Aug. 20, 2014 – Is it better to make software decisions before purchasing hardware, or vice versa? Do you know the firm’s vital signs? Have you considered how the law firm’s entity structure impacts your tax burden? Do you know the myths concerning write-offs?

Attorneys who own or want to start a business as a solo or small firm should know the answer to these questions, according to Jeffrey Krause, Chris Carmen, and David Elmer, in addition to other business concepts that are crucial to business success.

Krause is a Wisconsin lawyer who owns a technology consulting firm. Carmen is a certified business coach. And Elmer is a certified public accountant. All three spoke at the State Bar of Wisconsin PINNACLE’s Business School for Lawyers (BSL) last week in a session called “Business Plans for Lawyers.”

In this article, Krause, Carmen, and Elmer provide their business insights as explained at the session and post-session interviews.

More than 85 lawyers attended the kick-off BSL seminar on Aug. 13, either in person or via live webcast.

Start-Up Technology

You want to start your own firm or need to incorporate new technology into your existing firm. But how does one make software and hardware decisions? Krause, who owns Solfecta LLC based in Waterford, says software decisions should precede choices about hardware.

“When you are thinking about the technology to start your practice, don’t start thinking about the type of computer or tablet you want to buy,” he said. “Think about the software you need, and then decide what hardware can support that type of software.”

Krause says lawyers primarily communicate through email. They stay organized through document and case management systems. And they collect earnings and track revenues through billing and accounting systems. These are all software tools.

But what if the computer you just bought won’t support the software tool you want to use? That’s why Krause says it’s important to decide on software first. For instance, at present Apple hardware systems don’t support many software tools for lawyers.

“If you purchase a Mac to run your law firm, you have a really nice computer. But you’ve limited your software options,” he said. “That’s just the truth about where these products are right now. At present, PCs support more software options that run locally.”

Krause said lawyers who choose Macs have more cloud-based (Internet-based) software options, but those program applications may not run locally. Lawyers who go this route should simply be aware of the software limitations, Krause says.

Once lawyers make the software decisions, it’s time to consider hardware, which is largely a matter of preference. Obviously a computer is essential. Krause has a PC and uses a laptop when he’s outside the office. He prefers computers with large keyboards.

A printer is also essential, and Krause recommends a laser printer. In the long-run, laser printers are cheaper because they don’t require constant ink replacement, Krause says.

Krause also recommends a scanner. He has a Fujitsu Scan Snap, and notes that this product comes with Adobe Acrobat software to view and create PDF documents.

Krause also discussed smartphones and tablets. Lawyers have many choices and most have similar functionalities. Thus, he says personal preference should take precedent.

Do you want to have a consistent connection with other staff members who work virtually? Krause notes that virtual phone services like 8 x 8.com, a VoIP service provider, allow employees to communicate “internally” from anywhere.

What about a fax machine? With a scanner and email, a fax machine isn’t really necessary, he says, because there are phone-based or Internet-based fax services.

Checking Your Firm’s Vital Signs

At the yearly doctor appointment, the doctor checks your vital signs: heart rate, breathing rate, blood pressure, and body temperature. An abnormal vital sign may be an indication that a health problem is afoot. It’s no different when running a business.

So what are the “vital signs” of a business? According to Chris Carmen, a business coach at ActionCOACH in Elm Grove, the business’s vital signs involve indicators such as revenue, profits, cash flow, and equity. It could be billable versus nonbillable hours.

If the firm is retreating from the billable hour, it may be vital to track the number of meetings with potential alliance partners that could provide referrals for fixed-rate matters. Or the firm could be tracking how many referrals they actually receive.

“Business owners should not be watching every number and statistic like a hawk, and frankly they shouldn’t be, because there are other things the owners should be doing,” Carmen said. “But there are some vital numbers that you want to be looking at.”

For instance, attorneys must stay attuned to the firm’s cash flow. As attorneys know, the number of hours worked does not automatically convert to cash in the bank.

