Law Firm Launchpad: Elevating Your First Year with Strategic Tax and Funding Approaches

Ali Katz:
Hello, and welcome to the NewLaw podcast, where we guide entrepreneurial lawyers to build law practices into businesses they love.

Ali Katz:
I'm Ali Katz.

Ali Katz:
In today's episode, I'm laying out a detailed roadmap for a lawyer in her first year, showing her how to leverage tax savings aggressively, how to elect the right taxation status to minimize her self employment taxes, and how to get Uncle Sam, the government, to fund her business growth wisely.

Ali Katz:
So, if you're in your first year and you're considering how to make the very best decisions for the startup of your law practice to turn it into a business, this episode is for you.

Ali Katz:
Let's get into it. Emily.

Emily:
Hello.

Ali Katz:
You are just rocking it. How are you feeling about everything?

Emily:
Excited but nervous a little bit. Yeah.

Ali Katz:
That's very normal. You're super new. You're super new here, and I think in your own practice, right?

Emily:
Yes. We just officially opened our firm in September, so. Just happened.

Ali Katz:
Here you are with five family wealth planning sessions last month, engaged four of them, seven more scheduled in the next four weeks. And your husband is joining the firm. He's doing big law. And your plan is for him to join the firm as CSD? Eventually. Is he going to see clients?

Emily:
Yeah, eventually. He would like to. So he's doing litigation right now, and he wants to move through the curriculum and become familiar, but he's very excited to take on the sort of systems client-facing, but not necessarily serving the plans yet till he's more comfortable.

Ali Katz:
And you have four little kids, you're pregnant with your fifth, and you're scared of losing your stable source of income, which makes total sense. And you're finding it hard to see clearly how to weigh the pros and cons and decide when he needs to join the firm and quit his job. And is this a logistics question or emotional? Psychological? It's both. So, just to be very clear here, Emily, it is absolutely without question, a both. And first of all, what I'd ask is, is he going to get a bonus from big law if he stays a little longer? No bonus is coming. And right now I'm imagining he gets his pay as a W2. And have you ever been a business owner before?

Emily:
No, we've never done something like this before.

Ali Katz:
Got it. So this is going to be a big shift in the context of you learning to use your business as a business and to really get subsidized by the government with how you structure your business. So that right now, I'll just give you an example. Let's say that I get a $10,000 paycheck. That paycheck ends up being something like $4,500 after everything.

Ali Katz:
Well, that doesn't happen with your business. Right. You engaged five clients, four clients last month. How much did you get?

Emily:
$21,000.

Ali Katz:
So you got $21,000, and it didn't get whatever the tax haircut right away. If you got 20,000 in September, let's imagine that that happened. 20 in September, October, November, December, it's going to be about $80,000. Let's just imagine that that happens and you get $80,000 of revenue. What is your business entity structure right now?

Emily:
So it's nothing great. I just have an LLC, I have a meeting to meet with a CPA to elect to be taxed as an S corp, but I haven't done it yet.

Ali Katz:
Okay. So if you do that before the end of the year, so it might be, by the way, with all of your startup expenses, that you have enough business expenses this year to write that $80,000 down to very little profit, because you're still an LLC until you transition to being taxed as an S corp, whatever profit you have this year, you will pay self employment tax, which is about 15% plus your regular tax rate. So your job for this year is to write off as many business expenses as you can. Okay? And that comes down to categorization of your business expenses or categorization of your expenses. So I'll give you an example. Let's say you buy a computer, and if you categorize that as a business expense, you write it off. If you categorize it only half as a business expense, you only write off half of it. So your job is to be in the curiosity of how can I be as creative as possible so that everything that I do is for my business.

Ali Katz:
When I go out to dinner, it's a business meeting. When I go travel, I structure it so that it's a business meeting, it's a board meeting for my business, or that I speak at an event, and then therefore it's a business expense. And so that's going to be one of your most important jobs. You really want to be looking at your financials with your bookkeeper every single month, ideally about two weeks after the month ends, so that you can remember, and you want to have your expenses categorized so that you can talk to your bookkeeper and see if there's anything that needs to be categorized differently.

