The following is an excerpt from "Solo Out of Law School--A How Can Guide to Starting a Law Firm as a New Attorney"
Solo out of Law School is a book for both law students thinking about a solo career and attorneys looking to open their own firms. It's about mindset, motivation, and viewing your solo career with perspective that allows you to see yourself and your work as something you can be proud of. It's not a "how to" guide to starting a law practice. It doesn't say anything about the tools you'll need or whether to open a brick and mortar office. Rather, it's a "how can" guide to developing the mental toughness and right mindset to succeed as a solo attorney. It's a collection of little lessons and simple reminders for when your choice to go solo in the first place come into doubt. Solo out of Law School is about finding the strength and motivation to keep pushing. By embracing the words on its pages, my hope is that you'll realize, no matter how much you doubt yourself or second-guess your actions, you are good enough to be successful as your own boss.
If you’re reading this book, then you are probably thinking about starting a law firm. Congratulations on even getting to this point of consideration! That alone is a huge step towards the metaphoric ledge from which you are thinking about inevitably leaping.
Tune out the Negative Speak
Let's get one thing out of the way right from the beginning: There is never a good time to start a law firm. Life has a funny way of creating all sorts of excuses that make it easy for us continually to put things off until the very inspiration we had to start something new—perhaps even revolutionary—fizzles away like a teapot losing steam.
It’s human nature to doubt ourselves, our skills, and our abilities to succeed. For you, that could be a fear of not being able to support your two young children, or maybe it's a worry that your friends will look at your decision to strike out on your own as an indication that you were not "good enough" to get one of those plush Big Law jobs.
Here’s what you need to remember: If everyone thought that going to law school, spending tens (if not hundreds) of thousands of dollars on education, and spending countless hours with your head buried in books and outlines just to say "no thanks" to becoming a big-shot lawyer sounded smart, they would be doing it. If everyone thought what you are about to consider doing was an excellent idea, then they would be doing it themselves.
People are going to doubt you. People are going to critique your decision to open up your own shop, and they are going to let you know about it. To be honest, one of those doubters from time to time is going to be you.
A harsh reality? Yes. One that you can weather? Absolutely. Being in business for yourself means that you are going to need to have incredibly thick skin. You’re going to need to let things roll off your back, because at the end of the day, no one’s views matter except for yours. People are going to judge you regardless of what you do, so it's best to accept that and forget about it.
You are no doubt reading this book for a reason. Whether you're passionate about a growing niche area of law, you think that billing 2200 hours a year at a large firm sounds like the easiest way to drive yourself to an early grave, or you just can't find work anywhere else, you've no doubt had at least a passing thought that starting your own firm may be your best chance at happiness and prosperity. You may have ideas on how to make the law more accessible to clients or more responsive to industry needs. You probably want to do things cheaper, faster, or more efficient than the established law firms that are already out there.
If everyone shared that same belief, they would be doing it too.
If you can’t convince yourself that your reasons for wanting to start a law firm are valid, then you have set yourself up for failure before even getting started.
So, forget what other people think and stop worrying about what they may be saying. Most importantly, turn off that little voice in your head telling you that you can't do it and that you're going to fail. If you can't have confidence in yourself, you are destined to fail. You might as well realize that now because you are going to be your biggest cheerleader for the foreseeable future, so get on your good side now before things get tougher.
Think about why you want to start a law firm in the first place. Whether it's the freedom to work with the clients you want or the ability to make it to all of your daughter's soccer games, put that thought in the front of your mind and keep it there. Positive inspiration becomes your best friend when the road gets bumpy.
The Tax Cuts and Jobs Act, otherwise known as the tax reform bill includes some provisions which should prove beneficial to pass-through business owners. For those unfamiliar with the concept of pass-through businesses, they are the most common form of business ownership in the United States, particularly when it comes to small businesses. Pass-through entities include limited liability companies, partnerships, S corporations and sole proprietorships. The good news for small business owners with pass-through structured businesses is that beginning in 2019 (for tax year 2018) and running up through 2026, unless extended, they will be allowed to deduct 20% of all “qualified business income” But, the question then becomes, what exactly is qualified business income?
Qualified business income is defined as “the net amount of qualified items of income, gain, deduction, and loss with respect to any qualified trade or business of the taxpayer.” Less than helpful on its face, the definition turns on the meaning of a number if items, including what items are qualified. Well, put as simply as possible, qualified business income includes all business income except for a number of items, like reasonable S corporation shareholder compensation or guaranteed payments to stakeholders in an LLC, for example. But, overall, the new deduction has the potential to reduce small business taxes for pass-through entities by 20%.
