A Practice Smart ™ Feature
Carole C. Foos, CPA
David B. Mandell, JD, MBA
Most attorneys strive to achieve two goals in their practice – to “do good,” by being a quality practitioner and helping clients; and to “do well” in terms of financial rewards. Unfortunately, as to the second goal, many attorneys who own their practices do not run them with optimal after-tax efficiency.
In fact, we often see lawyers leaving tens of thousands of dollars “on the table” each year –which can equate to nearly $1 million of lost wealth over a career. The good news is that many reading this can likely improve your post-tax bottom line in a number of ways
The Common Causes of Dollars “Left on the Table”
While the causes of “dollars left on the table” in a law practice can range from too much overhead to unproductive employees, our expertise and focus is corporate structure, tax reduction and benefit planning. For this article, we will focus on three strategies for recapturing some of the funds left on the table:
- Using the ideal corporate structure;
- Maximizing tax-deductible benefits for the attorney-owner(s); and
- Utilizing a captive insurance arrangement
Keep an open mind. Just because you have operated your practice a certain way for 5, 10 or 20 years, you don’t have to keep doing the same thing. Changing just a few areas of your practice could recover $10,000 to $100,000 of “lost dollars” annually. Let’s explore the 3 areas:
- Using the Ideal Corporate Structure
Choosing the form and structure of one’s law practice is an important decision and one that can have a direct impact on your financial efficiency and the state and federal taxes you will owe every April 15. Yet from experience in examining many law practices, most attorneys get it wrong. Here are a few ideas to consider when thinking about your present corporate structure:
- You must avoid using a proprietorship or “disregarded entity” for a solo practice: These entities are asset protection nightmares and can be tax traps for attorneys. Nonetheless, some very successful lawyers operate their practices as such. The good news is that lawyers who run their practices as a proprietorship or disregarded entity have a tremendous opportunity to find “dollars on the table” through lower taxes – especially on the 3.8% Medicare tax on income. This can be a $10,000-30,000 annual recovery.
- Consider an “S” corporation. Not enough attorneys take advantage of “S” corporation status – which can allow Medicare tax savings through your compensation system in a reasonable way. This can be a $10,000-30,000 annual recovery for practices not properly structured.
- Consider a “C” corporation. Few practices operate as “C” corporations. Why? Because most attorneys, bookkeepers and accountants focus on avoiding the corporate and individual “double tax” problem. While this is vital to the proper use of a “C” corporation, it is only one of a number of important considerations a attorney must make when choosing the proper entity. A common mistake is to overlook the tax deductions that are only available to “C” corporations.
- Get the Best of Both Worlds – Use Multiple Entities. Very few law practices use more than one entity for the operation of the practice… and, if they do, it is simply to own the practice real estate. While this tactic is also wise from an asset-protection perspective, its tax benefits are typically non-existent.
Successful practices can often benefit from a superior practice structure that includes both a partnership entity and an “S” or a “C” corporation. This can create both tax reduction and asset protection advantages. If you have not explored the benefits of multiple entities to get the best of both worlds in planning, now is the time to do so. Utilizing a two-entity structure properly can create a $10,000-40,000 annual improvement.
Part II of this article, will discuss benefit plans and captive insurance companies for law practices.
About the authors: David B. Mandell, JD, MBA, is an attorney and author of 10 books on legal, tax and financial issues, including Wealth Secrets of the Affluent. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) where Carole C. Foos, CPA is a tax consultant. They welcome questions and can be reached at 877-656-4362 and Mandell@ojmgroup.com.
If you would like a free hardcopy or electronic copy of their book “Fortune Building for Business Owners and Entrepreneurs,” just call 877-656-4362.
This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
Practice Smart(™) Features are a service of Michael Blum and Appeal Funding Partners, LLC. The Features are thoughts from a variety of sources on our practices, on being trial lawyers and things of importance to trial lawyers and their clients.
Michael Blum is a trial attorney and CEO of Appeal Funding Partners, LLC. He is a pioneer in the Litigation Funding industry with over 20 years’ experience providing risk mitigation services and non-recourse funding to attorneys and plaintiffs with money judgments on appeal. He has served on the Board of Directors of the Consumer Attorneys of California and of the Marin Trial Lawyers Association and is an active member of the American Association for Justice. He speaks to trial-lawyer groups and has written for TLA publications on the financial management of a contingency-fee law firm. He may be contacted at 415-729-4214 or firstname.lastname@example.org.