10 things to consider when setting up a law firm
There is an ever-increasing number of start-up practices, with practitioners setting up law firms across the country. Many solicitors are understandably attracted to self-employment and the ability to profit directly from their own efforts without having to answer to the demands and targets set by others.
However, setting up and running a successful law firm is no walk in the park. Here at Richard Nelson LLP, we are experienced in advising law firms and potential law firms achieve these objectives. We take a look at 10 things you consider if you are looking to set up on your own firm:
1. Choose the business structure
First things first, it is important to decide what type of entity you wish to operate. Will it be a recognised sole practice, traditional partnership, limited liability partnership (LLP) or limited company? We can advise you about these and the alternatives.
2. Create a business plan before setting up a law firm
It is essential that you create a comprehensive business plan before setting up your own legal practice. At the very least it should cover:
- What legal services you plan to offer;
- How you will obtain work from clients;
- Where your funding will come from;
- Where you will be based;
- Risk management and contingency planning;
- Details of the management team;
- And how you propose dealing with SRA compliance.
3. Cash Flow Forecasts
It is essential to create a realistic cash flow forecast so you can see exactly how much money it will take to set up and run your law firm. It is important to budget for a slow build-up of income either, because it takes time to generate new business, or for existing clients to pay you. The SRA and your funder will want to see accurate forecasts for the cash flow for your business. You will also want to know that your law firm will genuinely be profitable and that you have enough money behind you to start the business and sustain yourself during its infancy.
4. Professional Indemnity Insurance
It is a requirement for all solicitors in private practice to have a minimum level of PII cover from a qualifying insurer. This must be in place before you commence work and the SRA will want to see details of the proposed cover you would take.
5. SRA Approval
If you are setting up a solicitor’s practice you will need to obtain authorisation from the SRA. Not only must the entity itself be authorised to practise, you will also need to apply for the authorisation of a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA). The SRA target for processing such decisions is currently 12 to 16 weeks although expect this to be longer in respect of ABS’s. In reality, they tend to turn things around in 6 to 8 weeks. The time scale for authorisation can be lengthy and you should factor this into your business planning. For more information, visit our SRA authorisation page.
6. Compliance with accounts rules
However you approach this, you are liable for any breach of the accounts rules, whether or not you are aware of them. You will have to consider how you are going to comply with the Solicitors Accounts Rules, particularly where you are going to operate a client account. Unless you outsource, you are likely to have to invest in an accounts package, which can be very expensive. You are also going to have to decide who is going to operate your accounting system.
The more you do, the less time you will have to generate business and undertake fee-paying work. If you are going to employ another to do it for you, this will be an additional cost to the business, as well as involving an element of trusting another with one your key regulatory responsibilities. Whatever decision you make, it is important that you understand the Solicitors Accounts Rules and, if you have no experience of them, you should undertake an in-depth training course.
Where will you run your business from and where will you see clients? If you choose to have fixed business premises, you will incur further costs which could involve long term liability if you cease to practice or outgrow the space.
8. Tax Issues
It is likely that you will engage the services of an accountant at some stage to help you with the finance and tax side of your business. If you are going to have employees you will need a PAYE (pay as you earn) scheme. You will also need to consider registration for VAT and how you will make a quarterly return.
9. Contingency Planning
Whilst it may seem strange at the outset to be thinking about what happens in the event that the business closes, it is something that you must consider because of the regulatory and financial consequences of closing a practice. This will include the payment of run off cover unless there is a practice to succeed your firm. Run off cover will provide insurance for a period of 6 years for a cost of a single premium of approximately 3 times the cost of your last annual premium. In setting up you therefore commit to a minimum of at least four years of insurance cover.
The SRA will also want to know that you have contingency plans in place for an orderly closure of the business which will comply with your regulatory obligations. This will include consideration of what happens to ongoing client files and archived files. It is also necessary to consider what will happen in the event that you are not present due to illness or holiday.
10. Make a new will and Power of Attorney
It may not seem obvious but if you are planning to set up a new law firm, but you must consider what will happen in the event of your death or incapacity. Whatever else you will need to appoint a solicitor to be a special executor to deal with your practice regardless of the administration of the rest of your assets. You will also need a suitably qualified attorney to manage your practice in the event of your incapacity. Our wills and probate lawyers can help.
Even allowing for the excitement and exhilaration associated with setting up and operating a new venture, the going can be tough and time-consuming. We can offer you advice and assistance on an ongoing basis from the time you decide to set up the business and throughout its life.
As an option to consider, we can offer you an alternative way to achieve the objectives of independence and working for yourself whilst reducing the administrative burden. We offer an arrangement whereby we will provide the regulatory and accounting cover in exchange for a fee share once funds are received. It is always worth an early discussion; get in touch with Steve Roberts to discuss these issues in confidence on 0333 888 4040, or alternatively, complete a call back request form.