How to set up a law firm: our 8 top tips
You’re excited. You’re going to set up and run your own law firm. You cannot wait. We understand. We applaud you! However, please don’t tell your boss what they can do with their six-minute units just yet! If you want to set up your own solicitor’s firm or alternative business structure (ABS) then you will need to meet certain criteria for SRA authorisation. Work through our 8 top tips for setting up a law firm before you commit yourself.
TIP 1: Consider the alternatives to setting up a law firm first
The SRA Standards and Regulations 2019 (in force from 25 November 2019) make it easier for lawyers to provide legal services outside of a law firm.
So instead of operating as a solicitor’s firm you can do a certain amount of legal work in your own name as an independent solicitor. In theory this should be a cheaper and easier route, though there are some significant limitations to consider. You cannot refer to yourself as a firm of solicitors and there are significant restrictions on holding client money. If you want to do ‘reserved work’ (e.g. litigation, probate and conveyancing) you must trade and bill in your own name. You cannot employ or work with anyone else, even a secretary it seems. Most freelance solicitors will still also need professional indemnity insurance and the usual risk and compliance systems, so savings on cost and bureaucracy may not be worth it for some. However, for other solicitors, such as genuine sole practitioners doing unreserved work in particular, this is definitely a worthwhile option to consider before proceeding with a law firm or ABS application.
The new rules also permit solicitors working in-house in an organisation to sell ‘unreserved’ legal services to the public (e.g. most aspects of will writing, employment law and general legal advice). For certain types of work and organisations with an existing network of leads this could be a great option. However, if you want to provide reserved legal work with others or simply want the credibility associated with calling yourself a firm of solicitors then setting up a new law firm or alternative business structure (ABS) could be right for you. You can learn about the SRA’s new rules on their website.
TIP 2: Make sure you have a lawyer with at least 3 years experience
Part of the SRA authorisation process when setting up a new law firm is to check that you will have a lawyer qualified in England & Wales with at least 3 years experience involved in the business. In fact, your professional indemnity insurers may want to see someone with closer to 5 years experience. In the past that individual was required to have completed at least 12 hours of management training but from November 2019 that requirement has been scrapped. If you do not have the 3 years experience but are doing unreserved work then the freelance solicitor option above could be considered instead (see above). Alternatively you could ask the SRA to consider a waiver of this rule as part of the authorisation process, something which in the past it has been prepared to do where an individual has demonstrated alternative significant experience managing or supervising work. Now that the rationale for this provision has been reviewed and restated however it is possible that we will see a slightly tougher stance from the SRA on waivers of the 3 year rule when authorising new solicitor’s firms / alternative business structures (ABS).
TIP 3: Determine your structure at the outset
The SRA’s FA1 form for law firm authorisation asks you to confirm whether the law firm you are setting up will be a ‘recognised body’, a ‘licensed body’ or a ‘recognised sole practice’. So you will need to decide this before getting too far into the SRA law firm authorisation process. A recognised body law firm simply refers to a more traditional solicitors practice in which all of the people who are partners / directors and all of the owners in the firm are legally qualified. Whereas a licensed body refers to an alternative business structure or ABS in which a ‘non-lawyer’ must hold at least some degree of ownership share or be a partner / director in the law firm. So if you intend to have some non-lawyer investment or control in the law firm then you will need to apply to become an alternative business structure. In fact even more traditional firms and sole practitioner solicitors are opting to purposely create some form of non-lawyer ownership in the business to keep the option open for future investment or so that a family member can be part of the business. ABS is no longer a new and experimental option when setting up a law firm – it is becoming the default and with good reason. The SRA assesses the business in much the same way as a traditional firm save for applying fit and proper tests to the non-lawyer owners / partners. The upside however is that the options available to you for structuring and funding an ABS are virtually endless. If you do want to be an ABS then the firm could be 100% owned by non-lawyers provided that you have at least one lawyer of England & Wales at partner / director level in the business. That is a fundamental requirement for allowing non-lawyer ownership of the business. Before you can determine what SRA form you need to fill in for the authorisation process you need to know your firm’s structure. Click on the video below to find out more about alternative business structures.
What is an alternative business structure?
In terms of the legal structure for your law firm, increasingly we find our clients are opting to be limited companies, particularly those which wish to practise as an alternative business structure / ABS. Limited Liability Partnerships (LLP) are also an option if you are going to have at least two members and don’t need to separate out your ownership structure from your management / director level structure. Traditional partnerships and sole traders with no limited liability for the principals of the business are a less common choice when setting up a new law firm now but ultimately it is up to you what structure you wish to operate. The important thing is that if you are going to incorporate the law firm you need to do so before you can fill in the SRA forms because you will need the full details of incorporation for the paperwork.
