The Ultimate Guide to Financial Planning for Law Firm Owners
(A comprehensive guide to maximizing profits, minimizing taxes, and building long-term wealth as a law firm owner.)
Why Financial Planning is Critical for Law Firm Owners
Law firm owners face very unique financial challenges. Unlike Big Law associates, law firm owners are often responsible for producing their own income and their income can fluctuate dramatically. It’s often a continuous cycle of feast or famine. That makes saving very difficult.
Beyond cash flow, tax planning is often a sore spot for law firm owners. The complexities of running a business along with high income brackets, make tax planning a necessity. Yet, most law firm owners do not receive the tax planning help they need.
Finally, the burden of running a business and practicing law mean you have little time to devote to these tasks. Retirement planning often takes a back seat to the bigger task at hand: keeping the cash flow going and growing the business.
For these reasons, financial planning is critical. Yet, traditional financial advice doesn’t always work well for law firm owners. Traditional financial advisors are focused on investments and retirement. And while important, investments are only one piece of the puzzle. Law firm owners face bigger challenges with cash flow, tax planning, and business growth.
And most law firm owners don’t really have a set retirement date in mind. You probably enjoy what you do and can envision yourself doing it indefinitely, especially if you’re able to scale your law practice and get out of the day-to-day grind.
This guide will teach you how to optimize your cash flow, build wealth, minimize taxes, and set up for a profitable exit. It’s a tall order, but let’s dive in.
The Law Firm Owner's Financial Game Plan: Where to Start
The biggest mistake I see when working with law firm owners is the intermingling of business and personal finances. Separating business and personal finances is the foundation of financial clarity.
I’ve heard all the excuses. But I get more points on this personal Am Ex if I use it for business purposes. But I don’t have time to set up new accounts. But it's just easier this way.
It’s not.
If you’re serious about cleaning up your finances, the first order of business is to create separate personal and business accounts–this means bank accounts and credit cards.
The next step is that you have to start paying yourself a regular wage. It might be hard in the beginning, but setting up an automatic paycheck or draw for yourself each month will bring a ton of financial clarity to your personal finances and your business. Greg Crabtree recommends this in his book Simple Numbers, Straight Talk, Big Profits. He says the first thing any owner needs to get right is owner’s compensation.
The second biggest mistake I see law firm owners make is having cash flowing back and forth between their personal and business accounts. You need to create a firewall between the two. If the business is low on funds, do not borrow money from yourself. And don’t take money out of the business for personal expenses. Other than your regularly planned paycheck, do not take extra funds ad hoc. Keep the personal and business separate.
Finally, have an emergency fund both for yourself and the business. Yes–both. Your business needs a 3-6 month cushion as do you. Do not neglect either. Do not pull from your personal emergency fund to help the business and vice versa.
Cash Flow Mastery: How to Keep More of What You Earn
The top cash flow mistakes law firm owners make are: (1) Not paying themselves a regular, automatic paycheck, (2) Not prioritizing profit, (3) Not collecting on receivables.
Even law firms generating over $1 million a year struggle with profitability. Revenue is not the same as profit. Your goal is profitability. No one cares if you have an 8 figure law firm, but you’re not profitable.
We are big fans of Profit First for Law Firms. Just like it can be easy to overspend in our personal lives, it can be easy to do in your business. Keeping business expenses in check can be difficult.
Profit First for Law Firms flips accounting on its head and advocates taking profit proactively (first), rather than waiting to see what is left over. The Profit First system involves creating several different bank accounts for more effective management of business cash flow. Those accounts are:
Income account - This is where all receivables come.
Profit account - An automatic percentage of all income goes here first.
Taxes - Next a percentage goes here to pay taxes in the future.
Owner’s compensation - A percentage of income comes here to pay you.
Operating expenses - What’s left over goes to pay operating costs.
Billing, collections, and cash flow are critical areas to get right if you want to be profitable. Cash is king. You need customers who pay and pay on time. Otherwise, you are handing out interest free loans at best, and doing free work at worst. Focus on ways you can improve payment speed and reduce receivables:
Make paying easy with more options like credit cards.
Get the money up front if possible.
Bill faster and more frequently.
Incentivize paying early and penalize paying late.
Smart Tax Strategies for Law Firm Owners
Smart tax planning can save you tens or even hundreds of thousands of dollars. The first area we often examine is your business structure. Should you be set up as an S-Corp, LLC, LLP, or C-Corp?
A lot depends on where you are. First, you need to consider the bar rules of the state you are in. In many states, law firms are required to form as LLPs instead of LLCs. There isn’t much difference. Both are flowthrough entities.
Under current tax law and in most locations, an LLC electing to file as an S-Corp is advantageous to a C-Corp. This is because under current tax law, this arrangement qualifies for the QBI (qualified business income) deduction, and you have the ability to segregate your income as an owner into salary (subject to FICA tax) and draw (not subject to FICA tax). This is a major tax advantage.
