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Opening Bank Accounts For Your Law Firm
(Current as of August 2020)
When starting a law firm, you’ll need to open a minimum of two bank accounts. First, you’ll need a business checking account for your firm’s day-to-day operations. You’ll also need one or more client trust accounts (an IOLTA account at the very least) to ensure that client property is not commingled with law firm property.
Business Checking Account
You should open a business checking account (sometimes referred to as an operating account) as soon as your legal entity is formed and your law firm starts incurring business expenses. A business checking account is essential for preserving your personal liability protection, and will also help you keep accurate financial records.
Maintaining Personal Liability Protection. Any limitation on liability that you enjoy from operating your law firm as a separate legal entity will likely be lost if you don’t keep your business and personal finances separate. If you regularly use your personal bank account for business expenses, or vice versa, a court may allow business creditors to pierce the corporate veil and collect on your personal assets to satisfy business debts. Maintaining a business checking account (and using it for business purposes only) draws a critical line between your business and personal affairs.
Keeping Accurate Financial Records. If you don’t keep an accurate account of your business expenses, you may wind up leaving money on the table by forfeiting valuable tax deductions. All of your law firm’s income and expenses should flow through your business checking account. Your monthly account statements will serve as an important record of your law firm’s finances.
Client Trust Accounts
Lawyers often find themselves in possession of client funds—whether it’s an advanced retainer for legal services, proceeds from a settlement, or money to pay expenses on the client’s behalf. ABA Model Rule of Professional Conduct 1.15 says that a lawyer must keep client property in the lawyer’s possession separate from the lawyer’s own property. Most states, if not all, have adopted some variation of this rule against commingling funds. That means you’ll need to deposit client funds directly into a client trust account.
There are two general types of client trust accounts:
Attorney IOLTA Accounts. An IOLTA account is a special type of interest-bearing trust account that you’ll use to pool client deposits that are too small or short-term in duration to generate significant interest on their own. Your bank will pay any interest generated by your IOLTA deposits directly to the state for charitable use (often to provide civil legal services to indigents). All 50 states have an IOLTA program, and participation is mandatory in most. Check with your state for procedures on setting up an IOLTA account.
Non-IOLTA Interest-Bearing Trust Accounts. Lawyers are generally prohibited from profiting off of client property. If a client’s funds are significant in amount and will be in your possession for a significant period of time, you may have a fiduciary obligation to deposit them in a separate interest-bearing trust account and to pay the client any interest earned.
Whether a client’s funds should go in an IOLTA account or a separate interest-bearing trust account generally depends on whether the funds are likely to generate net interest. In most states, that decision is left to a lawyer’s sound discretion, considering factors like the size and expected duration of the deposit, the available interest rate, and whether the interest earned will be greater than any bank fees associated with maintaining a separate interest-bearing account.
Conclusion
When your law firm is first starting out, you should open both a business checking account and an IOLTA account. The IOLTA will provide a short to medium-term place to hold client funds if needed. You can then assess on a client-by-client basis whether a separate interest-bearing trust account might be necessary.
A word of caution: be sure to check your state’s guidance on proper trust account management. Requirements can vary by jurisdiction, and every year there are well-intentioned lawyers who are suspended or disbarred because they unknowingly run afoul of trust account rules that aren’t always the most intuitive.
OTHER ARTICLES ON THE LAW FIRM LAUNCHPAD:
Choosing A Business Entity Structure
Getting An Employer Identification Number (EIN)
Getting A Business Credit Card
Buying Legal Malpractice Insurance
Assessing Your Furniture And Office Supply Needs
Setting Up Internet, Phone, and Fax
Assessing Your Computer And Technology Hardware Needs
Assessing Your Software Solutions Needs
Fortifying Your Electronic Data Security
Setting Up Mailing And Shipping Accounts