Starting a law firm is really two projects running at once. One is legal and administrative: entity, licenses, insurance, bank accounts. The other is entrepreneurial: deciding what the firm is for, who it serves, and how it will make money. Most launch guides only cover the first project. This one covers both, in the order that actually works.
Key takeaways
- Decide the business before the paperwork: practice area, client, fee model, and a one-page plan you will actually use.
- The setup sequence matters. Entity and EIN come early because insurance, banking, and the bar all ask for them.
- Malpractice coverage rules vary by state. Oregon runs the only mandatory bar-related program, and several states require disclosure, so check your own bar before you open.
- Open two bank accounts before your first client: operating and trust. Client advances go into trust, always.
- Price like a business from day one. Clio’s 2024 data puts the average lawyer rate at $341 an hour, and 71 percent of clients say they prefer a flat fee for their whole case.
Decide what the firm is before you file anything
The most important startup decisions have nothing to do with the secretary of state. They are business-design decisions: which matters you will take, which clients you serve best, what you will charge, and what the firm needs to collect each month to pay you properly. Every administrative choice downstream, from entity to software, gets easier once those are written down.
Resist the generalist trap. A new firm that does “whatever comes in the door” competes with every other lawyer in town on every matter type at once, and its marketing says nothing to anyone. A firm built around a defined practice area and client learns faster, systematizes sooner, and refers out the rest. Narrow is not small; narrow is how small firms get strong.
Put the plan on paper before the launch, even if it is one page. Revenue target, matter mix, fee model, monthly expense budget, and the date you will review it. If you want a structured version of that exercise, our free law firm business plan workbook walks through it question by question.
The setup sequence, in the order that works
The administrative launch is a dependency chain, not a checklist you can run in any order. The entity and tax ID come early because nearly everything else, insurance applications, bank accounts, and bar registrations, will ask for them. Here is the sequence that avoids backtracking.
| Step | What it is | Watch for |
|---|---|---|
| 1. Business plan | Practice area, client, fee model, budget | One page you will reread, not a binder |
| 2. Entity formation | PLLC, PC, LLC, or sole proprietorship per your state | States restrict which entities lawyers may use |
| 3. EIN and tax setup | Federal tax ID from the IRS, state registrations | Needed before banking and payroll |
| 4. Bar compliance | Entity registration, trust account registration, status updates | Many bars must approve professional entities |
| 5. Malpractice insurance | Professional liability coverage | State rules differ; see the section below |
| 6. Two bank accounts | Operating account plus client trust (IOLTA) | Never one account; see the section below |
| 7. Accounting system | Bookkeeping with trust-compliant ledgers | Generic bookkeeping mishandles trust funds |
| 8. Fee agreement templates | Engagement letter and fee structures in writing | Scope, fee basis, trust handling, billing cadence |
| 9. Core technology | Practice management, e-signature, online payments | Pick tools that talk to each other |
| 10. Intake and marketing basics | Phone answering, website, referral outreach | Response speed decides whether leads become clients |
Two of these steps deserve their own sections, because they are the two a new owner is most likely to get wrong in ways that hurt later: the entity and insurance decisions, and the bank accounts.
Choosing an entity, without the mythology
For most solo and small firms, the entity choice is between a professional limited liability company, a professional corporation, and, in some states, a standard LLC or plain sole proprietorship. Which options exist for lawyers is a state-by-state question, because most states restrict professionals to designated entity forms and many require the bar or the licensing authority to approve the formation.
Keep two facts straight about what an entity does and does not do. It can shield you from business liabilities like the lease and the copier contract, and from a partner’s malpractice in multi-owner firms. It cannot shield you from your own professional negligence; no entity form anywhere removes personal responsibility for your own lawyering. That is what insurance is for.
Taxes are the other half of the decision, and they change as revenue grows. Many owners start taxed as a sole proprietor or partnership and later elect S corporation treatment, which splits income into salary and distributions once profit supports a reasonable salary. The mechanics, including what the IRS expects that salary to look like, are covered in our guide to attorney compensation. Set the structure up with an accountant who works with law firms, because trust accounting and contingency timing confuse generalist bookkeepers.
Malpractice insurance: treat it as mandatory even where it is not
Whether you are required to carry professional liability insurance depends on your state, and the spread is wide. Oregon sits at one extreme: it is the only state that both requires coverage for lawyers in private practice and provides it through a mandatory bar-related program, the Professional Liability Fund, which has operated since July 1, 1978. Every Oregon State Bar licensee in private practice with a principal office in Oregon pays into the PLF, with a 2026 assessment of $3,500 and primary coverage of $300,000 aggregate plus a $75,000 claims expense allowance.
