More and more attorneys in Atlanta are starting their own small firms. Whether you’re forming a partnership with other lawyers or going it alone, there are a variety of accounting and financial issues that you may not have learned while practicing elsewhere.
Trust account accounting. Many types of lawyers, especially personal injury attorneys and transactional attorneys, will have an active trust account. When you start your own law firm with a trust account, it’s critical that you understand how the account works and how it should be handled. Amounts in the trust account are held on behalf of others – typically clients. As a result, deposits into the account are not income, and payments from it are not expenses. More importantly, it’s critical to avoid comingling the trust account’s funds with the firm’s own operating funds. Operating expenses like rent should never be paid from the trust account, and trust account payments such as clients’ medical expenses should never be paid from the operating account. Operating income like client fees should never be deposited into the trust account, and trust account deposits such as settlements received from insurance companies should never be deposited into the operating account. If such a mistake is ever made, it should be corrected as soon as possible. Moreover, firms should carefully track who their trust accounts’ funds actually belong to.
1099 reporting. Many business owners are aware of the annual requirement to issue Form 1099-MISC to any noncorporate nonemployee paid $600 or more during the tax year. However, this requirement also extends to all attorneys’ fees, regardless of whether they are paid to an individual, a noncorporate law firm, or a corporate law firm. Since many law firms pay other firms for subcontracted work or as part of fee-splitting arrangements, it’s important to be aware of the specific 1099-MISC filing requirements for legal services. In order to be able to file these 1099-MISCs in a timely fashion, the best practice is to formally request a completed W-9 from the firm or other payee before work begins, or at least before payment is made to them. The W-9s can then be filed away and used in preparing the 1099-MISCs when the tax year ends. If you have any questions about who may need to be issued a 1099-MISC or how it should be issued, you should contact a tax accountant.
Cash flow management. Most law firms’ revenue streams are somewhat irregular and unpredictable in nature. Estate lawyers are called upon subsequent to life events like death, divorce, or the birth of a child. Transactional lawyers are used to handle operating agreements, business separations, and business sales. Litigators are needed when an accident, injury, or criminal accusation occurs. In all of these cases, the revenue earned from these engagements is the result of one-time or uncommon events, not a consistent stream of events. By contrast, most law firms’ expenses are very regular in nature. Firms must pay items like rent, salaries, and research database subscriptions in a timely fashion in order to continue operating. The result of this discrepancy, particularly for smaller firms, is that cash flow must be managed very carefully. For most firms, the most effective way to improve cash flow management is to make an effort to improve revenue collection. This effort can involve requiring retainers to be paid up front before work begins, sending progress billings rather than one final invoice, being more active and vigorous in collection attempts, or refusing new engagements from a client until previous invoices are paid. However, the effectiveness of these strategies for a given firm will depend heavily upon the firm’s specialties and its client base.
If you have financial, bookkeeping, or accounting questions about your specific law firm, feel free to contact us. We are the leading CPA firm in Atlanta that specializes in the internal accounting, bookkeeping and tax planning for Law Firms in.
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