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Starting a Law Firm - Your Questions Answered - LIT Panelists Answer Your Questions from Successful May 12th Webinar

Starting a Law Firm - Your Questions Answered
LIT Panelists Answer Your Questions from Successful May 12 Webinar

The panelists from the Lawyers in Transition Committee’s webinar on May 12, 2010, answer questions about starting a law practice.

Thank you very much to the 350+ of you who attended the Lawyers in Transition Committee webinar on May 12, 2010: “Opening Your Own Firm: The Things They Never Told You and What You Forgot to Ask.” Far more questions were asked than the panelists had time to answer at the time of the program. Therefore, we have assembled some of the unanswered questions and asked the panelists to give you their thoughts.

We divided the questions among the five panelists, and each gives his or her ideas below, with a few added perspectives from the others sprinkled in. The Committee gives huge thanks to our panel members, both for giving us all a very successful program and for their extra time responding to these questions. The members are:

David Caplan - Moderator - Principal: Law Offices of David S Caplan (Chapel Hill, NC, & San Jose, CA)
Lori Cantwell – Partner: Cantwell Law Firm (Plattsburgh, NY)
Willard DaSilva – Partner: DaSilva, Hilowitz & McEvily (Garden City, NY)
Carlene (“CJ”) Jadusingh – Principal: Jadusingh Law Office (New York, NY)
Marshall Isaacs – Attorney at Law (New York, NY)

Dave Caplan agreed to give us his thoughts on the most commonly asked question of all:

• What are the considerations for choosing the form of business entity for a new law practice?

The first consideration for a potential solo practitioner is whether to form any type of separate entity or whether to practice as a sole proprietor. As a sole proprietor, you just pick a trade name such as the “Law Offices of NAME” and don’t need to set up any separate entity to house the business. Perhaps the key reason why sole practitioners often remain as sole proprietors is that no form of business entity can create a “corporate veil” to protect personal assets from exposure to malpractice suits. This means that the time and expense of setting up a separate entity won't yield protection from the most debilitating liability a lawyer can face.

On the other hand, even a sole practitioner may have other business obligations besides the (hopefully small) potential of professional negligence, such as office and equipment leases and other contracts. Unless the counterparties to these contracts require personal guarantees, a limited liability entity would protect the lawyer’s personal assets in the event of a problem. The lawyer opening his or her practice must weigh the potential benefits of liability protection against the cost and administrative workload of setting up and maintaining a separate entity.

Once a decision is made to form an entity, the usual choices are a professional corporation or a professional limited liability company (PLLC). A PLLC requires more carefully prepared paperwork to set up (and therefore more costly if done right and you can't do it yourself). However, it will require far less formalities to operate.

The absolutely most important consideration in choosing which form to use is the tax impact. We are not going to try to give tax advice. Make your decision after sitting down with a tax accountant who knows all the facts of your financial situation and the impact of each form of entity on your tax planning requirements.

So with that background, we recommend that you sit down and decide whether an entity will be useful, find out what it would cost to set one up (depending on location and prevailing fees – including whether you are familiar enough with corporate law to do it yourself or will have to hire someone to do it for you), and decide whether to form an entity at all. Then sit down again, this time with your accountant, and decide which form puts you in the best tax position.

A couple last considerations:
• Many practitioners have commented that there is a slight marketing advantage to having PLLC or P.C. in the business name – to show a degree of professionalism.

• If you are joining with another lawyer to jointly operate the firm, one of these limited liability forms is ESSENTIAL. Do NOT just go into practice without a formal written agreement outlining all aspects of your relationship. Mainly, though, if you don’t set up a P.C. or a PLLC, you will be deemed to have a general partnership, and each of you will be personally liable for the other partners’ mistakes.

• Finally, limited liability protection is only valuable if you operate the separate entity like a truly separate company. The finest quality initial set-up will be useless if you start commingling business and personal funds and if you don’t make it clear to the business’ counterparties that they are dealing with a limited liability entity, as opposed to you personally.

Here are Bill DaSilva’s thoughts on three more of your questions:

1. What key points should a lawyer starting his or her own practice consider in purchasing malpractice insurance? Are there any required minimums?

In purchasing legal malpractice insurance, have as much coverage as is affordable. The minimums are the smallest amounts that the insurance company will offer. Be sure that legal expenses are included in the coverage; they can often be more than a claim that is settled. Be aware that most policies are on a "claims made" basis. This means that the coverage must be in effect when the claim is made, not when the alleged malpractice is claimed to have occurred. [Be careful, though, to review the ‘prior acts’ coverage date – this is the earliest date of a potentially erroneous act that will be covered when the claim is made during the policy period.] Choose a deductible that makes sense. If the difference in the annual premium between a $5,000 deductible and a $10,000 deductible is $3,000, estimate the likelihood of receiving a claim within the first two years of coverage. If there is little chance, then the $10,000 deductible makes sense because the savings in premiums after the first two years is $6,000. Then again, there is the issue of "peace of mind" with full coverage.

