A law firm is a business like any other, with different legal professionals (partners, paralegals, associates, etc.) working in a symbiotic relationship to meet their clients’ demands. Law firms are full-functioning businesses with revenue generation sources and workers whose livelihood depends on these revenues.
If you want to get started in the legal industry or are perhaps just curious about how law firms like The Medlin Law Firm make money, this article covers what you need to know.
Law firm business models
Every active business has a business model, and it is no different with law firms. There are various business models for law firms, the most common being a partnership. It entails a group of individuals (partners) providing the capital needed to kickstart the firm. These partners profit through the fixed hourly rates they charge their clients. The partners hire associate lawyers responsible for handling clients’ cases and bringing earnings. Most times, the more the associate lawyers, the more the profit. Nevertheless, other crucial factors determine how much money a law firm makes.
The other business models used by lawyers or law firms are vendors, retail, and contingent fee. Law firms that operate as vendors are usually outsourced by companies or hired as in-house counsel to handle the legal operation of that company. The retail law firm specializes in volume legal cases such as wills, articles of incorporation, and trust.
Finally, law firms that adopt the contingency fee business structures are those that only bill their clients upon the success of the case. This business structure is common in a specific field of law called personal injury law.
The business model of a law firm may change with time, and the initial model adopted is mostly due to its status as a solo practice, size, and goals.
What Affects Law Firm Revenue?
Several things determine how much a law firm makes, with some being specific depending on the kind of law firm. Some common factors that impact the revenue of the average law firm are:
According to the Martindale-Avvo Attorney Compensation Report notes, as of 2019, female attorneys bring in 35% less income than their male colleagues. This results in them earning a lesser compensation which subsequently affects the law firm’s revenue.
The location of a law firm can impact their revenue as factors like cost of living are considered when drafting hourly rates. For example, in New York, a lawyer can charge up to $485 per hour, but the highest average hourly rate in Nebraska is $215.
In the legal industry, time is indeed money. Although most law firms work on an hourly basis, the number of hours worked by attorneys determines the firm’s total revenue. Therefore, the higher the hours worked, the better the income. To tell whether a law firm is productive, divide their billable hours by the total number of hours worked by each lawyer in the firm.
Just as the location of a law firm determines the revenue they generate, so does the practice area. According to statistics, medical law is the highest paying field of law, with its attorney’s average income being $138,431 annually. Intellectual property attorneys, trial attorneys, tax attorneys, and corporate lawyers are also high earners in contrast to an attorney specializing in juvenile law whose average income is $87 per hour.
The make-up of a law firm’s client base can strongly impact its revenue. This client base usually comprises only customers, businesses, or a combination of both. According to the Martindale-Avvo Attorney Compensation Report, the law firms with consumers as their clients in 2019 earn $181,000. In contrast, those that serve businesses earn $238,000 on an average. Law firms with both consumers and enterprises as clients make an average of $175,000.
About 77% of law firms charge clients by an hourly billing system. This type of bulking structure is lucrative if the attorneys utilize many hours. In contrast to the hourly rate, many law firms also use the fixed-fee billing method. The latter makes the revenue more predictable and easy to track. Many solo practitioners opt for fixed fees.
Before going ahead to launch your law firm, make sure to consider all these factors.
Like any other business, profits also go hand in hand with a good reputation for law firms. There are many competitions in the legal industry, so standing out could really help. Revenue generation can also be improved by investing in good advising and promotion and a strong network of clients.