The time is right to set up your own law firm — but what form should your new business take? Is success as a sole practitioner achievable, or is it a case of safety in numbers?
More than a quarter of law firms in England and Wales are classed as sole practitioners. This doesn’t include those sole practitioners who have restructured their businesses as limited companies. This goes to show that by no means do you have to get a partner on board to make a go of it. But that’s not to say that the partnership model doesn’t have its attractions. Here, we put sole practitioners and partnerships under the spotlight to help you decide which one might be best for you…
A sole practitioner
This is where a single lawyer owns the entire firm. It doesn’t just include ‘one man band’ structures. However, there could be a whole army of salaried solicitors and support staff on payroll and still be classed as a sole practitioner firm.
Here’s why you may prefer being a sole practitioner…
- Profitability. The focus, especially in the early days of your new firm, is likely to be on building up a profitable caseload. Rarely does this happen overnight, and you may decide that generating enough work to sustain multiple salaries isn’t really an option at the beginning.
- Control. In short, with 100 percent equity, you — and only you — call the shots. If you’ve got a very definite vision for where you want the business to go, you may not relish the idea of teaming up with someone who may turn out to have different ideas.
- Marketing. Some firms are marketed squarely on the reputation and profile of the founder – although they may evolve into something much bigger over time (see Carter-Ruck, as an example). For instance, perhaps you’re in the process of building a reputation in a niche area of litigation. When you carry this over into your new firm, you might be keen to make it clear to prospective clients that you will be giving 100 percent attention to each case. If there’s another partner on the scene, you may think that this dilutes your value proposition here.
Partnership
Essentially, this is any arrangement where ownership of the firm is split between two or more parties. The terms require careful consideration, not least when it comes to issues such as the precise division of assets, bringing new parties on board, and the procedure when a partner wishes to leave the arrangement. As such, each party should seek independent legal advice before signing the agreement.
Why should you consider a partnership…
- A boost to your startup kitty. If more than one of you are able to contribute to startup costs, this could help to put your firm on a more secure footing from the outset. The downside is that fee income will need to be stretched to cover multiple salaries.
- Kudos. If you are relatively recently qualified, getting someone on board who is perhaps a little ‘longer in the tooth’ can be beneficial not just for marketing purposes, but also for convincing professional indemnity insurers that you are a safe bet.
- Complementary skills. Let’s say mergers and acquisitions is your thing. You find that such clients regularly raise TUPE matters (where an employee transfers from one company to another) — but this is outside of your comfort zone. A partner with complementary experience can help you present a more rounded offering to potential clients.
- Support. There’s a lot to be said for being able to pop your head around the door to talk through issues with a partner. Having someone else there can also mean fewer costly locum bills for things like maternity leave.
- Looking like a ‘real firm’. Unfairly, some clients may be put off by the ‘lone ranger’ image of a sole practitioner. As such, having more than one name on your letterhead could provide a useful trust indicator.
The alternatives: LLPs and limited companies
In a standard partnership, all partners are liable for the debts and liabilities of the business. The absence of a distinction between you and the business means you have no protection against the claims of creditors in the event of the firm getting into difficulties. A limited liability partnership (LLP) offers an alternative way forward. In theory, and subject to any personal guarantees provided by the partners, it is the business that owes the debts rather than the individuals.
Setting up an LLP requires registration with Companies House — a straightforward process if you’re in the right hands. As in the case of a limited company, an LLP also involves filing accounts and a return with Companies House each year. Similarly, for tax or other reasons, such as wanting to get non-lawyers on board, the time may come when setting up as a limited company may appear attractive.
Keeping your options open
In reality, you’re not tied to any one structure, and you may find yourself moving from one to another as a firm develops. Set up as a sole practitioner. Take on an associate solicitor. Reward him or her with an equity partnership. Realise the advantages of LLP status… All of these are natural steps in many firms’ growth cycles.
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