But watch out because in some jurisdictions S-Corps are subject to extra taxes. California imposes a franchise tax of 1.5% on the net income of S-Corporations. New York City does not recognize federal S Corporation status and taxes S Corporations at an 8.85% rate, similar to C Corporations. The District of Columbia, New Hampshire, and Tennessee are similar.
What are the top tax deductions and write offs for law firm owners? As a business owner, you have the ability to deduct many expenses. Anything that is business related, you could reasonably expect to deduct from your income. If you work from home, you can deduct a portion of many of your home expenses like rent, mortgage interest, utilities, insurance, and maintenance costs.
Other common deductions include advertising and marketing costs, travel expenses, continuing legal education costs, professional memberships and fees, office supplies and equipment, insurance premiums, retirement plan contributions, vehicle expenses, and legal research tools.
How do you reduce your tax liability without raising red flags? An audit isn’t the end of the world. Be sure that you are reporting your income accurately and maintaining all necessary documentation. Maintain detailed records and receipts. Don’t overstate deductions. Don’t let clients pay in cash–though I doubt you’re doing that. Common audit triggers are significant discrepancies between reported income and third party information, large charitable deductions, or unusually high business expenses compared to income.
Finally, pay your taxes on time. The IRS should not be your lender. The Profit First system will help you make sure you have money to pay taxes when you need it. Running payroll for yourself will ensure taxes are paid in a timely manner and in accordance with income. And careful planning with a tax professional can help you time your quarterly estimated tax payments so you are not hit with tax penalties.
Paying Yourself Right: Salary, Distributions, & Wealth Growth
How much should you pay yourself? There are two ways to think about this–logistically and legally. First, if you are using the S-Corp strategy and splitting income into “payroll” and “draw” to minimize FICA taxes, your payroll amount needs to be reasonable. The IRS has no guidance as to what “reasonable” means though. Just make sure that the amount can be justified. Paying yourself $1 in payroll and the rest in draw is sure to raise eyebrows.
Logistically, you should pay yourself enough to meet your needs and be comfortable if you are able to. It should be sustainable for the business and reasonable for your lifestyle. The key is that it should be regular and automatic. Set up a regular paycheck / draw for yourself twice a month. If you have additional profits, give yourself a bonus once a quarter.
Another way to pay yourself is through a retirement plan. As soon as possible, you should set up a retirement plan for yourself and your business. When you’re a solo, the SEP IRA is the easiest plan to set up, and it’s free. You can simply open an account through Schwab, Vanguard, or any other major brokerage firm. A good next step is the 401(k). Setting up a 401(k) is not as expensive as you may think and offers you a lot more flexibility.
If you’re income is consistently high (top tax bracket), you may want to consider setting up a cash balance plan. This is actually a type of pension plan, but it permits you to defer significantly more than the 401(k) which can greatly reduce your taxable income. And you can have both a cash balance plan and 401(k)--pairing the two together is a great strategy.
Finally, think about building wealth outside your law firm and retirement accounts. Investing in a brokerage account gives you a lot of flexibility. Income generating investments can be additional sources of passive income for lean months. Real estate is also attractive for this reason–offering the potential for passive income, inflation protection, and asset appreciation.
Growing Your Law Firm Into a Sellable Asset
Your law firm could be a significant source of future wealth–if you take the right steps. Law firms, just like other professional services businesses, can be sold and do have value. The way you structure and build your law firm determines how much value it has.
Law firm value is based on two factors: profitability and a multiple assigned by the market. The multiple depends on how attractive your business is to an outside buyer and how ready it is to transition. The biggest ingredient in valuation is owner independence. Systematizing and scaling your business to the point where it is not dependent on you for daily operation is the single biggest thing you can do to build a sellable law firm with value.
How do you sell a law firm? There are three primary ways you could sell your practice in the future. They include: an internal sale to someone within the firm, an external sale to someone outside the firm, or a merger with another firm.
Investment Strategy for Law Firm Owners
An often overlooked aspect of financial planning for law firm owners is developing a strong investment strategy. For law firm owners, investing wisely is essential to creating long-term financial security, building passive income, and preparing for eventual retirement or firm exit. While your law firm may be your largest income generator today, it shouldn’t be your only source of wealth.
Why Law Firm Owners Need an Investment Strategy
Investing allows you to build assets that will generate income and grow over time. Your law firm may be your primary asset today—but putting all your eggs in one basket exposes you to increased risk. Creating a diversified portfolio of wealth outside of your business helps to reduce risk. It also gives you multiple ways to grow wealth and future income besides billable hours. And most importantly, a smart investment strategy gives you options. It builds financial independence so that you’re not tied to the office forever.
Start With Your Financial Goals
Before choosing investments or account types, clarify your long term financial goals. Do you want to retire early? Take a sabbatical? Sell your firm and live off of passive income? Your investment strategy should align with your personal vision of success.
Some things to consider include:
Your target retirement age and lifestyle expectations
Your desired annual passive income
Major life events and planned expenses (children’s education, home purchase, etc.)
