May 2023
Adam Hoeksema
The IRS publishes tax return data each year on the roughly 28,000,000 sole proprietorships in the U.S. We analyzed the 329,604 tax returns that were filed in the legal services industry to pull out some key statistics and insights to help our customers ensure that they are creating realistic financial projections for their legal services business.
We hope that this data will be helpful for you as a “reality check” for your financial projections and law firm business planning process. We hope you create a forecast for your unique situation and plan, and then use this data to make sure your projections seem reasonable based on industry averages.
Here is what we will cover in this article:
Learn How to Use this Financial Data
If you are creating projections for your startup business, or you just want to see how your existing business stacks up to industry averages, you can take your income statement and compare key ratios and percentages for your business compared to this industry average data.
How many legal services businesses in the US are sole proprietorships
There are roughly 330,000 legal services businesses in the US organized as sole proprietorships. We specifically analyzed 329,604 legal services companies based on the 2019 IRS tax return data. These would certainly include law firms, but may also include other businesses that are best categorized as a legal service.
Average annual revenue for a law firm business
The average annual revenue for all sole proprietorship legal services businesses in the U.S. was just $121,261.
Based on that annual revenue number it seems that most of these businesses are likely single lawyer practices where the owner is practicing on their own.
I think we need to remember that this tax return data includes all sole proprietors that categorize themselves in the “legal services”. Depending on location and number of attorneys the potential revenue will vary dramatically.
This underscores the importance of actually creating your own law firm projections based on your specific business plan.
Average annual expenses for a law firm
The average annual expenses for all sole proprietorship legal services businesses in the U.S. was $69,106.
The average annual expenses for legal services will be made up of the rent, additional workers, and advertising, but these all could vary depending on location and type of services offered, so again let’s not focus too much on the specific dollar amounts here. What we can gain from this tax return data is an understanding of expenses and profits as a percentage of revenue rather than a specific dollar amount.
Average net profit margin for a legal services business
The average net profit margin for a legal services business was 43%.
Not surprisingly, this was one of the highest net profit margins of any industry that we observed.
How much can I make by owning a legal services business?
In order to calculate the earnings potential of a legal services you can take the following assumptions:
- Billable rate per hour
- # of billable hours available per attorney
- Billable % or utilization rate
These assumptions will allow you to come up with a revenue forecast for your legal services. From there you can apply the 43% profit margin.
Top 10 expenses for a legal services business
Based on the tax returns of roughly 329,604 sole proprietors operating in the legal services industry, the following were the 10 largest business expenses as a percentage of revenue.
Average other business expenses for a legal services business
The average legal services business spent 13% of annual revenue on other business expenses.
This is somewhat of a catch all for different types of expenses within an administrative business. This can be related to different types of fees, licenses or memberships as well as different kinds of administrative expenses that do not fall into office expenses
Average salaries and wages for a legal services
The average sole proprietor law firm spent roughly 10% of annual revenue on Salaries and Wages.
The salaries and wages for administrative staff is important to help keep the business moving forward even if not directly contributing to billable hours. As with all professional services, it is important to drive revenue which requires billing hours to the client.
Average material cost of goods sold for a law firm
The average sole proprietor law firm spent roughly 6% of annual revenue on materials cost.
Average rent expense for a law firm
The average law firm spent roughly 4% of annual revenue on rent.
Important Details about the Data
I want to point out a few key items about the data:
- You can download this data for free from the IRS website.
- The data includes 329,604 legal services sole proprietorships in the U.S. in 2019.
- This data will include businesses that operate full time, and businesses that only operate on a part time basis.
- Because of this, you should take the raw numbers for revenue, expenses and profit with a grain of salt, but the percentages can still be quite valuable when trying to forecast expenses for your business.
- This data includes businesses from all across the country, keep in mind that revenue and expenses can vary greatly based on your specific geographic location.
- We used 2019 data because we felt it was most likely to be representative of a “normal” environment for the industry. COVID-19 caused disruption to almost every business in 2020 and 2021, so we wanted to utilize “normalized” data.
If you have any questions about the data or how to utilize the data in your financial forecasting process please don’t hesitate to reach out to us!