Also, ask your peers about the reputation of the carriers. It can be worth paying a little more to have coverage from a top quality carrier committed to customer service. If you know a lawyer who practices in the malpractice defense area, ask him or her which carriers are easiest to work with when a claim arises.

Finally, we want to emphasize again the critical importance of having a policy where the carrier will hire the defense lawyer and start advancing defense costs as soon as you have consumed the deductible. Beware of policies that will only reimburse you for your legal fees after the fact. No small practitioner can afford to carry those costs.

2. Do retainers have to be held in a trust account until earned, or may they be deposited into my operating account – subject to my duty to pay it back if not earned?

Whether you have to place unearned retainers in a trust account depends in part upon the area where you are practicing. In upstate New York, e.g. 3rd and 4th Departments, I believe that the general rule promulgated by the bar associations is that retainers must be deposited in escrow accounts and not removed until earned. However, in downstate areas, e.g. 1st and 2d Departments, I know of no such rule, and most attorneys do not place retainers is escrow accounts. However, the better practice is to keep retainers is a separate account so that funding is readily available if a retainer, or part of it, is to be refunded.

Regardless of the local departmental practice, however, you can only do what your retainer agreement allows. The analysis will be driven by how that document is drafted. If you set out an hourly rate and ask for an upfront retainer with no further clarification as to how that upfront money is to be treated, the funds are not yours until you have performed the hours of service and the unearned portion should be held in a trust account.

3. Are there any ethical or bar compliance requirements to be met when sharing office space with a non lawyer?

I am not personally aware of any specific bar requirements in connection with an attorney sharing space with a non-attorney. However, basic rules apply, such as those protecting the confidentiality of files and information in them. This even extends to having names of clients exposed on files, desks, etc. where a non-lawyer may see them. Reasonable measures must be taken to protect the confidentiality of clients and their files, and safeguards should be in place to avoid even inadvertent exposure of client information (including telephone conversations that may be overheard by non-lawyer tenants and their employees and business visitors).

Also, be sure to have all signage, etc., clearly show that your law practice is separate from the non legal office mate’s business. The Rules of Professional Conduct do prohibit fee sharing with non lawyers, and that includes having a legal and non-legal business share revenues. And perception often trumps reality. So, the clearer the presentation of separation the less likely it is that the public will be confused as to who is benefiting from the legal services you provide.

More answers from Lori Cantwell:

1. What advice can you offer for preserving or obtaining health insurance for someone leaving a small firm to open a solo practice? Please include an explanation of COBRA and any related strategy advice.

Generally, COBRA is a federal mandate that requires an employer to continue making health benefits available to an employee after the employee has separated from employment. The employee must pay the premiums, but the employer has to allow the coverage to continue for a specified period (I believe it is 18 months). There are also some state law requirements for this as well. It is easy to find detailed explanations on the Internet, so I will just add that you should be given an election form when you separate from the employer and if you are not given one ask. If you are stonewalled, call the insurance company. Once your COBRA runs out (actually well before) or if you want to shop and see if you can procure insurance cheaper, consider contacting your chamber of commerce, bar association recommended companies (the NYSBA has some great offerings), a local insurance agent/broker and, depending on your income level at first, you may be eligible for some State sponsored programs.

2. Do you recommend investing in case management software, like Abacus, when you are just starting out since it is very expensive?

It is not necessary to have expensive software up-front, but remember that any tool which serves to organize you and essentially save you time makes you money in the long run, because that time can then be used for clients and thus billable. Also, remember that missed deadlines are among the most common reasons for malpractice claims. Perhaps to start, the Microsoft Office package would be sufficient because Outlook has the scheduling and organizing component you need. It has the ability to schedule events on a recurring basis if desired, so that they can be revisited periodically.

Abacus relies mostly on your own created documents and entries. You can accomplish the same with a forms directory and macros if you become savvy with Word or Word Perfect. Abacus also requires you to purchase a word processing software package in addition to their management software. If you really want to save money, take a look at Open Office on the Internet. It is free and all your data can be saved onto your own hard drive to keep it safe. When you get large and have lots of clients, then you may want to look at more sophisticated and expensive organizational tools like those which Abacus provides.