Emily:
Okay.

Ali Katz:
Because that's going to be the key. Your CPA really doesn't save you money on your taxes. You save you money on your taxes. By the way you work with your bookkeeper and categorize your expenses, and then the way that you submit those income and expenses to your CPA. Okay. Your CPA's job is to be as conservative as possible. Your job is to decide how aggressive you want to be, knowing that if you get audited, you'll have to prove up those business expenses. But the chances of you getting audited, especially if you are not filing a schedule C, are relatively low.

Ali Katz:
I got audited on my 2007 taxes. Sorry. In 2007, I got audited on my 2005 taxes. And I'll be honest, I did not have good backup. And yet I still ended up with a no change on my audit because of how I handled the audit. Because of how I handled the audit. If that ever becomes an issue, you can reach out and we can help you to know what to do in that case. The key for you as a business owner, though, is to decide how aggressive you want to be there.

Ali Katz:
Now, if you are not very aggressive, let's say, and so you're not writing off a lot of your business expenses and you have 80,000 of gross revenue. And let's say that you're like, oh, I'm only going to write off 30,000 of business expenses, although I think that you have a lot more business expenses than that. But if you're only writing off 30,000, you would end up with 50,000 of taxable income. That taxable income, if you don't have your S corp election, is all subject to both the self employment tax and the ordinary income. So that's going to add 15%. What you can do with the S corp election is then you pay yourself W2 payroll and it has to be a reasonable salary. Now, what's cool is because you are in so many different roles in your company, the reality is that your role as a lawyer is very tiny. Your role as a secretary, your role as an admin clerk, your role as all of the other things that you would actually pay a lot less for.

Ali Katz:
All factors into your reasonable salary. And there's a worksheet that can help you to calculate your reasonable salary when you are just starting out. You could make your reasonable salary $3,000 a month, $36,000 a year would then come to you as W2 income. That is where you'll pay your self employment taxes. And then the rest of that 50,000, let's call it 14,000, is only subject to the regular tax not the payroll tax. So whether you convert this year or next year will depend on how much profit you're going to have after your expenses. Is this making sense?

Emily:
It is making sense. I think I'm having a hard time thinking of, like, how could I have that many expenses? I mean, maybe I think I just need to get creative, I guess, and really think clearly about it.

Ali Katz:
Then what I'm also going to recommend is, there's a book that could be really useful for all of you. I think it's called how to save on your taxes big time. Let's just take a look here and see if that's it. "Lower your taxes big time" is a great book for you to just start to look at how creative you can be.

Ali Katz:
Because he really goes through all of the ways for you to be creative with those deductions. So that's a great resource.

Ali Katz:
Do you want direct support to help you grow your law practice into a business you love? Go to newlawbusinessmodel.com/show and sign up for a call with one of our trusted law business advisors. Each of our advisors has been trained directly by me over the past five years plus to help you chart your path from wherever you are now to exactly where you want to go as efficiently and effectively as possible. You're ready to build a law practice you love. We're here to help.

Ali Katz:
The other thing that I am going to suggest for you then, with respect to should my husband leave the firm, is I want you to look at how much he's bringing in after taxes and then how much. So I imagine he has health benefits. He has health insurance, correct?

Emily:
Yeah.

Ali Katz:
So you're going to look into, okay, we need to replace this much income, dollars, plus this amount for our health coverage. So that's going to mean looking into, what can I do for health coverage?

Emily:
Yeah, that's been a big question.

Ali Katz:
Yeah. So you want to look at that, especially with another baby coming. When are you due?

Emily:
April.

Ali Katz:
I see. So it's still quite a ways away.

Emily:
Yeah.

Ali Katz:
And you might want him to come in before that. So that's why I want you to have the exact dollar amount that you need to replace. It might be that you say, okay, we need to replace $10,000 a month. Okay, well, then we need to with him coming on board, we need to engage four more clients a month.

Emily:
Okay.

Ali Katz:
To replace his 10,000 plus the health insurance, let's just say. So I just want you to have that exact number. That's going to give you the logistics, that's going to give you the number. This is how many more clients we need to engage and serve each month together as a team for you to be able to leave your job.