Of course, this is the Internal Revenue Code, so there are a number of caveats, carveouts and specifics to ensure that abuse is curtailed and at least some semblance of fairness is written into the provision, or at least appears to be.
For example, there are phased-in caps on total income that qualify a business for the deduction and the deduction is simply unavailable for certain service trades and businesses unless they fall under certain income thresholds. Professionals in fields like law, accounting, and financial advising are not permitted to claim the deduction unless they fall under certain income benchmarks ($157,500 for single filers and $315,000 for joint filers), showing an obvious policy preference for favoring the manufacturing sector (one of those places we really only see a façade of fairness in the code).
The deduction is also limited to 50% of the W-2 wages paid by the business. So, with those caveats, it’s clear that the exact amount of the deduction is going to depend on the specific facts and circumstances of each business. For a great illustration of how the deduction for qualified business income would apply in various scenarios, I’d recommend reading Mike Piper’s detailed post on the qualified business income deduction over at Obvious Investor. Mike does a great job of using real life examples to show how the various nuances of the deduction may come into play for certain small businesses.
Regardless of the specifics, one thing is clear—the majority of small businesses operating as something other than a C corporation are going to see a benefit from this provision of the new tax law.
In the words of Benjamin Franklin, "an ounce of prevention is worth a pound of cure." Few places is that more evident than in the field of law, where taking proper measures to protect one's interests preeminently can ward off potentially messy situations down the road. Specifically, businesses that spend the time and resources to properly protect their interests before problems arise can limit their exposure to liabilities and lawsuits in the future. For that reason, it's important for every business owner to assess his or her exposure to legal risk from time to time and address any glaring holes in the business' risk mitigation practices.
When performing a legal audit of your business, ask yourself the following questions:
► Are you up to date on required filings, like your annual report, trademark and assumed business name renewals, business licenses and other registrations?
► Have you reviewed your operating agreement (if an LLC) or shareholder agreement and bylaws (if a corporation) within the last year to ensure they accurately reflect your business structure and operations?
► If you have employees have you assessed their status as exempt or non-exempt employees and determined your obligations to pay overtime?
► Have you appropriately classified your workers as employees or independent contractors?
► Do you have a written employment contract with each employer and a written consulting agreement with each independent contractor, and are they properly classified as employees or independents contractors?
► Have all employees signed non-disclosure or confidentiality agreements to protect your business’ sensitive information like client lists, business practices, marketing strategies, etc.?
► Do all directors/shareholders/partners regularly hold formal annual meetings?
► Are all business decisions recorded in writing?
► Have all transactions involving the business been properly documented?
► Is your business having difficulty collecting payment from your customers?
► Does to business have written contracts with all vendors and customers?
► Have you secured your trademarks?
► Have you reviewed your insurance in the past year with your agent to ensure sufficient coverage types and amounts?
If, after thinking about those questions you feel there are potential areas that may need to be addressed, drop us a line. Let's make sure we tackle things before they turn into expensive issues. You've worked hard to build your business, let us help protect it.
Hiring your first employee is an exiting time for any growing small business. But, it's not as simple as just writing a paycheck to your new worker. Failure to comply with the law can have some serious consequences when it comes to labor and employment, so knowing what you're getting yourself into upfront is essential. Here are 8 standard steps that you’ll want to take before hiring your first employee in Illinois.
Step 1. Obtain an Employer Identification Number (EIN)
Before hiring your first employee, you need to get an employment identification number (EIN) from the U.S. Internal Revenue Service. The EIN is often referred to as an Employer Tax ID or as Form SS-4. The EIN is necessary for reporting taxes and other documents to the IRS. In addition, the EIN is necessary when reporting information about your employees to state agencies. Apply for EIN online or contact the IRS at 1-800-829-4933.
Step 2. Set up Records for Withholding Taxes
According to the IRS, you must keep records of employment taxes for at least four years. Keeping good records can also help you monitor the progress of your business, prepare financial statements, identify sources of receipts, keep track of deductible expenses, prepare your tax returns, and support items reported on tax returns. A payroll system, like Zen Payroll (zenpayroll.com) can take care of everything for you for a monthly fee. There are others out there as well, but Zen will actually help with new hire paperwork and reporting, which is something many others don’t include.
