Are you a legal professional or non-lawyer seeking entry and regulatory approval into the legal services market? Or you may be an existing firm looking to restructure your business model? There are some key requirements you will need to think about before you set up your own business. Our Director of Compliance Tony Kang gives us his top five tips.
Know your structure
Traditionally only a solicitor was able to set up a law firm. However, the Legal Services Act 2007 opened up the market to non-lawyer management and ownership. You can now set up your business in a number of ways:
- Sole practitioner. Where a solicitor is the only manager and owner.
- Traditional partnership. Which would require at least two legally qualified individuals in the structure.
- Corporate entity (LLP or Limited Company). Accountants will tell you that this is a more tax efficient way of setting up your business. As the entity is a separate person, shareholders and directors are not liable for any debts incurred.
- Licensed body (ABS) through a corporate entity. This is where you have any type of non-lawyer management or ownership in the structure.
Research your market
Although new business failure rates for the first two years of operating are at around 30%, you will still need to consider how you intend to secure new instructions. If you have an existing book of clients, will your current employer allow you to take these with you? Does your contract have any covenants or non-poaching clauses that restrict you from contacting current clients? You will need to think about how you intend to market your business as the SRA will not allow you to make direct unsolicited approaches or cold call potential clients. Generating new business will be a key challenge for you.
Business Plan and Financials
Preparing a robust business plan will help you map out your journey and give the opportunity to self-reflect. Your business plan should address the key risks to your proposal and contain a Strengths, Weakness, Opportunities and Threats analysis. By doing this, you are already putting in place measures to address the challenges that your business will face when it begins operating.
Instruct an accountant to help out with your financial forecast and be conservative with your figures. The SRA will require a forecast for the first three years.
Professional Indemnity Insurance
As part of your application to the SRA, a valid insurance quotation will be required. With the exception of the ‘traditional’ structures, the minimum level of cover required is £3m. You can only obtain your quotation from the SRA list of Participating Insurers for the current indemnity period. Based on your projected turnover for year one, expect to pay a premium of between 5% – 7.5%. As part of the proposal, your broker will also require a comprehensive business plan and financial forecast.
From our experience, obtaining a valid insurance quotation is often the biggest delay encountered at this stage of the process. You will need to factor this into your timetable for approval.
Prepare and submit your application
Once you have your core documents ready (structure, business plan, financial forecast and insurance quotation) you will need to complete the SRA application forms. Depending on the type of structure and work areas, these will involve a combination of a form for the entity, role holders, financial services and money laundering approvals. All submitted forms will require declarations from your lawyer manager (any false declarations could be deemed dishonest) and, once the application pack is ready, submission can be made via your MySRA account. If the SRA require additional information, they will raise these issues with you as part of the decision making process.
Your business proposition will require a considerable degree of thought and planning. If you would like some assistance with the process of setting up your own law firm, we can help.