3. What is the average rate being charged for per diem work for other attorneys in upstate New York?

Hourly rates are ranging from approximately $50.00 to $300.00 depending on the level of experience, expertise and regional demand. Most attorneys are charging in the $175.00 to $275.00 range. In terms of per diem, it really depends on what you will be able to negotiate, but the rate will probably be half to one-third of the firm’s regular hourly rates. Consider that the courts will pay you $75.00 per hour to do assigned work in areas where legal representation/protection is constitutionally/statutorily mandated.

Here are answers from Marshall Isaacs to more of your questions:

1. Please address the ethical and malpractice concerns of ceasing representation of a client for failure to pay. Could it be malpractice to just stop work?

There are entire law review articles dedicated to this issue, so here’s the “30-second” version (and it only speaks to litigation!). If a client fails to pay before the attorney has appeared in an action, the attorney can simply advise the client in writing that representation is being terminated. I always do this both by email and certified mail. If a client fails to pay after a lawyer has appeared in an action, the lawyer is required to move by Order to Show Cause to be relieved as counsel. I make this application routinely. I never state the reason for my withdrawal in my application so as not to enflame my client and to protect his or her privacy (the attorney-client privilege applies even to the fee dispute unless the client makes it public). Instead, I advise the court that I am willing to give an in camera explanation, if required. I rarely, if ever, let a client’s balance grow beyond $2,000.00 before bringing my OSC. I also never sue a client for unpaid legal fees. I did this one time early-on, and my client counterclaimed for malpractice and filed a grievance. Even though my client’s claims were frivolous and ultimately dismissed, it was a huge boondoggle for my practice.

Finally, be sure to review Rule 1.16 of the New York Rules of Professional Conduct. It contains specific requirements for the termination process that apply in all contexts, not just litigation, including the requirement to take steps to avoid undue prejudice to the client, even when terminating for nonpayment of fees.

2. What should I consider before deciding to represent a relative in efforts to collect a debt, or any other litigation?
I rarely agree to represent relatives or close friends. Why risk destroying those relationships? I have represented friends and relatives in straight-forward DUIs and Small Claims Court. Again, I do it rarely and only when there is not a lot at stake.

3. If I decide to not represent family or close friends, is there a reason to not market through them (i.e. asking them to refer their friends)?

Oh my! Definitely lean on friends and family for business! My friends and family have been the source of some of my most lucrative referrals. Also, referrals from my family and friends almost always turn out to be quality clients because they are coming from a trusted source.

Finally, C.J. Jadusingh responds to the last of your questions:

1. What are “virtual” offices and what are their pros and cons? Is it ok to use a virtual office for about a year while I build my client base?

Generally, when we hear the term “virtual office,” it is referring to a facility that provides only an address for your business cards etc. & receipt of mail. Some facilities also provide use of a receptionist, voice mail and conference rooms for meetings & such. Prices range from $100/month up- depending on what services you want and how frequently you want to use them. From what I have heard, depending on the provider used, it is not a bad thing & can be a very convenient resource for starting a practice. If I couldn't afford an actual office and didn't have the ability to build an office at home, I would definitely look into a virtual office situation. Just make sure you read the lease, contract, agreements thoroughly and that the terms are suitable to your needs etc. Also, visit the location a few times and see how professional it will appear to your clients and prospective clients if they come to meet with you there.

2. How does a young lawyer find mentors?

Work hard at it. Be open and honest about your needs, goals etc. Try to give back at least as much as you give in whatever way you can. Don't be restrained by ego, pride or fear of rejection. Understand that you may get hurt, ignored, or frustrated in the process and even angry at times but, just like dating, sometimes things work out really well. And, on that point, remember, remember you are NOT dating! Do NOT flirt or lead people on - really bad idea - unless the feelings are mutual and genuine of course.

One specific thing I did when I started looking was make it known to everyone I met that I was looking. Friends, strangers, anyone - because you never know who other people may know. Another thing I did was to start my own networking group, initially from my contacts on social networks but then others started joining. Both methods have proven very successful for me.

Where can you start looking for mentors? The two best places to start are at your local bar association and at your law school. Get active in your bar association (they always need people to help on myriad projects) and seek out the older lawyers in your chosen field. Join a field specific committee or section. At your school, go to the professors in your chosen field, or talk to the alumni office about networking events, listservs, etc., where you can meet older alums in your field.


If you have more questions or have ideas of your own about the subjects covered here, PLEASE POST A COMMENT below.

Thank you, again, to our panelists and all who attended the program. See you at the next event.


Lawyers in Transition Committee

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