Laying firm foundations for future growth

Establishing a new business is a daunting task. No matter what your professional background, investing time in careful planning and having a clear understanding of the associated risks is the only way to maximise your chances of success.

Any solicitor who is considering setting up in practice, whether as a sole practitioner or in a partnership, must take an objective and dispassionate view of the project – assessing its strengths and weaknesses, much as they would any piece of legal work.

It is also vital to seek the counsel of those who have recently set up in practice to gain an insight into the pitfalls and challenges they encountered.

As with any new small business, a law firm must ensure it is built upon strong foundations – both professional and practical.

Composition of the business

There are many factors to be considered before starting up and the composition of the business has a direct bearing on this.  In the case of sole practitioners the services to be provided are generally dictated by the background of the individual setting up the practice, whether this is in general practice, offering a range of services, or concentrating on criminal work, with cases funded through Legal Aid.

For those proposing to set up in partnership there are a unique number of points to be considered.

The first, and most important, decision you will have to make is who to pick as a prospective business partner.

As this will hopefully be a long-lasting relationship it is essential that those entering into the partnership are able to interact with each other on a daily basis, take a responsible approach to decision making and complement each other’s professional strengths.

At this set-up stage there must be a clear plan and all the partners must be committed to it. The partners should not assume that as lawyers they do not need advice, but should actively seek it – and not just from those within the legal profession.

Joint and Several liability is the bottom line, so TRUST is essential.  The money laundering regulations, the soon to be introduced Proceeds of Crime Act 2002 and the Law Society’s regulations all place very stringent conditions on the operation of the professional firms.

There is no point in being naïve at the outset, if a partner in a practice commits a breach of any of the above, there are serious repercussions for all the partners.  These could impact the practice continuing to trade and could have even more serious implications on the partners as individuals, both financially and in terms of criminal prosecution.  

Another crucial area exclusive to partnerships is the removal of partners, whether through natural retirement, or other reasons!

It is essential if you are to protect all the partners’ interests that a robust partnership agreement is drawn up and the terms and conditions of this are fully subscribed to by all the partners.

Profit sharing ratios

Once the make-up of your partnership is decided, it is imperative that the partners establish which services they will offer to generate the income streams needed to keep the business afloat.

Will the lower return services, such as domestic conveyancing, be areas that will generate further income? Will the practice take on Legal Aid work? How will financial advice be handled – in house or using a third party?

Individual responsibilities for various aspects of the running of the business will also have to be delegated to the new partners.

Who, for example, will be the Designated Cashroom Partner, or the Finance Partner? How much time is going to be allocated to these individuals to carry out their duties and do they have the necessary experience?

You will also have to decide at this stage what the profit sharing ratios between partners will be and incorporate this into the partnership agreement.

It is also a fact of life within partnerships that certain partners attract more new business than others.  In practice those partners are looking for recognition, usually financial, for attracting this work.   This is an issue that may not arise at the start of the practice, but as financial issues tend to be very emotive it is should be addressed at the outset.

Sole practitioners

None of the above matters affect the sole practitioner as he/she is a jack of all trades; Designated Cashroom Partner, money laundering officer, finance executive.  The administration of a sole practice places an immense workload on the practitioner.  It is definitely worthwhile arranging an alliance with another firm should there be issues arising which the solicitor may wish to discuss and take advice on.

Agree the name of the new firm, this may seem a minor point but in practice, depending on the individuals involved, can prove to be a contentious area.

Funding

The funding of the business is also a key factor in setting up a practice. Do you have sufficient funds to cover set-up costs? What is the level of capital paid into the business?

Other financial issues to take into account include whether you will operate with one bank or several banks for clients’ funds and how structured the finance side of your business is going to be? Will you operate on a monthly or quarterly basis for accounts, budgets and projections?

You must also set a fee policy and decide how you are going to ensure that bad debts are collected.

Other questions to ask when considering if you are properly prepared are whether you are familiar with the Law Society’s regulations for both cashroom and investment business and what level of Professional Indemnity insurance you require?

Location location location

The siting of the practice must also be carefully considered as it will have a direct effect on the amount and types of  business you receive. The location of your practice will also play a significant role in determining what your outgoings will be.

Have suitable offices been located and will you lease office space or purchase it? Is the office appropriately sited? Have the costs of maintaining the office, such as rates and factors fees, been accounted for?

Once you have your office you will need to staff it – and deal with the payment and tax issues which becoming an employer will entail!

Registering for VAT

Registration for PAYE and planning for the operation of this system should also be dealt with at this point.  Funds should be set aside to meet the liability for PAYE when these become due.

The firm must also ensure that sufficient funds are set aside to meet the sole practitioner’s and partners’ income tax on the due dates and that they set up NIC payments.

The practice will also have to register for VAT and on an ongoing basis ensure quarterly returns are submitted on a timeous basis and that sufficient funds are available to meet the liability.

A real priority for any new business will be appointing a suitably experienced cashier, while the partners will also have to decide on the remuneration packages and contracts of employees.

Depending on the size of the proposed new firm the appropriate professional advisors will need to be appointed for the practice, and if appropriate the partners. Consider the other types of insurance needed.

Keyman insurance, for example, may be used to ensure that the long-term incapacitation of a partner of senior member of staff does not have an adverse effect on the performance of the business, while disaster insurance may add to your peace of mind.

Any solicitor wishing to set up in practice, either as sole trader or in a partnership must appreciate that the future success of the business will depend on the level of thought and effort that goes into planning the business.

There is no point reinventing the wheel. There is a wealth of experience available to those setting out in business, both in terms of legal and accounting issues.  Advice sought at the outset from a professional advisor who has experience in setting up a new practice will help to avoid all the obvious pitfalls and to promote the success of the new firm.

It is only once all of these questions and issues have been answered and dealt with that your fledgling firm can begin its climb to the top with confidence in its future.

Bob Dallas is joint senior partner at Campbell Dallas, chartered accountants and business advisors