How to: set up a law firm

Just go for it. Follow that dream, take the plunge! Or you will always wonder what it would be like to set up your own law firm. Leave it too late and you will regret it.

Bold sentiments – and, it has to be said, they were not among those expressed by anyone contacted for this article. Although the Solicitors Regulation Authority is acknowledged by practitioners to have improved the authorisation process, most sector observers counsel caution.

As William Robins, who set up Keystone Law 15 years ago, comments: ‘Setting up a law firm is not without cost, time and energy. These days [the legal market] is not a great place to be as a small firm.’

The Law Society’s risk and compliance chief, Pearl Moses, says it is common for lawyers to ‘get noticeably smaller in their chairs’ as she lists the sheer range of financial, management and regulatory issues someone seeking to start a new firm must consider.

In the beginning

Clearly not all are deterred. On an annualised basis, more than 1,000 law firms are set to be formed in calendar 2016, compared with 812 last year. So, where to start?

The SRA’s 14-page form FA1 (Firm Authorisation Application Form) is the relevant form for most solicitors seeking to set up a new firm; though there may be others where ownership and management would involve non-lawyers.

Would-be law firm principals are also directed to consult the SRA Authorisation Rules 2011 and the SRA Practice Framework Rules – weighing in at roughly 150 pages combined.

Other requirements, though, have been removed in recent years and the quantum of information sought by the SRA is much reduced. But that does not quite take the process back to what Moses describes as ‘the old days when, as the US saying goes, you could hang out your shingle and say you were open for business’.

David Nix, the SRA’s interim director of legal enforcement, explains: ‘The authorisation application form used to be pretty extensive and complex, with [many] questions about risk. We’d expect a lot of financial information and forecasting.’ Now, he adds: ‘It’s much more focused and targeted. We use our knowledge of different types of firm to target particular questions – [reflecting] what we’ve learned from experience. We understand the business models. We concentrate on asking for information based on that.’ Nix estimates that it now takes about six weeks to authorise most new firms.

There is, of course, much else to think about. You may be about to become an entrepreneur, but this is also the time to engage the ‘cautious lawyer’ side of your brain.

Fergus Payne, head of the partnerships legal practice group at Lewis Silkin, advises: ‘If there are two or more founders – partners or shareholders – make sure you sign a proper written agreement to record key elements, including the terms of ownership.’ He adds: ‘On a slightly larger scale, moving a full team as part of the start-up will need a great deal of care.’

The need for clarity around roles is a point also stressed by Moses. Who will be the COLP and the COFA? Who will keep up to date with requirements such as compliance with anti-money laundering laws? And what will be the arrangements for supervision and training?

Choosing the most suitable firm type is a key decision at the outset. Payne advises: ‘There is the opportunity to think about being an alternative business structure; it may better to deal with this now rather than later. It is relatively easy to avoid trading with unlimited liability. The real decision is whether you use a company or an LLP.’

Robins observes: ‘As a vehicle I strongly favour a limited company, for reasons of liability, the simplicity of dealing with shares, enhanced tax arrangements and the ease of bringing people in and out.’

He continues: ‘An LLP works for partners who have common ground – who are at a similar stage, have similar clients and similar markets. They are a genuine partnership.’

Business planning

The SRA, Nix says, does not now routinely ask for business plans unless there is a marked ‘anomaly’ in the figures – for example, relating to an unrealistic forecast income for a two-partner firm.

Bear in mind too that others will want to see your business plan. Moses notes: ‘Where we support people, we would say: have you seen the bank? Do they agree with your business plan? Does it add up?’

With insurance no longer following automatically upon authorisation, a good business plan is a way of telling a broker the proposed firm’s ‘story’.

Keystone’s Robins recalls: ‘We budgeted for a slow take-up and it was even harder than expected to bring in business.’

Cashflow and funding, Payne notes, are critical calculations – ‘potential killers, in fact, for any law firm’.

There are the clients to consider, too. ‘First and foremost, make sure you have a core group of loyal clients and referrers of work who will guarantee you a sufficient level of work to enable you to plan at least the next 12 months,’ advises Laura Devine, principal of immigration firm Laura Devine Solicitors.

She adds: ‘Have a viable business plan for developing the new firm for the longer term. It should be based on there being a sustainable and growing market for your services in which you are confident that you can compete with the elite in your area of work.’

Devine also recommends using external advisers: ‘Take the best possible professional advice you can afford, particularly from lawyers, accountants, IT providers and others experienced in helping start–ups, to ensure you put in place all the necessary building blocks for your new firm.’

Such advisers are there to facilitate ‘a realistic business plan and cashflow, but also indemnity cover, SRA registration, financial reporting systems, VAT registration, employment contracts, risk and compliance systems and premises. These will be essential if you are to give comfort to your bank, your landlord, the SRA and staff you are seeking to employ, regarding the future viability of your new firm’.

Up and running

Ensuring that management responsibilities are clear at the outset is also about admitting how much time it takes to run a firm. Any firm that has failed to factor that in will struggle, Moses avers.

Robins expands on the point: ‘Everyone understands that there will be a big effort to lay the groundwork as you establish and before you get your first client. What surprised me were the ongoing requirements – what you might call red tape, or business expense – once we had set up.’  

He includes within this monitoring and keeping up to speed with technological developments. ‘It took a third of one’s time to run the firm. That has implications for business. There is always something to do. Typically as a partner [in a bigger firm] you are exclusively focused on your practice area.’

Devine adds: ‘Concentrate on what interests you and what you do easily, and recruit staff, suppliers and advisers to undertake those areas you would be more likely to neglect and which others will do better than you. My number one tip is to employ a top-rate PA as your first employee and then develop the business from there.’

She adds: ‘Don’t concentrate on exclusively employing lawyers, which seems to be the fashion and is seen as a cost-saving exercise. Excellent support staff save a firm money.’

While compliance tasks can be outsourced, Robins and others warn, the responsibility for compliance cannot.  

Lawyers who come out of larger firms will also have to consider that clients will have connected issues that require specialisms the new firm does not have – in which case, formal or informal networks will need to be established with other firms to serve and retain them.

Exit

Finally, there is a topic that seems faintly distasteful to bring up at the birth of a business. How will it end?

This has to be addressed, Moses stresses. The ‘nightmare scenario’ is to run a firm for a year or two that does not work out, only to discover that it cannot be sold, saddling the owners with the huge cost of run-off cover. (Run-off cover is the subject of an SRA consultation, see page 20.)

‘You need to have your eyes open to that,’ Robins says. ‘Run-off cover is two and a half to four times the cost [of PII]. You could run for a year, decide to close, and then face £40-£50,000 in run-off cover.’

But let us end on a more upbeat note. The launch of a new firm, Robins says, ‘is one of the best bits of marketing you can do’.

And then there is the fun of choosing a name. Devine recalls her decision: ‘At the outset advisers suggested I go down the eponymous route because of my name and because I was a woman setting up a City law firm.’ She adds: ‘As the firm has grown, now with 60 staff across London and New York, some clients are surprised to find out there is actually a Laura Devine.’

• To contact the Law Society risk and compliance service, tel: 020 7316 5655 (or go to tinyurl.com/hrsdcax).For more details from the SRA, go to  tinyurl.com/goh7fn5.