Setting up a Law Practice: Key areas to consider with the accounts department
What to consider when setting up a Law Practice?
Starting up a law firm can be a daunting prospect, which is why it is important to get assistance from an accounts team as soon as possible. There are certain considerations that an accounts department will be able to highlight and assist with before opening up a law firm.
In this article, we will look at some of the key areas that you and your accounts team will need to consider when you set up a legal practice.
The first thing to consider when setting up is the structure. Everything feeds from what kind of business structure is applied.
Are you a sole practitioner, setting up a solo law firm?
Are you setting up a solicitor’s firm as a partnership?
Are you setting up as a limited liability partnership?
Are you setting up as a limited company?
The answer to this question will dictate certain areas of your business, for example:
With a limited company, the money belongs to the firm as opposed to the individual, meaning business bank accounts must be used.
How you account for tax – This is different between partnerships, individuals, and corporations.
Where responsibilities and liabilities lie. These are very different depending on structure and law office setup and will determine how business decisions are made.
Banking
Banking is the first consideration for any accounts department when a lawyer is setting up their own law firm. Key points to think about are:
Which bank is going to be used? It is best to review a few different ones. Speak to peers and get some feedback about providers. You need to ensure that the bank you are looking at can provide all the services you require?
Type of account? Business Account/Partnership/Individual? This will be determined by the structure of the business as stated above.
What is the internet banking like? Review the corporate internet banking services and the standard business banking ones. It is important that there is a dual authority aspect to them so that money can be sent out compliantly if using an accounts department to set payments up for you.
What are the payment limits? Often, they differ depending on the internet banking service you use.
How many accounts do you need? Most firms would go for a client account, office account and business savings account. But this will vary depending on the type of law firm you are. Review your requirements. Please also note that to stay compliant with the Accounts Rules, a client account must show “Client Account” in the account name.
Charges & Interest. Review these carefully and see what will benefit you the most. Get value for money.
Compliance & Regulators
Who is going to be your regulator?
The full list of legal regulators from the Legal Services Board can be found here: Approved regulators – The Legal Services Board
Registration with your regulator should take priority over most things when setting up a law firm. You cannot practice law without registering with a regulator, and this applies even to setting up a virtual law office. A new firm setup is also possible, but each regulator will have a minimum number of practicing years requirement before you can proceed. This prevents lawyers with no experience from starting their own firms. This is to mitigate risk.
The next question is, who are your compliance officers?
SRA Terms:
- Compliance Officer for Legal Practice (COLP)
- Compliance Officer for Finance and Administration (COFA)
Other Regulators:
- Head of Legal Finance (HOLP)
- Head of Finance and Administration (HOFA)
If you are setting up a law firm as a sole practitioner, you will likely be the head of both legal practice and finance and administration. If you are opening up a law firm with other partners/directors, it makes sense to split these roles.
Software
Software choice is a surprisingly big subject for new law firms. You should take the time to determine which practice management system is right for you and your accounts department. There are many considerations to factor into your choice:
- Cost
- Size & Complexity
- Do you want to run all your files through it digitally?
- Do you need outside integrations with other software?
- Is the software compliant with your regulator and the accounts rules?
- What features are you most interested in?
- What are the contract terms?
These are some of the main things to think about, but The Law Factory has plenty of articles on software choices to aid consideration.
Budgets and Financial Planning
When setting up a law practice, a budget is crucial. Work with your accounts department and your auditors to start building a budget. This document will evolve as suppliers are selected and direct debits are set up. The key is having an idea of what turnover is likely to be. What is the number of invoices done each month and what is their likely total value?
It is then important to think about how the firm is likely to grow, and in what areas. What is the staffing situation going to look like and how is expenditure likely to increase?
Budget and financial planning are key to your overall business strategy.
Professional indemnity insurance must also be high on the list when it comes to setting up a law practice. It is important to take the time to review brokers and insurance companies and see which one is right for you. Like software, it is recommended that you seek feedback from others who undertake the same working disciplines as you. Your stated work type will determine what cover you need and therefore what you will need to pay. It is important to get this right.
It is important when completing the form that you speak to your auditors and accounts department to ensure that you complete it correctly. Use the budgets and financial planning documentation mentioned above to be as accurate as you can with your figures.
VAT
Are you going to be VAT registered straight away? A firm can choose to register for Vat from the start or wait until it reaches the VAT threshold.
The threshold for VAT registration from 1st April 2024 is £90,000 turnover per annum. A firm must register for VAT if it exceeds this threshold of turnover for any consecutive 12-month period.
A detailed guide from HMRC can be found here: Register for VAT: When to register for VAT – GOV.UK (www.gov.uk)
It is important to discuss VAT registration and planning with your auditors and accounts department before going ahead.
Once registered, the accounts department will need to enable Making Tax Digital (MTD) on your software and have a login to the HMRC website to submit your returns.
AML
It is very important to have strict Anti-Money Laundering (AML) policies in place and ensure that processes have been setup to deal with AML. It’s worth looking at providers who can offer services for ID checks and source of funds checks. This can also be linked/done by certain practice management software, so it is worth investigating this. You and your staff must be given full training on the AML rules and obligations so that issues can be spotted and reported to your Money Laundering Reporting Office (MLRO). Again if you are a sole practitioner, this will be you. You must also have a written risk assessment policy for the firm and guidelines for KYC which are applied rigorously.
Other Considerations
Auditors/Accountants
Always choose auditors who have experience with the Accounts Rules and understand how legal practices operate.IT Providers
It is important to ensure you have reliable IT providers and review how much of their service you need before signing up. IT can be costly, so it is important to review a few.Systems and processes
These are crucial to agree with your accounts department and the rest of the firm. How is information going to be transferred between people within the firm and how is it going to be kept? The Law Factory has plenty of literature on this subject.
There are of course many other things to think about when setting up a legal practice. It is however important to highlight several that will be directly linked to your accounts department.
If you are thinking of starting up a law firm and need an accounts department, contact The Law Factory and we will see how we can assist you.
Alex Simons MAAT
Outsourced Accounts and New Business Manager
The Law Factory LLP