In England and Wales there are currently five types of work which can only be undertaken by law firms: appearing as an advocate, conducting litigation, conveyancing, probate and the administration of oaths (see section 12 and Schedule 2 of the Legal Services Act). These categories are generally referred to as “reserved work”. By definition all other types of legal work are not reserved for solicitors and can be undertaken by anyone.
Do I need to set up a law firm?
In many ways the most important choice is whether to set up a law firm at all. You can offer excellent and trusted legal advice in your capacity as a lawyer, legal adviser and legal consultant outside the law firm structure providing: (i) you do not undertake reserved work and (ii) you do not hold yourself out as solicitor. "Holding out" refers to how you describe yourself, on, for example, business cards, letterhead and email footers and indeed refers to how the Law Society holds you out in its “Find a Solicitor" service. It is only the term ‘solicitor’ which is prohibited. That is to say such term should not be used and you should notify the Law Society that you are no longer practising and a solicitor, this is referred to a “coming off the roll of solicitors”.
For completeness you should also note the law on privilege. Solicitor/client privilege applies only to those practising as solicitors, so advice to clients delivered outside a regulated firm is unlikely to attract privilege.
If the unregulated route is suitable, then it is quite simple to achieve and the key requirements of the regulated route such as compliance, SRA regulated insurance and SRA authorisation are not required. It wont be suitable of course if you want to practice as a solicitor or want to carry out reserved work. There are also certain logistical considerations, for example only law firms can hold a client account, go on the court record and give solicitor's undertakings.
Setting up a regulated law firm
If you wish to set up a regulated law firm then, the next structural choice is to decide on the vehicle through which you will practise. You can work as a sole practitioner, an unincorporated partnership, a limited liability partnership or a limited liability company (naturally the partnership options require more than one principal in the business). Setting up a corporate vehicle is simple and inexpensive and of course ensures you will not be personally responsible for the liabilities of the firm. Traditionally, law firms have been set up as partnerships, as this reflects the joint enterprise nature of the practice and the shared responsibility for management and control. However, there has been a recent and noticeable increase in the number of law firms setting up as limited liability companies. Such can offer greater flexibility to raise capital and offer shares to employees and generally is a structure more in line with clients which are typically also limited liability companies. Further, limited liability status is better suited where there are to be professional (i.e. non-lawyer) managers and profits are to be retained and reinvested in the business.
Partnerships (whether incorporated or otherwise) and sole practitioners on the one hand and limited liabilities companies on the other hand are taxed very differently. According to George Bull, former Chair of the Professional Practices Group at Baker Tilly “partnerships and limited liability partnerships are taxed as if they are fiscally transparent. In other words, the tax-adjusted results of the business are apportioned to partners in a manner which reflects their profit sharing arrangements. Each individual who receives a taxable profit share is responsible for paying the relevant income tax and National Insurance Contributions. Provided the individual partner is recognised as self-employed by HM Revenue & Customs, the partnership/LLP has no responsibility to account for PAYE in respect of partners’ earnings or to pay National Insurance Contributions in its own right. If, following the change of UK tax law on 6th April 2015, a partner is not recognised by HMRC as self-employed, then the firm must operate PAYE on their earnings as if they were an employee.”
“Partners pay tax on the firm’s profits in accordance with their respective profit shares. The tax-transparent nature of LLPs and partnerships is therefore tax-efficient for firms (and their partners) which distribute all profits in full. However, partnerships and LLPs are tax-inefficient for firms which retain profit, because the partners are taxed both on the distributed profit and the retained profit. In that situation, the limited liability company may be a better choice of structure. Profits retained within the company will be taxed at corporation tax rates (20% from 1st April 2015). This compares favourably with income tax rates of up to 45% (2014/15). Remuneration paid to employees or directors of a limited company reaches them through the PAYE system, with Class 1 National Insurance Contribution liabilities for both the employee and the employer. Dividends can however be paid to shareholders of the limited company without attracting an NIC liability.”
There is an alternative solution if you seek all the flexibility and freedom of setting up your own law firm but wish to avoid the investment inherent in setting up.