Setting up a legal practice

It is essential to choose the right type of legal entity for you and your business, be it sole practitioner, partnership, limited liability partnership (LLP) or limited company. Whilst this decision can boil down to effective tax planning based on your anticipated earnings, there are other factors to consider, such as the perception of your target client base and succession options. The SRA approval process will differ depending on your structure, and it is a longer process if any owners of the new practice are non-lawyers. If there are any non-lawyer owners (individuals or separate entities) then you will need to register with the SRA as an Alternative Business Structure (ABS).

Should you want to practise via an LLP or limited company, you will need the entity to be incorporated at Companies House before applying to the SRA for authorisation. Remember that LLPs and companies are obliged to file confirmation statements and accounts with Companies House on an annual basis, and you will need to inform Companies House about any changes in management (members/directors), issued share capital for companies, change in accounting reference date, etc. We can do all of that for you. The same reporting requirements are not required for sole practitioners and traditional partnerships.

A comprehensive business plan is normally required by the SRA, your insurance provider(s) and banks when setting up your new practice. We can assist with this but, as a minimum, we would recommend you consider the following:

• The services you plan to offer
• Target market
• Your management team – e.g. key advisers as well as you
• Recruitment and training needs
• Location
• IT strategies
• Financial forecasts, including cash flow
• Risk management
• Legislative and SRA compliance
• Marketing plan
• Succession

It is a regulatory requirement for solicitors in private practice to take out and maintain compulsory minimum PII from a participating insurer. PII must be acquired before commencing to practise, and the SRA will ask for your insurance details as part of the authorisation process (see point 5 for more details). The SRA requires that practices assess and purchase a level of PII that is appropriate for the firm and you should therefore consider whether any additional cover is required above the compulsory minimum level. The cost of PII for start-up practices is not always consistent; it can be either surprisingly good value or surprisingly expensive, so it is important to contact several providers. There are providers in the market who specialise in start-up practices, and we know them well, so can introduce you.

The SRA authorisation process can be easily completed online these days, and we have recently seen relatively quick approvals for practices with simple structures. The SRA’s guidance states that they will aim to make a decision on recognised (non-ABS) businesses in 12 to 16 weeks if the application papers and fees are correct, but the process to become licensed as an ABS can take longer. You must receive authorisation before commencing your practice, so forward planning is essential. On average, we are currently seeing the SRA turn around straightforward applications in six to eight weeks.

All authorised bodies must have a Compliance Officer for Legal Practice (COLP) and Compliance Officer for Finance and Administration (COFA) approved by the SRA. A separate individual approval application form must be completed for each individual in the firm who will require specific approval (the managers, owners, COLP and COFA).  Sole practitioners and smaller practices may find that the process is a little easier for them, as the SRA are able to ‘deem approved’ some people.

Consider whether you intend to hold client money (which must be decided as part of the above SRA approval process) and contact the bank in good time to get bank accounts set up before you commence trading. It is definitely worth doing research into which bank will offer you the best deals on interest and charges if you believe you will be holding large sums of client money and/or operating a considerable office account overdraft.

You will need accounting and case management software that is appropriate for your firm's specific needs, which is particularly relevant to the firm's size and the type of work you are going to undertake. If you are operating a client bank account, it is important to have accounting software which will ensure you comply with the SRA Accounts Rules. We are familiar with all of the main packages and know most of the main suppliers. The ILFM publish a useful guide, and we invigilate the ILFM’s Law Firm Software Users Award every year.

Consider whether HMRC needs to be specifically informed about the new business. Notification to HMRC of new companies is automatic on incorporation at Companies House. However, you may want/need to register the business for VAT, set up a PAYE scheme and/or let HMRC know that you have become self-employed.