Beyond Billable Hours: Financial Considerations for Legal Professionals
- December 13, 2023
- By: Marcos A. Segrera
As a partner or shareholder of a law firm, your financial structure might be less predictable or straightforward compared to traditional salaried employees. Between irregular cash flows from legal settlements, dividends, and distinct firm-related structures, there are complex tax and cash flow considerations that should be addressed in your financial plan.
1. Unpredictable Cash Flows
If your income is based on your firm’s profitability, it can be challenging to budget and plan around these wide fluctuations. Aside from basic emergency funds you’ll want to ensure you’re maximizing your investment opportunities in a timely and consistent manner, despite the ebbs and flows in your income. You’ll also want to take steps to ensure that you have access to liquidity during leaner times, without overhauling your budget or pulling funds at inopportune times. How do you arrive at your target emergency reserve? Start with 3-12 months of non-discretionary expenses. From there, adjust based on the variability and stability of your income. If you just started your own practice, stay on the higher end of that target. Alternatively, if you have two distinct incomes supporting your household, you can lower your target.
2. Tax Efficiency, Retirement, Succession Planning and your Business
Irregular income through distributions or dividends often results in a heightened tax responsibility. If you’re operating as an independent contractor or owner, tax-deferred investment avenues are integral to a comprehensive financial plan. Having a mid-year tax report sent to your CPA can offer valuable insights, helping you fine-tune quarterly tax payments. Retirement accounts such as SEP IRAs, 401(k)s, Solo 401(k)s, ESOPs are great vehicle to help defer taxes, grow your assets, and attract and retain top talent. Having a retirement plan that considers when and how you’ll exit your firm will give you peace of mind as you build your legacy at work and at home, helping you avoid unforeseen financial implications and gaining a wide-lens view of how various types of transitions can impact you, your family, and your firm.
3. Liability Concerns
In today's litigious environment, safeguarding your liability is paramount. Partnering with a seasoned advisor who understands the intricacies of your profession is crucial in fortifying your household and your practice against potential risks. From tailored insurance solutions to comprehensive risk management strategies, a skilled advisor can provide the necessary guidance to protect your practice and reputation, allowing you to focus on delivering exceptional legal services with confidence.
5. Investment Opportunities
Law partners often have access to unique investment opportunities through their clients or broader network. While these might be tempting, it's crucial to ensure they fit within your broader financial plan. A varied landscape across equities, bonds, real estate, and the like fortifies your portfolio against market vagaries and can open avenues to important growth opportunities and a balanced wealth trajectory. Having someone in your corner to review your overall balance sheet can help you approach these decisions with your best interests in mind. While the new land development deal sounds wonderful, you need to weigh that opportunity against your liquidity needs and overall balance sheet allocation.
6. Work-Life-Wealth Balance
The intense demands of a legal career can sometimes overshadow personal financial planning. Scheduling regular financial check-ins ensures consistent evaluation and implementation around your
There's a measurable value in seeking expert counsel. Just as clients turn to you for your legal expertise, a seasoned wealth manager can deliver strategies tailor-made for your unique financial blueprint.
Partners and shareholders of law firms navigate a distinct financial terrain. The intersection of professional success and personal financial well-being is nuanced, and a targeted approach can make all the difference.
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