Knowing your “why” makes it easier to build a plan that supports the life you want—both now and in the future.
Match Your Portfolio to Your Season of Life
Your investments should reflect where you are in your journey. Are you early in your practice and looking for growth? Or are you starting to think about exiting in the next 5-10 years? If the latter, you may want a more conservative portfolio.
Younger firm owners should consider taking more risk and leaning into growth-focused investment portfolios. Closer to retirement? You’ll want to start dialing that risk down and shifting toward income and stability.
It doesn’t have to be complicated. A well diversified portfolio with a few key assets—like the S&P 500, aggregate bonds, real estate, etc.—rebalanced regularly will do the heavy lifting over time.
Invest With Taxes in Mind
You already know taxes are one of your biggest expenses. So let’s make sure your investment strategy is tax efficient.
Some quick wins:
Max out tax deferred accounts to reduce your taxable income
Use tax loss harvesting to offset gains
Use Roth accounts (when it makes sense) to build future tax free wealth
Don’t forget about HSAs and 529 plans
Working with a financial planner who understands both tax strategy and investment management is key here.
Insurance and Risk Management: Protect What You’ve Built
You’ve built a business and a life worth protecting. But all it takes is one unexpected event—a lawsuit, a health scare, a cyberattack—to put that at risk. Insurance isn’t exciting, but it’s essential. Think of it as the foundation that supports everything else you’re building.
Here are the core types of insurance every law firm owner should consider:
Malpractice Insurance
This one’s non-negotiable. But coverage isn’t one-size-fits-all. Make sure your policy reflects the actual risk level of your practice, especially if you handle complex or high-value cases. If you’re planning to retire or sell, consider tail coverage to protect against future claims on past work.
Business Owner’s Policy (BOP)
A BOP bundles important protections like:
General liability (for things like slip-and-falls at your office)
Property insurance (for your tech, furnishings, and equipment)
Business interruption coverage (if something forces you to temporarily shut down)
If you’ve got a physical office, you need this.
Cyber Liability Insurance
Law firms are increasingly targeted by cybercriminals. If you store sensitive client data, case files, or financial records (and you do), you’re vulnerable. Cyber insurance helps cover the cost of breaches, legal fallout, and restoring trust.
Disability Insurance
Your ability to earn income is one of your biggest assets. Long-term disability insurance replaces a portion of your income if you’re unable to work due to illness or injury. Look for a policy with an “own occupation” definition, so it covers you if you can’t do your specific job—not just any job.
Life Insurance: Term vs. Cash Value
If others rely on your income—family, employees, or a business partner—you need life insurance. But not all policies are created equal.
Term Life Insurance is simple and cost-effective. It covers you for a set number of years (like 20 or 30) and pays a tax-free death benefit if something happens during that term. It’s usually the best fit for law firm owners who want solid protection without overpaying.
Cash Value (Permanent) Insurance, like whole life or universal life, includes an investment-like savings component. It’s often marketed as a way to build wealth and get insurance in one product.
But here’s the catch:
Premiums are much higher than term policies
The “investment” returns are usually underwhelming
It can take years before the cash value is even usable
These policies are often sold aggressively, but rarely make sense for the average attorney
Unless you’re dealing with complex estate or tax planning, term life plus a smart investment strategy is usually the better path. In short: buy insurance for protection, not for growth.
Umbrella Policy
An umbrella policy gives you extra liability protection above your other coverages—usually in $1 million increments. It’s affordable and adds peace of mind, especially if you have significant assets to protect.
Common Financial Mistakes Law Firm Owners Make (And How to Avoid Them)
In my years of working with law firm owners, there are four major mistakes I see all the time. Avoiding these will save you huge headaches and thousands of dollars. The first big mistake is failing to save for taxes. This leads to IRS headaches, penalties, and interest. Using the Profit First system, and automatically setting aside a percentage of receivables for taxes, will help avoid this problem.
Second is a failure to separate personal and business finances. Not only does this lead to inefficiencies and missed opportunities and deductions, this could also open you up to additional legal risk. If you get sued, and your personal and business finances are intermingled, you could expose your personal assets to risk. There should be an iron curtain between your personal and business finances.
The third mistake in my opinion is relying too heavily on billable hours. Billable hours seriously hamper your ability to be efficient and profitable. And clients don’t like them in many cases. As much as possible, you should introduce flat fees or deliverables based pricing. Even better, subscription fees can provide recurring revenue that creates financial stability and long term relationships with clients.
Finally, the biggest mistake of all is not having an exit plan. Even if you never really plan to retire, if you don’t have an exit plan you’ll never have exit options. Exit planning is about optionality. You may keep working until you die. However, if the day comes that you want to step away, having a well thought out exit plan can make all the difference. As you get older, your thoughts about working indefinitely may change.
Next steps
If the thoughts in this guide resonated with you, it’s time to take the next steps. Book your free intro call to learn how The Lawyer Millionaire Founders Network can help you create a financial plan that gives you confidence, clarity, and the freedom of optionality.