How to set up a law firm

Posted: 08 November 2010

As a budding legal entrepreneur, not only do you have 20 new ideas a day – mostly birthed out of seeing problems to which you have a simple, cost-effective solution - but you also probably dream of starting your own law firm.

There is a security in salary but for an entrepreneur that is a claustrophobic place to be. Why don’t you start a law firm? I asked my friend Simon Lexton to advise me on how to go about it. Here is the report below:

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  1. Create an LLP via Companies House. There must be at least two members. You will need to send a completed Form LLP2 to the Company Registrar at Companies House setting out the name of the partnership, the address of its registered office and the name, full address and date of birth of each partner. At least two members of the LLP must be "designated members" who perform duties a little like those of a company secretary. In addition, they may perform duties such as signing off the LLP's accounts.
  2. Renew your Practising Certificate. The fee is currently £1,180 annually (pro rata for registering part way through the year). There is also an annual contribution to the Compensation Fund of £195 payable once you renew your fourth annual Practising Certificate.
  3. Purchase solicitor indemnity insurance. The minimum cover for a LLP must be £3m. Premiums can be in the £1,500 to £15,000 range depending on fee income, work-split, location, experience and claims record.
  4. Apply to the SRA to become a recognised body (RB), in this case an LLP. Use Form RB2 to apply for approval of a new LLP. Annual renewal is £180 by 31st October each year. You will need to prove you have indemnity insurance in place. For a LLP to be a Registered Body, all its members (partners) must be lawyers.
  5. Organise basic infrastructure: dedicated phone number, web site, letterhead and stationery.
  6. Register with the Information Commissioner.
  7. Open new bank accounts (both client and office accounts).

Relationship with Introducers

Becoming a SRA Recognised Body will involve you disclosing any associations you have for introductions and referrals. You will need to disclose details such as the name of the introducing firm, the date of commencement of the agreement, the area(s) of work involved and the percentage of your firm's total estimated fee income that you expect to arise in your first year of trading from your arrangements with each introducer.

You will also have to disclose details of any contractual or other type of relationship that the firm or any of the managers has that might affect, or might be perceived to affect, the integrity or independence of the firm. This would include your interest in a referring company and may cause problems with your application.

The general requirement is: “You must ensure that your arrangement with an introducer (including your wish to avoid offending the introducer and your interest in continuing to receive work) does not compromise your duties to act in the best interests of your client, to be independent and to provide a good standard of service (rule 1)“.

You will therefore need to consider carefully any proposed referral arrangement before accepting work from an introducer. It is also recommended that your firm conducts regular reviews of your referral arrangements to ensure that they remain compliant.

Owning an interest in a separate business

If you own an interest in, or provide services through, a separate business which is an introducer, you must ensure that you comply with rule 21 (separate businesses).

The solicitor's core duty of ‘independence’ must also be met. 'Independence' means your own and your firm's independence, and not merely your ability to give independent advice to a client.

Examples of situations which might put your independence at risk include: a relationship with an outside body which is not at arm's length, and/or which suggests that your firm is more akin to a part of or subsidiary of that body, rather than an independent law firm.

If you are planning to refer potential clients through a company you already own, it could be argued that the company has a controlling interest in the law firm, as the law firm may be dependent on it for all its introductions and referrals.

This is obviously a risk factor in such a situation. When you apply to the SRA to have your LLP to become a Registered Body, you will have to provide details of any contractual or other type of relationship that the firm or any of the managers has that might affect, or might be perceived to affect, the integrity or independence of the law firm. You have to be wary of “certain contractual conditions in agreements with referrers of business or funders effectively pass control of your firm to an outside body”. Does the contractual relationship between the law firm and your other company inadvertently give company shareholders a controlling interest in the law firm?

