Law firms have long being envied for the huge profits often noted in the industry, prompting many people to want to actually know what a typical law firm is worth. Going by the analysis of earning in the industry, it can be said that law firm profit margins are generally high. The highest-earning lawyers identified intellectual property as their primary practice area.
They made an average of $240,000 in 2017. They are followed by personal injury lawyers ($237,000); employment lawyers ($225,000); Workers Compensation lawyers ($219,000); and business lawyers ($217,000). Lawyers who primarily provide legal services to businesses earned more money on average than lawyers who primarily provide legal services to consumers.
In a survey conducted, twenty-seven percent of the responding lawyers said their earnings had increased by up to 10 percent over the prior year, while 18 percent said their earnings had increased by more than 10 percent. This shows that things are going well in the law business, or are things really as rosy as they seem? Let’s find out.
How Much Money Do Law Firms Make and What is Their Profit Margin
It has been realized that the primary reason law firms look so much more profitable than other businesses is that their profits are reported before equity partners are paid. The rationale behind this is that equity partners are entitled to everything that’s left over after other expenses are paid, since they own the firm. This is the primary reason why it seems like law firms earn quite high.
Traditional law firm partnership structures are effectively unable to retain any earnings at the end of each fiscal year. Except for any planned investments, all remaining profit is distributed among the equity partners in full.
Compared to companies in other industries, this gives law firms an artificially high profit margin, since from an accounting perspective; equity partners receive no above-the-line salary and therefore represent no cost to the business. It also means that the most popular metrics used to assess law firm profitability—profit margin and average profit per equity partner (PEP)—are susceptible to distortion by leverage.
The high profitability rate is something that has seen firms shooting themselves in the foot by publishing artificially high profit margins that fail to account for the cost of equity partners.
The explanations given above pretty much explains the profitability of law firms, but in the aspect of figures, it is pretty hard to find a law firm that publishes its earnings, so it would be a herculean task trying to figure out what a typical law firm can earn, or what their profit margin is. Law firms are typically tight lipped on this matter, thus further fueling the insinuation that law firms earn exceptionally high profit.