Emily:
At what point can we feel like we can do that reliably? Because I have that number in my mind and I can say that it needs to be x number of clients, but I keep having this fear that they will dry up somehow or something, like we won't be able to find them.

Ali Katz:
Everybody has that fear, everybody has that fear. And so what you want to make sure that you have in place is the consistent marketing.

Emily:
Right. Okay.

Ali Katz:
So what I would say is, have you done a presentation yet?

Emily:
I did one webinar, yes.

Ali Katz:
How did it go?

Emily:
It went well. Only a few people came. I think there were like five people and like two of them were my family members. But someone booked a family wealth planning session from it, so that made it feel worth it.

Ali Katz:
And did they engage?

Emily:
They did.

Emily:
Well, I haven't had it yet.

Emily:
Sorry.

Emily:
Theirs is coming.

Ali Katz:
Got it. So when you're doing presentations, there sometimes needs to be a little more follow up between the presentation and the family wealth planning session. So you build connection with them. And that's something that your CSD could do when he comes on board is as soon as somebody books from a presentation, he calls them or texts them and says, great, we're so excited. Here's your homework. Let me know if you need any help with it. We can't wait to see you, that kind of thing. So what I would say is that you want to map out your calendar so that you've got, and this is where you all need to be mapping your calendars to match your desired cash flow.

Ali Katz:
So let's imagine that you want to have twelve family wealth planning sessions a month starting in January in order to, let's say, engage ten clients. Then what you're going to do, if you have not already done this, is you're going to hold twelve specific spots for family wealth planning sessions. Are you already doing that where you're holding where you've got twelve specific spots? 10:00 a.m. on Tuesday. 02:00 p.m. on Tuesday. 06:00 p.m. on Wednesday.

Emily:
Yeah, I have it blocked out on my calendar. I think the scheduling that I did initially was a little bit more ad hoc because I didn't have a plan in place. But now going forward I have more.

Emily:
Of a blocked out schedule.

Ali Katz:
Okay, so you've got your calendar blocked and you also want to be blocking the time for your signings and for your binder deliveries, unless somebody else is doing those for you. And you want to be blocking the time to review your documents and to prepare the documents, unless you're hiring that out so that you can see on your calendar what your goals are. And then, Emily, if you were to do two presentations a month and you were to invest in the marketing to fill those presentations, you will fill those ten sessions, those twelve sessions. Now, I understand that you don't have the confidence in that yet because you're just brand new and everybody's really scared of that. But the reality is that when you educate your community consistently enough, and that's the key, it's consistent. And so, on your calendar, you're not just blocking your family wealth planning sessions, you're blocking the presentations, the education as well, and it's educating your community. It may be that in the beginning, you want to be doing one education presentation a week just to feel confident. And those presentations can't, in my opinion, I don't think just be webinars if you want ten new clients a month.

Emily:
Okay.

Ali Katz:
I think you need to be doing some in person that you fill. I think that you need to be doing some in person or webinars with other groups. So you could do a presentation for a group of CPAs. You could do a presentation for a group of real estate agents. You could do a presentation with a financial advisor to their clients. You could do a presentation to a bunch of divorce lawyers.

Emily:
Okay.

Ali Katz:
And the reason I want you to fill in with those is because you're not paying to get people to those presentations. Whereas with the ones that you're hosting, you're paying to get people there. One way or another, you're going to pay to get people to your presentations.

Emily:
Right.

Ali Katz:
And if you're paying to get people to your presentations, and you know that your presentation turns into family wealth planning sessions, now all you need to do is turn up the volume on paying to get people to the presentations. Yeah. And the last piece that I want to leave you with, Emily, is while your husband has a job and while you're already doing so great. Have you looked at and modified the PFL business plan yet?

Emily:
No.

Ali Katz:
Okay. So I want all of you to.

Emily:
Oh, sorry. I just realized what the question was. I was confused.

Emily:
I did. Yes.
And I actually sent it to a bank.

Ali Katz:
Okay. So I want all of you to get the PFL business plan and modify it. And when you say that you sent it to a bank, well, first of all, how did that go?

