny you earn, you may want to wait a bit before hanging your own shingle. Nope, I’m talking about operating accounts and IOLTA accounts.
You see, I didn’t have a clue how either of these worked before I decided to open my own firm. I thought, I know plenty of lawyers who run their own show and if they can do it, I can do it. I am familiar with the cardinal sin of lawyering: don’t screw with your IOLTA. So, I thought I should know the intricacies of an IOLTA. I learned that IOLTA means Interest On Lawyers Trust Account; I learned that a high number of lawyers get sanctioned for commingling IOLTA funds with operating funds, and I learned what money belongs in an IOLTA account and what doesn’t.
Maybe you’re smarter than me – okay, many of you are certainly smarter than me – and you already know that when you get money from a client for work that you have not yet performed, i.e. retainers or upfront flat fees, that money is not your money yet, and you must deposit it into your IOLTA account. Only after you perform the work can you transfer that money, i.e. write a check from your IOLTA account to your operating account; of course, you can only transfer the percentage of money commensurate with the amount of work you performed. Conversely, if you bill a client after services are rendered and that client later pays the bill, that payment can bypass your IOLTA and be deposited directly into your operating account. What I just explained in three sentences took me a couple of hours to learn, through Internet searching and bouncing questions off of two colleagues who traveled this path a few years before me.
So you know you need an IOLTA account, but how do you get one? That’s the easy part – walk into any bank (most people seem to stick with their personal bank), walk up to the teller, and say you want to open a bank account for your new law firm. Most bankers know to also open an IOLTA account in this situation, but if yours forgets – like mine did – a simple reminder will have you leaving the bank with both accounts. Caution: the bank will need to see your corporate entity documents and will require you to deposit money into your operating account when you open it.
How you finance your firm will largely dictate how much money you initially deposit into your operating account. If you take out a second mortgage on your home or pull a line a credit for a certain amount of money, that is how much you put in the bank. If you are just transferring money from your personal checking or savings account, then you have more flexibility in how much is deposited.
It is important to accurately calculate the amount of money you think you will need to initially deposit into your operating account for all of the expenses associated with opening a law firm. Fortunately, I did not have many upfront costs: I needed a new cell phone, bar association membership dues, business cards, a scanner, and a healthy marketing budget. I planned on working out of my house as much as possible and was going to use my already existing printer, monitor, keyboard, furniture, and office supplies. I did not have to pay a first and last month rent, so I saved some money there. I am test driving how much research I can do without buying a Lexis or Westlaw membership – and so far I do not miss them.
Now, I know at some point the tax man will commeth and I will claim certain business expenses as deductions on my tax returns. Truthfully, I’m neither making nor spending much money right now – three weeks into solo life – so figuring out my future tax issues are not top of my mind. I have recommendations of a few accountants from other solo attorneys and those professionals will be vetted within the next few months.
I digressed. Rather than writing checks from the operating expense or paying for business expenses with my personal credit card, I opened a credit card that I use only for business purchases. You do not need to open a credit card in your firm’s name. I opened one in my own name, but some people believe a corporate card is best because it establishes a credit history and rating for your firm. I made sure to have an extra card made so my wife can carry one, too, should she ever make business purchases for Austin Legal, LLC.
We do not use this credit card for anything but business expenses. I will cross-check the credit card statement with the business expense receipts once I start receiving statements; hopefully they match up. I’ll then have a firm understanding of business expense deductions for when I finally have that conversation with my player-to-be-named-later accountant.