Below are three types of withholding taxes you need for your business:
Federal Income Tax Withholding - Every employee must provide an employer with a signed withholding exemption certificate (Form W-4) on or before the date of employment. The employer must then submit Form W-4 to the IRS. For specific information, read the IRS' Employer's Tax Guide [PDF].
Federal Wage and Tax Statements - Every year, employers must report to the federal government wages paid and taxes withheld for each employee. This report is filed using Form W-2, wage and tax statement. Employers must complete a W-2 form for each employee who they pay a salary, wage or other compensation. Additionally, you will be required quarterly to file an IRS form 941 to indicate employment taxes due for that quarter and an IRS Form 940 annually to report any unemployment taxes due. Employers must send Copy A of W-2 forms to the Social Security Administration by the last day of February to report wages and taxes of your employees for the previous calendar year. In addition, employers should send copies of W-2 forms to their employees by Jan. 31 of the year following the reporting period. Visit SSA.gov/employer for more information.
State Taxes - Depending on the state where your employees are located, you may be required to withhold state income taxes. Visit the state and local tax page for more information. In Illinois, you’ll need to register for business tax payments at http://www.revenue.state.il.us/Businesses/register.htm
Step 3. Employee Eligibility Verification
Big thing to remember here is that you need to have each employee complete an I-9. Federal law requires employers to verify an employee's eligibility to work in the United States. Within three days of hire, employers must complete IRS Form I-9, employment eligibility verification, which requires employers to examine documents to confirm the employee's citizenship or eligibility to work in the U.S. Employers can only request documentation specified on the I-9 form.
Employers do not need to submit the I-9 form with the federal government but are required to keep them on file for three years after the date of hire or one year after the date of the employee's termination, whichever is later.
Employers can use information taken from the Form I-9 to electronically verify the employment eligibility of newly hired employees by registering with E-Verify. However, use of E-Verify is not required for private entities.
Visit the U.S. Immigration and Customs Enforcement agency’s I-9 website to download the form and find more information.
Step 4. Register with Your State's New Hire Reporting Program
All employers are required to report newly hired and re-hired employees to a state directory within 20 days of their hire or rehire date. In Illinois, you can register at http://www.ides.illinois.gov/Pages/New_Hire_Reporting.aspx If you go with Zen, I believe they will make the new hire report for you. In addition, in Illinois, once you pay out $1500 in wages over a 20 week period, you’ll be required to contribute to the state unemployment insurance fund. You will be able to make your reports and contributions here, otherwise, I believe Zen can help with that as well.
Step 5. Obtain Workers' Compensation Insurance
All businesses with employees (even a single part-time employee) are required to carry workers' compensation insurance coverage through a commercial carrier or on a self-insured basis.
Step 6. Post Required Notices
Employers are required to display certain posters in the workplace that inform employees of their rights and employer responsibilities under labor laws. If you will be having a principal place of business, you can purchase poster bundles here.
Step 7. File Your Taxes
Generally, employers who pay wages subject to income tax withholding, Social Security and Medicare taxes must file IRS Form 941, Employer's Quarterly Federal Tax Return. in addition to the state equivalents. Again, I’d invest in a good payroll system to automate this for you. For more information, visit IRS.gov.
New and existing employers should consult the IRS Employer's Tax Guide to understand all their federal tax filing requirements.
Step 8. Get Organized and Keep Yourself Informed
Being a good employer doesn't stop with fulfilling your various tax and reporting obligations. Maintaining a healthy and fair workplace, providing benefits and keeping employees informed about your company's policies are key to your business' success. Here are some additional steps you should take after you've hired your first employee:
Set up Recordkeeping
In addition to requirements for keeping payroll records of your employees for tax purposes, certain federal employment laws also require you to keep records about your employees. The following sites provide more information about federal reporting requirements:
Complying with standards for employee rights in regards to equal opportunity and fair labor standards is a requirement. Following statutes and regulations for minimum wage, overtime, and child labor will help you avoid error and a lawsuit. See the Department of Labor’s Employment Law Guide for up-to-date information on these statutes and regulations.
You’ve filed your articles of incorporation with the state, paid the required filing fees and received confirmation that your articles have been approved and your business formed.
So now what? Well, forming the business is just the first step in ensuring that your new corporation is operating legitimately. So, there are a few major issues to consider starting now.
Appoint Directors and Officers
Every corporation needs directors and officers. These are the individuals authorized and appointed to conduct business on the corporation’s behalf for terms set either in your corporation’s bylaws or by statute (more on this later).