There is also a question of other roles that managers in the law firm might have. This issue is not aimed at trying to identify, for example, where members work on a part-time basis or are involved in "out of work" activities such as coaching the local football team. What they want to identify is whether there are certain types of situation where firms' effectiveness, or even compliance, might be affected by other activities of the members. This may be as a result of time spent away from the firm, or the nature of another role might in some way interfere with responsibilities to the firm and clients. Examples quoted in the rules are:

  • a member, particularly if he or she is the only person in the firm who is "qualified to supervise", plays a major role in another firm or is, for some other reason, frequently absent from the firm.
  • a member is also a member of or owns a non-legal business, the business demands of which might affect the firm.

The nature of the relationship between the law firm and the other firm will have to be detailed when applying for the firm to become a Registered Body. It is at this point that the degree to which the firm may be regarded as independent may be questioned and also whether your role in the other firm may be such that it is deemed as significant enough to interfere with the proper running of the law firm. They may question how much supervision you can provide given your other responsibilities.

General safeguards when running a separate business to the law firm

You must ensure that the following safeguards are in place in relation to a separate business.

The separate business must not be held out or described in such a way as to suggest that the separate business is carrying on a practice regulated by the Solicitors Regulation Authority or that any lawyer connected with your firm is providing services through the separate business as a practising lawyer regulated by the Solicitors Regulation Authority.

All paperwork, documents, records or files relating to the separate business and its customers must be kept separate from those of any firm, even where a customer of the separate business is also a client of the firm.

Any firm must not be used to hold money for the separate business, or for customers of the separate business in their capacity as such.

If the separate business shares premises, office accommodation or reception staff with any firm or in-house practice:

The areas used by the firm must be clearly differentiated from the areas used by the separate business; and all customers of the separate business must be informed that it is not regulated by the Solicitors Regulation Authority and that the statutory protections attaching to clients of a lawyer regulated by the Authority are not available to them as customers of that business.

If you or your firm refer a client to the separate business, the client must first be informed of your interest in the separate business, that the separate business is not regulated by the Solicitors Regulation Authority, and that the statutory protections attaching to clients of a lawyer regulated by the Authority are not available to them as customers of the separate business.

You are not prohibited from running your separate business in association with your firm, or using a similar or related name or "brand". However, in order to comply you would need to differentiate properly the separate business from your firm and make it clear on the face of any notepaper or other publicity of the separate business using a similar or related name that the services of the separate business are not the services of practising lawyers.

However, you could not properly carry on your separate business under the same name as your firm, because that would create too strong a suggestion that the business, like the firm, is regulated by the SRA.

Arrangements with Introducers

The general rule is that “you must ensure that your arrangement with an introducer (including your wish to avoid offending the introducer and your interest in continuing to receive work) does not compromise your duties to act in the best interests of your client, to be independent and to provide a good standard of service (rule 1)”.

You would need to be able to show how this would be achieved and monitored. How feasible is it to do a risk assessment for each case to show that it is in the best interest of the client that the case be referred to the law firm rather than a different remedy through your original company?

If the SRA has issues with this scenario, it will be picked up on applying to become a Registered Body. If there is full disclosure at the application stage, one can assume it is safe to carry on if the application is approved! However, sharing a compliance officer across the two companies would probably not be sensible.

There is nothing in the Solicitors Code of Conduct for Rule 21 (Separate Businesses) or Rule 9 (Referral of Business) that stipulates how contractually the firms should act or how payments and invoices should be handled. The emphasis in the code of conduct is on the need for full disclosure to clients about the nature of the relationship and any referral fees charged, e.g. “where a payment is made to an introducer in relation to each client referred by the introducer, either as a fixed amount or as a proportion of the fee charged to the client, the amount of the payment must be disclosed to each client."

“Where you are being paid by an introducer to provide services to the introducer's customers, both you and the introducer are required to disclose both the amount the introducer is paying you to provide services to the client and the amount the introducer is charging the client for your services. This will enable the client to ascertain whether, and if so how much, the introducer is charging for making the referral and to make an informed decision whether to accept the referral on that basis."

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