Most states leave the decision to you, and a number of them require you to disclose to clients or the bar whether you carry coverage. Treat the disclosure regimes as a hint. An uninsured firm is betting its owner’s personal finances on a perfect career, and the bet is worst in year one, when systems are new and workload judgment is untested. When you shop for coverage, understand that policies are typically claims-made, which makes continuity matter: ask how prior acts are treated when you switch carriers and what tail coverage costs if you ever close or move firms.
Two bank accounts, and the discipline between them
Before the first client signs, open two accounts: an operating account for the firm’s money and a client trust account for money that is not yet the firm’s. Under ABA Model Rule 1.15 and its state versions, fees and expenses paid in advance belong in the trust account and move to operating only as they are earned or incurred. Most states route small or short-term client funds through IOLTA accounts, where the interest funds legal aid, and your bar or its foundation will have an approved-bank list.
The discipline between the accounts is where new firms stumble, because the failure mode feels like a bookkeeping shortcut rather than an ethics violation. Spending an advance before it is earned, topping up a shortfall from operating, or leaving earned fees parked in trust are all commingling problems, and trust violations are among the fastest routes to discipline that exist. The full system, including the three-way reconciliation habit that keeps you provably compliant, is in our trust accounting guide, and the fee structures that feed the accounts are in the retainers guide.
Set prices like a business, not like an apology
New owners tend to price by copying the firm they just left, minus a discount for nerves. Price from the market and the business plan instead. Clio’s 2024 Legal Trends Report puts the average lawyer hourly rate at $341, with wide variation by state and practice area, so find where your market and matter type actually sit rather than guessing low. Remember that only a fraction of a working day converts to collected cash, which means a thin rate cannot be fixed with effort later; the arithmetic is in our law firm profitability guide.
Structure matters as much as level. Where scope is definable, clients strongly prefer certainty: 71 percent say they would rather pay a flat fee for their entire case. Flat fees also pull cash forward and cut billing overhead, which is exactly what a young firm needs. Whatever you choose, put scope, fee basis, trust handling, and billing cadence in a written agreement from the first client onward.
The first ninety days are an operating problem
Once the firm exists, the work shifts from setup to rhythm. Three rhythms matter most in the first quarter. First, a pipeline rhythm: a fixed weekly block for referral outreach and visibility, protected like a court date, because the matters you sign in month one run out by month three. Second, an intake rhythm: every inquiry answered fast, logged, conflict-checked, and either engaged in writing or declined in writing. The mechanics are in our intake process guide.
Third, a numbers rhythm. Close the books monthly from day one, even when the numbers are small, and review the same short scorecard every month: cash collected, hours worked versus billed, unpaid invoices, and overhead. Small-firm financial trouble almost never announces itself; it accumulates quietly in unbilled work and aging receivables while the owner is busy lawyering. The scorecard that catches it is in the profitability guide, and building all seven of these systems in sequence is what the Spine program teaches.
Frequently asked questions
It varies too much by state and model for an honest single number. Budget around the recurring lines rather than the one-time filings: malpractice insurance, practice management software, an accounting system, phone and intake coverage, and marketing. Oregon publishes a useful reference point at the required end of the spectrum, where the mandatory 2026 malpractice assessment alone is $3,500 per lawyer. A lean home-office launch mostly costs insurance and software; an office lease and staff change the math entirely, which is why the budget belongs in your business plan before you commit to either.
Most solos choose a professional limited liability company or professional corporation, but the honest answer is state-specific: states restrict which entity forms lawyers may use and many require bar approval. The entity protects you from business liabilities, not from your own malpractice, and the tax election matters as much as the form. Decide it with an accountant who works with law firms.
In most states, no, though several require you to disclose whether you carry it. Oregon is the exception: it is the only state that requires coverage and provides it through a mandatory bar program, the Professional Liability Fund, in operation since 1978. Requirement or not, practicing uninsured puts your personal finances behind every professional judgment you make, so treat coverage as a launch cost, not an option.
Yes, if you will accept any money before it is earned, which nearly every fee model involves. Advance fees and cost deposits are client property under Rule 1.15 and must sit in a trust account, usually IOLTA, until earned or spent on the matter. Opening it after the first retainer arrives means either turning money away or breaking the rule in week one.
Sources
- Oregon State Bar Professional Liability Fund, “Who We Are” (mandatory program, in operation since July 1, 1978). osbplf.org
- Oregon State Bar Professional Liability Fund, “Do I Need Coverage?” (2026 coverage terms and assessment). osbplf.org
- American Bar Association, Model Rule 1.15, Safekeeping Property. americanbar.org
- Clio, 2024 Legal Trends Report (average hourly rate). Reported by Attorney at Work. attorneyatwork.com
- Clio, 2024 Legal Trends Report (flat-fee client preference). Reported by the Illinois Supreme Court Commission on Professionalism. 2civility.org