How to Start a Law Firm: Entity, Insurance, Trust Accounting, and Software

DEFINITION

Professional Corporation (PC)

A business structure for licensed professionals that limits personal liability while satisfying state bar rules on attorney ownership. Available in most states as an alternative to a standard LLC for attorneys forming a firm.

DEFINITION

IOLTA

Interest on Lawyer Trust Account — a dedicated bank account required by every state bar for holding client funds that are nominal in amount or expected to be held for a short period. Interest earned goes to fund legal aid programs. Attorneys who commingle client funds with their operating account are subject to bar discipline.

DEFINITION

Malpractice tail coverage

An insurance policy that covers claims made after you cancel or leave a claims-made malpractice policy, for incidents that occurred during the period the original policy was active. Essential when switching carriers or winding down a practice.

The gap between passing the bar and opening a practice

Passing the bar exam and being admitted to practice gives you the right to represent clients. It does not tell you how to run the business that delivers legal services. Most attorneys figure out the operational side by doing — which means the first set of systems is usually built reactively, after a problem makes the need for a proper system obvious.

The better path is to build the operational foundation before you take a client. It takes less time than most attorneys expect, and it is substantially harder to fix after the fact. A trust account discrepancy three years into a practice is far more costly to resolve than setting up the account correctly on day one.

This guide covers the six things you need to have in place before you open for business.

Why entity structure matters more than attorneys expect

Most new solos operate as sole proprietorships by default — there is no filing required, and bar admission covers the right to practice. The problem is that a sole proprietorship offers no liability protection. A judgment against the firm is a judgment against you personally, which means your personal assets are exposed.

An LLC or Professional Corporation (PC) creates a legal separation between the firm and your personal finances. Whether a standard LLC or a PC is available to you — and which form your state bar requires for multi-attorney firms — varies by state. Check your state bar’s rules on professional entities before filing anything, because some states prohibit attorneys from using standard LLCs and require a PLLC or PC instead.

Formation is straightforward: file the articles of organization or incorporation with your state’s Secretary of State, pay the filing fee ($50–$300 in most states), and register the entity with your state bar. An operating agreement or shareholder agreement should follow — even for a solo, this document governs what happens to the firm if you become incapacitated.

Malpractice insurance: before the first client, not after

The question of when to get malpractice insurance is easy: before you take a client. The question of which policy to get is more complicated.

Claims-made policies are the most common type for attorneys. They cover claims made while the policy is active — which means if you cancel the policy and a client files a claim six months later for work you did while covered, you are not covered. That gap is what tail coverage addresses. Tail coverage extends the reporting period after a claims-made policy is cancelled or you retire, so work done during the covered period remains protected.

For most new solos, the decision is: get a reasonable amount of coverage for your practice area and state, from a carrier that specializes in legal professional liability. Premiums vary by practice area — litigation and real estate carry higher rates than estate planning or transactional work. Get quotes from multiple carriers before committing.

Trust accounting: the non-negotiable setup requirement

If you will hold client funds — retainers being the most common — you need a separate IOLTA trust account before you receive any money. This is not optional or recommended: it is a bar rule in every US jurisdiction. Commingling client funds with your operating account is a disciplinary offense that can result in suspension.

An IOLTA account is a separate bank account at a participating bank (your state bar has a list), where interest earned on pooled client funds goes to a legal aid fund. Every client whose funds you hold gets their own ledger entry in your accounting system. Every disbursement from the trust account must be recorded against the right client’s balance. A monthly reconciliation confirms that the bank statement, your trust account journal, and the sum of individual client ledger balances all agree.

Practice management software with built-in trust accounting handles this automatically: deposits, disbursements, and reconciliations are tracked in the context of each matter. Setting this up before your first retainer means the records are clean from day one.

CaelusLaw handles trust accounting, intake, billing, and docketing in one place — built for solo and small firm attorneys who need to be operational quickly, without months of configuration. Join the early access list.

Software selection: the decision that shapes everything else

Practice management software is the operational infrastructure of the firm. It should handle matter management, time tracking, billing, invoices, and IOLTA trust accounting in one system. The single most important selection criterion is whether trust accounting is included or an add-on.

Clio is the market leader and a solid product, but its model has shifted toward selling multiple separate products — Clio Manage for practice management, Clio Grow for CRM, and Clio Draft for document automation — each priced separately. For a new solo, paying for three products when you need one is overhead you do not need in year one.

For a solo or small firm (1–20 attorneys), the right tool is one that handles everything in a single application at a price that makes sense for a practice that is still building revenue. The critical test: can you be operational in a day, or does setup require a week of configuration and a dedicated onboarding call?

Building your first pipeline: the fastest path to clients

Before spending anything on marketing, work your personal network. Every attorney you know who has started a practice got their first cases from people who already knew them. Law school classmates, former colleagues, former supervising attorneys, and personal contacts who know your practice area are the starting point.

After personal network, complete your Google Business Profile. This is free and generates local search calls — “divorce lawyer [city]”, “estate planning attorney near me” — without any ongoing spend. It takes about an hour to complete fully.

Bar association lawyer referral services are the next step. Most state and local bar associations have referral programs that send cases to registered attorneys for a small fee per referral. Registration requirements vary, but the barrier to entry is typically low.

Avvo, FindLaw, and Justia profiles are worth completing because they rank for attorney searches in Google. A basic profile on each takes under 30 minutes and generates occasional inbound calls.

A simple website — your name, practice areas, location, and phone number — covers the basics. Elaborate design and SEO investment come after you have a caseload that tells you which practice areas are actually in demand in your market.