TIP 4: Secure a professional indemnity insurance quote asap
All law firms must have a minimum of £2 million (£3 million for incorporated bodies) professional indemnity insurance. Only certain insurers who have agreed to abide the SRA’s strict ‘minimum terms’ for ensuring maximum consumer protection are allowed to offer cover. The SRA will not even look at a new law firm / alternative business structure application unless you have a quote for professional indemnity insurance to submit with your application for authorisation. Another reason to get a quote secured early in the process is to be sure that you can get insured and at a price that works for your model. Without this you cannot proceed and so you will want some comfort here before investing too much time and money in the process. If any of the key personnel in the firm you wish to set up have significant disciplinary findings in their history then this can have an impact upon whether you can get a quote at all for the firm. In most cases securing insurance is not a problem and it is more a question of checking that there are no nasty surprises on price but don’t leave it too late as occasionally it can be real stumbling block. Law Society research suggests that on average law firms spend 5% of their turnover on professional indemnity insurance. We tend to find that most clients spend less than this in a year one as a percentage of estimated turnover but it very much depends upon the type of work being undertaken. To get a quote you will likely need to fill in an insurance proposal form and will have to attach to it:
- A short business plan;
- Financial projections for the first few years of trading, at least at a high level showing the predicted turnover and key outgoings in the year. This is a great exercise anyway because the costs can quickly add up: SRA fees of circa 2k per year (though it will be less if you do not hold client money), practising certificate fees, insurance premium of circa 5% of turnover plus the usual business costs of office space, IT etc. You want to go into incurring these costs with your eyes wide open and a solid plan;
- The CVs of the senior individuals to be involved in the business (the lawyers in particular).
We typically find that securing a quote will take a week or two so we tend to ensure that the client submits the insurance proposal as soon as possible while we continue to work on the SRA authorisation forms. We have a couple of templates and broker contacts we can share if you need a helping hand here, just get in touch.
TIP 5: Work out who will need SRA approval as an individual
Part of the SRA authorisation process for a new law firm or alternative business structure (ABS) is considering whether to approve the individuals involved in the firm for that purpose in addition to looking at the entity itself. In smaller firms, solicitors in good regulatory standing will be exempt from the need to get approval to be a law firm principal, owner, Compliance Officer for Legal Practice (COLP) or Compliance Officer for Finance and Administration (COFA). It is these exemptions that the SRA refer to when they talk about Rule 13.2 of the SRA Authorisation Rules and Rule 13.3 of the SRA Authorisation Rules. However in an ABS non-lawyer principals, such as the Directors in a company, and owners holding a ‘material interest’ (such as 10% or more of voting rights or ownership share) in either the law firm or a parent company of the law firm will need specific SRA approval and there are no such exemptions. This authorisation process involves the completion of form FA2 and a vetting exercise by the SRA to satisfy itself that the relevant individuals are fit and proper persons to hold their role. Anyone completing an FA2 who is not yet on the SRA’s mySRA system will need to register as a new user to obtain a mySRA ID for the application forms.
TIP 6: Secure a practising address
A common problem we have to resolve when working with clients to set up a new law firm centres around an SRA requirement that the registered office of incorporated law firms must be at a ‘practising address’. So somewhere where the law firm is routinely doing some of its work. Some sole practitioners want to work at home initially but the reality is that this involves your home address being put into the public domain. If you are not comfortable with that then you may need to consider securing some office space sooner than you had anticipated. In reality you should be looking for your own office with a door which can be locked to secure client confidentiality. A similar consideration applies when an existing business wishes to add a law firm to its group by setting up an alternative business structure (ABS). If you are going to be doing any work from home or from shared premises you will need to reassure the SRA as to how you are going to maintain confidentiality in an informal potentially shared space.
TIP 7: Identify any ‘separate businesses’
The SRA used to prohibit law firm owners from being connected to other businesses which get involved in legal services or quasi-legal services which were not themselves a law firm. There is no longer such a strict prohibition but the SRA will want to be satisfied that the fact of any other business to whom clients will be referred or with whom branding or office space or staff will be shared does not impact upon client interests. For example, if clients are to be referred to a connected business is there transparency about the relationship and is it clear that they will no longer receive the same protection as they would as a client of a solicitor’s firm i.e. access to a Legal Ombudsman, minimum terms insurance cover, a compensation fund etc.
TIP 8: Finalise SRA authorisation forms and check the declarations very carefully
All new law firms will need to compete form FA1 for the entity and commonly at least one FA2 will be needed to approve certain individuals for owning or managing the firm or for being the COLP of COFA. If another entity such as another business will be a corporate director or shareholder in the business then form FA3 will also need to completed for that entity. Form FA8 is needed for firms conducting financial services work (this is a broader category of firms than many would think) and Form FA10 is needed if a firm will be conducting work covered by the Anti-Money Laundering Regulations. We always tend to supply a covering letter also which addresses any likely queries arising from a review of the forms. The SRA also likes to see a structure chart and constitutional documents such as the articles and memorandum of association in a company. The SRA no longer require sight of a full business plan (though insurers still want to see this) or a full set of risk and compliance policies and procedures as standard but it is good to be ready if these are required. We sell a template risk and compliance handbook on our website’s shop if you would like to purchase a copy. Once you have all of your paperwork together be sure to check each of the declarations which you are making very carefully. The SRA takes a very tough line on omissions and false statements in the application forms. If something material changes after submission you do also need to tell the SRA about this also during the process. If the SRA has concerns upon reviewing the application it will raise these with you and it is important to reassure the SRA as needed in your reply. You can learn more about the process for securing SRA authorisation on our main ABS and law firm applications page.
As you can see from the above there is a lot to consider. If you would like some expert help in setting up your law firm, whether it be a traditional solicitor’s practice or an alternative business structure (ABS), get in touch below. We’d be delighted to discuss your options for securing SRA authorisation.
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