“There is a gap between when the hours are billed and when the money is actually collected from the client,” Carmen said. “Businesses go out-of-business all the time because they are not aware of when the cash is going to be available.”

Carmen says using a cash flow statement, in addition to income statements and balance sheets, will allow attorneys to understand where the money is going and when. “In my opinion, the cash flow statement is the most vital statement to track,” he said.

In addition, attorneys could be rethinking how profits are determined. Traditionally, the profit is the amount of money that remains after all expenses are paid. But what if the attorney’s profit was a fixed expense? Carmen recommends “budgeting for profit.”

“What we tend to see are business owners paying everything and everyone else, and they pay themselves last with whatever is left over,” Carmen said. ”One thing that I encourage my clients to do is build profit into fixed expenses. Start at the end of the year and determine the profit goal, then work those profits into the monthly budget.”

Finally, Carmen has some parting advice: For the business to grow, the business owner must allocate time to work “on the business” and not just “in the business.”

“Lawyers are tempted to do the skilled work they do without paying proper attention to business growth. Business owners must take the time to work on the business,” he said.

Taxes and Tax Myths

When choosing a business entity structure, lawyers often choose to run as LLCs, LLPs, sole proprietorships, or professional service corporations. For tax purposes, these formations allow income to pass-through the firm, thereby avoiding a corporate tax.

But David Elmer, a CPA at Jannsen & Company based in Pewaukee, says other tax implications should not be an afterthought and tax planning is crucial. For instance, Elmer says solo and small firm attorneys often forget about the self-employment tax, which refers to the Social Security and Medicare taxes imposed on the self-employed.

For tax year 2014, the first $117,000 of a self-employed worker’s income is subject to a 12.4 percent Social Security tax. All income is also subject to a 2.9 percent Medicare tax, according to the IRS webpage discussing Self-Employment Tax.

“If you are in a personal service business, all the income you make in a partnership or a proprietorship passes through to you on your personal return. You pay regular state and federal income tax on that, plus self-employment taxes up to a relevant range,” he said.

Elmer says if a firm becomes an LLC or an S-corporation, or an LLC elected to be taxed as an S-corporation, “you can legally avoid payment of some of that self-employment tax, as long as you receive a W-2 and take a reasonable salary from the firm.”

This is just one tax consideration to think about, Elmer says. In addition, Elmer says business owners, including attorneys, are often confused about write-offs, which refers to the amount of business expenses that may be deducted from taxable income.

For instance, business loan payments are not tax deductible. So if you made $105,000 of income and made a $100,000 loan payment, that loan payment is not deductible. The lawyer will still pay tax on $105,000 in income minus other deductible expenses.

One of those deductible business expenses involves meals. In general, lawyers can take a 50 percent deduction (“write-off”) for business meals, but that can create a trap.

He notes the example of the $200 business meal with a potential client or a colleague. Of that, $100 is tax deductible, and the tax break depends on the relevant tax rate.

“If the tax rate amounts to 35 percent, you could end up saving $35 in taxes by spending $200 on lunch. That’s not great. I advise clients to avoid spending cash for the purposes of tax savings. Not everything you pay for in cash is deductible,” Elmer says.

Elmer also noted other write-off myths involving business mileage and advertising, and highlighted different strategies related to depreciation of assets. He counsels business owners to use an accountant, but says understanding these tax concepts is important.

Upcoming BSL Programming

Don’t miss an advanced BSL session titled, “Business Principles for a Successful Law Firm,” scheduled for Sept. 16, 2014. Attend the full-day session in-person at the State Bar Center in Madison or register to attend the session via live webcast.

The Aug. 13 (basic) and Sept. 16 (advanced) seminars will also be available via webcast replay on specific dates in September and October.

• Register now.

BSL programming is also scheduled for the upcoming Wisconsin Solo and Small Firm Conference, which will be held Oct. 23-25 at the Kalahari Resort in Wisconsin Dells. More BSL sessions will be planned for future dates as the initiative continues.