Going Solo or Finding a Partner: Where to Begin?
With the new year just around the corner, you may be considering setting up your own law practice. With such aspirations in mind, you may also be thinking about whether you should set up a firm alone or find a partner to set it up with you. As a matter of fact, this should be one of the first questions to cross your mind.
As with any new enterprise, would you rather brave this new chapter alone or with a trusted sidekick (or two)? You will have to decide whether you prefer running a sole proprietorship or teaming up with others to form a partnership.
To some extent, it depends a lot on your personality and character. You should be asking questions like, Are you a team player? Are you more of an individual and prefer doing things in your own way? Are you capable of making compromises? Are you a natural leader?
Even if such questions still leave you on the fence, there are still other advantages and disadvantages to consider when deciding between both these arrangements. You may wish to consider the following:
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Sole Proprietorship |
Partnership |
Strengths |
Sole decision-making power.
Start-up is quicker.
Entitlement to all income from the law firm.
Taxation is based on income less allowable expenses.
Lesser capital investment.
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Overhead may be divided among the partners.
Workload may be distributed among the partners.
Liability may be shared among the partners.
Diverse expertise and skills among partners.
Enhanced networking opportunities through multiple partners.
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Weaknesses |
Reduced borrowing powers.
Sole liability for all debts.
May encounter difficulties in competing with major players.
Dependence on sole expertise and availability.
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Any profit would be divided among the partners.
Reaching an agreement on important decisions can lead to conflicts and delays.
Disagreements may lead to some instability in the law firm.
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Opportunities |
Personalised client relationships.
Niche specialisation in a specific area of law.
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Effective collaboration amongst partners.
Ability to handle a wide range of legal cases.
Expansion into new practice areas.
Potential to expand with new branches.
Trust between partners will grow stronger with time.
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Threats |
Intense competition with major players.
Keeping up with changes in legal regulations and compliance requirements.
Budgetary concerns. |
Reputation and financial stability of the firm is dependent on the conduct of partners.
Joint liability may be imputed to all partners due to one partner’s inappropriate conduct.
Potential for unequal workload distribution.
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Preferred Areas of Work
The legal field comprises numerous areas of practice such as conveyancing, corporate law, civil litigation, criminal litigation, intellectual property, industrial law, family law, and so on.
Your preferred areas of work and personal expertise may dictate that your law practice is of a certain size, eg certain areas of legal work require more staff and other resources.
It may not be advisable to diversify your chosen practice areas too broadly when you are just beginning to set up a firm. Lawyers who fail to initiate some discipline in the types of cases they accept early in their practice are lawyers who eventually find that they are not managing their law practice – their law practice is managing them!
Diversifying your preferred areas of practice too much, especially at an early stage, may run the risk that you end up becoming a jack of all trades, but master of none. You should be cautious when choosing which areas of law you will be focusing on in your new firm.
Factors that may be considered in establishing the preferred work your new practice will accept are:
- Practice areas you wish to develop or in which you have the expertise.
- Types of cases within practice areas for which you have expertise or desire to develop.
- The types of clients with whom you would like to work with.
- The revenue generated by selected practice areas or case types.
- The labour and cash requirements of the law practice by certain types of cases or practice areas.
- The type of fee arrangement of the case (ie scale fees or progressive billing).
Money Matters
One of the fundamentals of the financial management of any law practice is knowing your costs.
Consideration should be given to your personal ability to sustain a new law practice. If you are not prepared to bear the financial burden alone, a partnership may be a viable solution.
A "rule of thumb" for computing "break-even" costs in a law practice is to divide overhead by (for example) 1,200 hours per lawyer, per year. This gives the hourly yield necessary to provide income to lawyers, be it lawyer salaries or partner profits, conservatively figured.
In solo practices, you should have an overhead that is ideally no more than 50% of your revenues. In small law firms, the overhead (exclusive of lawyer salaries) generally should be 45% or less of revenues.
A good way to establish the viability of setting up a law practice and deciding on the business model to adopt is by developing at least two vital documents:
- Business Plan
- Financial Plan
(A) Business Plan
An ability to understand and apply the intricacies of the law does not necessarily translate into knowledge of how to set up a law practice.
Sit down and draft a business plan before you start your practice. Having a solid business plan will give you an objective mark against which to assess your progress.
- If you are starting a new law practice, your business plan gives you an idea of how viable your venture really is.
- If you are looking for financing, your business plan will be the lender's reassurance that your law firm is worth funding.
You may be asking, “What is a law practice business plan and what does it consist of?”
In short, it is a concise and organised summary of how you intend to start and remain in business. It will give you an accurate picture of how your law firm will operate and cover areas such as:
- General description of your law practice.
- Your financial plan.
- Your management plan.
- Your marketing plan.
Be thorough when creating your business plan. Bear in mind that this business plan is something that your banker and potential partners may want to see.
(B) Financial Plan
A budget will be an important part of your financial plan. When you are starting out, you need to sit down and prepare a detailed month-by-month budget for at least the initial 12-month period. Budgeting and managing your cash flows well will be a big part of remaining in business.
Your budget should include all expenses that you know of and/or can anticipate, and when they must be paid:
- Include an amount for unexpected expenses, since it is Murphy's Law that costs will always be greater than you expect, particularly as the volume of work increases;
- Build in marketing time and expenses; and
- Build in your draw: If you do not look after yourself, no one else will.
Compare the total expenses to your anticipated revenue.
Do not confuse making a profit with cash flow. You might be making a profit, but if you run out of cash to pay your bills, your law practice cannot operate. The break-even point is where profit starts.
Every business, including a law practice, needs to know how much income has to be made before all the expenses are covered and actual profit begins. A law firm could well be turning over a lot of money - but running at a loss. This is where a simple calculation, the break-even point, is used to find where profit really starts.
If you are just starting up your practice, you may not have a historical basis to forecast income. In this case, you may have to make an educated estimate based on your marketing plan and any potential clients whom you are already acquainted with.
In setting up, consider:
a. Establishment Costs
These are your start-up costs which will not be repeated, eg setting up premises, licences, buying equipment, market research etc.
b. Profit and Loss Statement
This shows your profit and loss for the first 12 months: this will include income derived from fees, incidental costs and expenses.
c. Cash Flow Worksheet
Calculate how much cash you will need to keep your law firm running, irrespective of expected profit, and where it will come from. This will help you determine your overall overhead.
d. Break-even Analysis Information Sheet
This tells you how much money you need to make to run your law firm and is useful to calculate your required cash flow.
Conclusion
Opening a law firm is no easy task. There are many things to consider before you even start. This is to say nothing of any disagreements you may have with a potential partner in the course of discussing the possibility of opening a firm. If you are genuinely keen to start up your own firm, make sure you lay the groundwork and build a solid foundation upon which your firm will be able to stand.
Only then will it last.