If you are thinking about going solo, make sure you have the appropriate bank accounts set up from the beginning.
You will need at least two accounts to start. One is an operating account where you conduct the daily business of the firm and the other is an Interest on Lawyers Trust Account (IOLTA). The IOLTA is used to deposit funds received on behalf of clients, and the interest earned is transferred to the state bar where it is used to provide civil legal aid to underserved Californians.
So where did IOLTA’s get their start?
IOLTAs were established in Australia and Canada in the late 1960’s and early 1970’s. The first IOLTA in the U.S. began in 1981 by the Florida Bar Foundation, and it was quickly replicated in California.
Today, all 50 states participate in the IOLTA program, and in California, IOLTA participation is mandatory. (Business and Professions Code 6211.) Neither the clients nor the attorney pays out of pocket. In 2009, IOLTA’s in the U.S. generated $124.7 million.
It is important that you open the IOLTA with an eligible financial institution. You can find the approved list of IOLTA-eligible banks at calbar.ca.gov/attorneys/memberservices/iolta/eligibleinstitutions.aspx.
It is also important to keep track of client funds. One IOLTA account can hold several clients’ funds.
Some common mistakes made by attorneys are:
- “Borrowing” funds. It is acceptable to transfer funds from the IOLTA to your operating account after services have been rendered. It is unacceptable to take money from the IOLTA before it is earned.
- Mixing attorney funds with client money. You cannot keep personal or operating funds in the IOLTA. Attorneys must also remove earned fees or reimbursements in a timely manner.
- Poor accounting. There should be an individual ledger for each client, and all transactions should be appropriately documented against the overall account.
If you have an IOLTA and have made some errors, help is available. Many bar associations offer free law practice advice to their members. You can also hire a law practice management advisor for a fee.
About the authors:
Dan Duran has been in banking for over 10 years specializing in personal and small business banking. Lorrie Pendleton is a veteran banker and manager of First Republic Bank in the Financial District of San Francisco.