Emily:
It was okay. She said it was great. They love the business plan, but they don't do loans for businesses just starting out. But she did offer me a business credit card.

Ali Katz:
Okay, great.

Emily:
With okay terms. I don't think it was great, but we haven't taken that out.

Emily:
But we're considering it.

Ali Katz:
Okay. So it's very important that most banks will say, we don't loan to businesses unless they've been in business more than two years.

Emily:
Right.

Ali Katz:
But Sarah Beth Locke took the business plan to many different community business banks in her community. And she was so excited and so prepared, and they believed in her vision so much that one of them agreed to give her an SBA loan for $150,000. So while most banks will just give you that straight party line, not all of them will. And so it may make sense for you to hit the pavement, make a list at your local community business banks, and start going in and meeting private bankers and just telling them your story. You're new in business in the community. You've got this great vision. You've got this great business plan. You've already been successful with it.

Ali Katz:
And what you need is you just need the support to be able to invest. Carrie is sharing right here that she was able to get an SBA loan for $100,000 before she even had her first client. She used the PFL business plan with a local regional bank. So that's what I want you to do as well, Emily. Okay? Find the banker that's really going to believe in you and get out there and do it. This goes for all of you. If you haven't done that yet, you've made an investment already. You've got all the support in the world you've got.

Ali Katz:
And many of you already even have proof that you can do it. And when they feel your enthusiasm, they want you to be a successful member of the community. They're going to help you. Right? You're going to find the person that's going to help you. You're going to find the banker that's going to help you. So that's the next thing. And then, Emily, the last piece that I want you to consider is whether you should apply for any 0% business credit cards, and whether you should do that on your own, or if you should do that through the company that we work with called fund and grow. Have you heard of them yet?

Emily:
I watched the presentation.

Ali Katz:
Okay, great. So that's the other resource that we strongly recommend, is that you do have 0% business credit, because your line of credit that you're going to get from the SBA won't be at 0%, but your business credit cards will be at 0% for some period of time, six to 18 months. The benefit of using fund and grow rather than doing it yourself, and I understand you have to pay them to do it, but the benefit of paying them to do it is that when your credit card offers come back, they generally come back very low. Fund and grow will get those negotiated up to higher amounts. Then they'll show you how to get the inquiries removed from your account so that they can go back and get you more credit about six months down the line, because the 0% will start to end and at that point you want more 0% credit. So it's really worth considering having them do it for you. Because, look, if you could engage one more client for $4,000 as opposed to doing all of the legwork that they'll do on your behalf, it's a much better trade of your time for money.

Emily:
Right. Okay.

Emily:
Yeah. Thank you.

Ali Katz:
So keep breathing. You are in the literally most difficult time of your life right now. The good news is that you're fully supported. I did my own version of what you're doing. Yeah, what, 20 years ago now, my kids were little, but I didn't do it with a great husband by my side. I went through divorce while I did it, which was horrible. And I didn't have the PFL support because PFL didn't exist. I hadn't created it yet.

Ali Katz:
So I had to make all of this up as I went along. And so I know for sure is that if I could do it, so can you. And you're already doing it, and you're doing fantastic. So just keep breathing through it and recognize that you're learning how to be a business owner and increase your capacity. And you're doing an amazing job.

Emily:
Thank you. Thank you for all of your suggestions and resources and your support. I really appreciate it.

Ali Katz:
So welcome. We're so glad that you are here. We're so glad that you're here. Thanks for listening.

Ali Katz:
If you want the kind of support that you heard me giving in this podcast, go to newlaw.co/show and book your call with a law business advisor, so you can map the path to discovering exactly how you can turn your law practice into a business you absolutely love.

Ali Katz:
But before you do that, connect with us on Instagram at New Law Business model. And be sure to subscribe so you never miss an episode. And of course, we would love your five star reviews on wherever you're listening to this episode.

Ali Katz:
And after all that, go to newlaw.co/show and book a call with one of our law business advisors.

Ali Katz:
I look forward to seeing you on one of our future coaching calls. Bye for now.