Three Lawyers Left Their Firms. Then They Had to Build One.

Knowing the law isn't running a firm

William, Jane and Marcus are a composite case study. Names, figures and identifying details have been changed. The issues discussed are representative of the kinds of tax and financial questions that arise when professionals build a firm.

William, Jane and Marcus knew how to practice law. Running a law firm was another matter.

The three attorneys had spent years at established firms. They knew how to manage matters, develop client relationships and bill for their work. Eventually, they started asking a question many professionals quietly ask: why are we building somebody else's firm?

So they left. Three attorneys became three owners. And almost immediately, the questions changed.

One-third each sounds easy

Their starting point sounded reasonable. Three founders. One-third each. Split the profits. Except:

• William expected to bring the largest existing book of business.
• Jane would take on substantially more firm-management responsibility.
• Marcus wanted to retain earnings, hire an associate and grow.
• William preferred larger current distributions.
• Jane was thinking about retirement contributions.
• All three wanted to understand what they could actually take home.

Who actually earned the profit?

That's where "one-third each" stops answering very much. Ownership, compensation and cash distributions are related. They aren't necessarily the same thing.

Suppose William originates a significant client. Jane performs much of the legal work. Marcus supervises an associate working on the matter. Who should receive the economic benefit?

That's not a question a CPA should answer for three attorneys. It's a question the owners need to answer among themselves and document appropriately with counsel. Our job is to show them what their answer means financially and for tax purposes.

If the firm rewards origination, we can model it. If management responsibilities receive additional compensation, we can model that. If the partners want equal economics despite different production, we can model that too. Then we can show what those decisions mean for taxable income, partner compensation, distributions and cash flow.

The structure should follow the business agreement. Not the other way around.

A partner draw isn't a salary

This distinction matters. If the firm is taxed as a partnership, its partners generally aren't treated as W-2 employees of that partnership. Depending on the arrangement, payments to partners may involve guaranteed payments, distributive shares of partnership income and distributions. Those concepts don't necessarily produce the same tax result.

And a cash distribution isn't necessarily the same thing as taxable income. A partner can owe tax on allocated partnership income even when the firm retains some of the cash. That's an unpleasant concept to discover for the first time when the K-1 arrives.

So before deciding what the partners can distribute, we want to understand both the firm's economics and the individual owners' expected tax obligations.

Then someone asked about an S-corp

Of course they did. Successful business owners eventually hear: "Just elect S-corp and save on taxes." We don't start there.

For three practicing attorneys, an S-corporation analysis involves more than comparing self-employment tax against payroll tax. We need to consider expected recurring profit, compensation for the services each shareholder performs, payroll costs, retirement-plan consequences and whether the structure fits the firm's ownership and compensation model.

Professional-entity and ownership rules also vary by jurisdiction. Those legal requirements belong with the firm's counsel. Our role is tax and financial modeling.

And sometimes the answer to a tax strategy is: not yet. Adding payroll, another compliance regime and additional administrative cost to produce a marginal benefit isn't planning. It's complexity.

The bank balance wasn't their profit

Then the firm started collecting. And the operating account looked good. That's where another distinction becomes important: revenue, profit and cash are not interchangeable. The firm had:

• Payroll and contractors
• Malpractice insurance
• Research and practice-management software
• Technology and rent
• Professional dues and marketing
• Upcoming tax obligations and working-capital requirements

Client funds aren't firm revenue

The firm also handled client funds. Those funds require their own treatment and controls. Client trust funds aren't simply law-firm revenue because they're sitting in an account associated with the practice.

So when the partners asked, "How much can we distribute?" we didn't answer by opening the banking app. We started with the books.

Then Marcus wanted an associate

Marcus believed another attorney would let the firm accept more work. Reasonable.

But "Can we afford a $120,000 associate?" isn't answered by checking whether there's $120,000 in the bank. Salary is only part of the cost. There may be employer payroll taxes, benefits, insurance, technology, recruiting, bonuses and additional support costs.

Then comes the business question: what does this hire need to produce, or what higher-value partner capacity does the hire need to create, for the economics to work? Now accounting becomes useful for something more interesting than compliance. It helps answer a decision.

Jane wanted to maximize retirement savings

That introduced another variable. Retirement-plan design doesn't live in isolation. It can interact with compensation, employees, ownership and the firm's broader economics. So now several questions were connected:

• Should we hire?
• How should the partners be compensated?
• Should we reconsider the entity's tax classification?
• How much should we distribute?
• How much cash should the firm retain?
• What can the owners contribute toward retirement?
• What are the partners likely to owe personally?

What we actually review

Change one assumption and another answer may move with it. That's why we model the business as a system instead of treating every tax question as a separate trick.

This is where "tax advisory" can become a vague phrase, so here's what it means in practice. Before a planning conversation with owners like William, Jane and Marcus, we may be looking at year-to-date financial results, partner compensation and distributions, projected full-year taxable income, estimated payments already made, payroll, retirement contributions, upcoming expenditures and the firm's cash requirements.

Then we update the projection. Not because we believe we can predict December perfectly in June. We can't. The purpose is to give the owners a current estimate based on what we know today and identify decisions that still have time to be made. As the facts change, the projection changes.

And then the firm had a really good year

Collections accelerated late in the year. The operating account looked healthy. The partners wanted distributions. That was reasonable.

But before cash went out, we updated the firm's projected income. We reviewed distributions already made. We considered upcoming payroll and operating requirements. We looked at estimated tax exposure for the owners. We maintained working capital. Then the partners could decide what to distribute.

There was no magic tax loophole. No surprise five-figure deduction. Just three business owners making a significant financial decision with better information. That's often what good tax planning actually looks like.

They're lawyers. They don't need to become accountants.

William, Jane and Marcus didn't start a firm because they wanted to analyze capital accounts. They wanted to practice law on their own terms. Choose their clients. Build their team. Develop their reputation. And own what they were creating.

Our job isn't to turn attorneys into accountants. It's to give them enough command of the financial side of their firm to make informed decisions without spending their nights building tax projections. They practice law. We help them understand the business behind the practice.

Because eventually the most important question isn't "How much did we make?" It's "What are we building?" The tax return is the byproduct. The firm is the asset.

Your side quest

Sometimes your side quest doesn't happen after work. Sometimes you've already spent a decade becoming exceptionally good at what you do. The next step is building something you own.

Side Growth Partners provides tax compliance and planning for professionals and closely held businesses. Tax expertise for what you're building.