What type of bank accounts should our law firm have?
Whether a firm is a new solo practice or an established AmLaw 100 firm, a law firm needs to have at least three bank accounts.
These bank accounts should include:
- A business operating account. This account(s) are designated for practice income and expenses. If you’re audited, you would provide records for this bank account.
- A business savings account. Set aside extra funds to cover unforeseen expenses, taxes, and emergency costs. Additionally, having this surplus socked away can increase your chances of getting a business loan if you need one in the future.
- A client trust account/IOLTA account. This account secures client deposits for legal fees and can be used to payout costs. A single trust account can hold funds for all clients, but should have individual ledgers for each client[1].
Law firms may also have business credit cards, but these should be used cautiously and only for firm business. Credit card payments should come from the firm’s business operating account. Never pay anything from the trust account, even processing fees. Your credit card merchant should work with you to provide a way to make payments out of the primary business account, or bill them monthly.
If you have a small or solo firm, it’s important to keep all your firm’s banking activities separate from your personal bank accounts. The only deposits from the law firm to your bank account should be salary, bonus, or other recordable distributions from the firm. Moreover, a lawyer’s personal expenses should never be covered by the law firm’s accounts. This can greatly jeopardize the integrity of a firm’s finances and damage its reputation and your own.
Depending on the size of your firm, you may consider using petty cash instead of credit cards for some business expenses. Petty cash is a cash amount set aside for covering goods and services, particularly ones that are unexpected. Petty cash should be treated as if the funds are its own bank account. Carefully record all activity — funding, expenses, and any other transactions that impact its balance[2].
References
1. Law Firm Accounting 101
2. What is Petty Cash?