With terms like directors, officers, and shareholders floating around, things can get a bit confusing for the new business founder as to who plays what role. This is especially true when the corporation is small and there is some overlap between the roles with individuals wearing more than one hat.
But, understanding the differences in these individuals and what roles they play within a corporation is essential to ensuring the business runs smoothly and legitimately.
Shareholders make up the crux of the business ownership. As the owners of the corporation, they’re responsible for establishing basic corporate policy and direction, and for appointing directors (who are usually stockholders themselves). T ink about this is terms of any stock you may own in another company, like Apple or GE. As a shareholder, you actually have a voice in determining who is elected to run those companies (of course, in reality that power has little consequence since you own such a small portion). But, you do have a voice. In your corporation, there may only be a couple shareholders. Those individuals, in their capacity as shareholders get to decide who will run the day to day operations of the business.
In turn, directors are responsible for implementing the policies of the corporation as determined by the shareholders. They elect officers of the corporation. You’ve no doubt heard about the Board of Directors for larger companies. Yours has the exact same structure, just at a much smaller level (only for now, we hope!).
Finally, the corporation’s officers run the day-to-day operations of the company. For example, they’re responsible for ensuring that the company conducts its business properly and in accordance with the vision of the Board. Top-level officers, such as the President and CEO, have the power to execute contracts on behalf of the company, and must answer to the Board for any errors they make.
All corporations are governed by a set of rules. These are called “bylaws”. Bylaws set forth the rules under which the corporation will operate. Bylaws are created and adopted by the Board of Directors and describe the roles and responsibilities of the corporation’s officers, directors and shareholders. They also set forth things like the meeting requirements, the matters that may require consent, the nature of the majority required, notice requirements, limitations on expenditures and a host of other matters.
Whether bylaws are legally required varies by jurisdiction. But, in the event your corporation does not have them, it will be governed by default rules contained in state statutes. Sometimes these mirror the rules you’d set for your corporation if you had the choice, but sometimes they don’t.
Obtain a Tax ID number
Your company must to apply for an Employer ID number (EIN) from the IRS in order to open a bank account and conduct business. To obtain an EIN, visit the IRS website and complete Form SS-4. You may also need to apply for state tax identification numbers, depending on where your corporation is formed and where it conducts business.
Open a Corporate Bank Account
Your corporation is a legal entity entirely separate from its shareholders, directors and officers. As a result, it needs its own bank account so that its finances can be maintained separately. To open an account, the bank will likely want to see a certified copy of your filed and approved Articles of Incorporation, director resolutions appointing the officers, a copy of your bylaws and your EIN number. It’s important to keep corporate and individual finances separate; otherwise, there is a significant risk that, in the event trouble arises down the road, a court will disregard your corporation as a separate entity when determining if you should be personally liable for actions of the corporation. That’s not a situation you want to find yourself in.
Register as a Foreign Corporation
If you’ve incorporated in another state, you’ll need to obtain official permission to transact business in any other states in which you transact business. In the era of ecommerce, this can sometimes be challenging, as products may be sold all over the country. To ensure that you’ve appropriately registered everywhere you may need to, it’s important to enlist a business attorney to make sure nothing is missed (and also that you’re not registering in states in which you may not be required to do so).
Keep Corporate Records
Setting the business up is only a small part of your responsibility. Going forward, you’ll want to keep good books and records for all corporate actions, meetings, elections, appointments and other significant corporate decisions. There’s no required format, so do what works for you. It can be a simple loose-leaf notebook, or electronic records kept safe on your computer or external hard drive. Whatever method you choose, it’s important to keep up with it. Like all other corporate formalities, failure to keep good records could lead to a disregard of the corporate for liability purposes.
Your work is not done simply after you’ve formed the corporation. Depending on your state, county and city, you may need to obtain additional business licenses. These may also vary depending on the corporation’s industry. Typically, state and local jurisdiction websites will contain guidance on licenses you may need. But, if you have any confusion, it can help hiring an attorney to make sure all the boxes get checked off.
Michael F. Brennan is an attorney at the Virtual Attorney™ a virtual law office helping clients in Illinois, Wisconsin, and Minnesota with estate planning and small business legal needs. He can be reached at email@example.com with questions or comments, or check out his website atwww.thevirtualattorney.com.
The information contained herein is intended for informational purposes only and is not legal advice, nor is it intended to create an attorney-client relationship. For specific legal advice regarding a specific legal issue please contact me or another attorney for assistance.
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