How to Start a Law Firm: Authorisation, Costs and Funding the First Year

Choosing your structure

The first decision is how the firm will be set up. Sole practice, partnership, limited liability partnership and limited company are all possible, and each carries different implications for personal liability, tax, how profits are shared and how a lender will view the business. Firms with non-lawyer owners or managers are licensed bodies, often called alternative business structures, and face additional requirements.

Some solicitors choose a lighter route. Since 2019 the SRA has allowed solicitors to practise on their own account as freelancers without authorising a firm, subject to conditions, including that they do not hold client money. That suits some practitioners, but it limits the work available and is a different proposition from building a firm that will employ others and grow.

Take advice from an accountant and a solicitor experienced in law firm formation before deciding. The structure affects the authorisation application, the PII proposal and the funding options, so it is worth settling first.

At the same time, be clear about the work the firm will do and where it will come from. Lenders and insurers will both ask. A founder who is bringing a following of clients or referrers, or who has a defined niche such as private client, employment or commercial property, presents a stronger case than one planning to build a general practice from nothing. Write the business plan with that evidence in it: expected matters, typical fees, how long work takes to bill and the costs of delivering it.

SRA firm authorisation

A firm that will provide reserved legal activities must be authorised by the SRA, or another approved regulator, before it starts. The SRA’s page on applying for authorisation of a new firm sets out the forms, fees and supporting documents. The SRA says it aims to make a decision within 90 days where possible, but that a decision could take up to 180 days, and the clock does not start until the application is complete.

The application covers the firm’s structure, its managers and owners, its proposed work, its compliance arrangements and evidence of PII. The SRA’s guidance on how it decides whether to authorise a firm explains that the firm must have someone to supervise the work who is a lawyer with at least three years’ practice experience, and that managers are assessed as a group on whether they can run the firm properly.

Build the timetable around this. Premises, staff, bank accounts and launch plans can all be prepared in parallel, but committing to large costs before authorisation is granted carries risk.

COLP and COFA

Every authorised firm must have a Compliance Officer for Legal Practice (COLP) and a Compliance Officer for Finance and Administration (COFA), both approved by the SRA. In a small firm the same person may hold both roles.

The COLP is responsible for taking reasonable steps to ensure the firm complies with its regulatory obligations and for recording and reporting breaches. The COFA has a similar responsibility for the SRA Accounts Rules and the firm’s financial affairs. Both roles carry personal regulatory accountability, so the people nominated need the time, authority and knowledge to do them properly from the outset.

Professional indemnity insurance and the first premium

A solicitors’ firm must hold qualifying insurance that meets the SRA’s minimum terms and conditions, set out in the SRA Indemnity Insurance Rules. The minimum level of cover is higher for LLPs and companies than for sole practices and partnerships, and the SRA expects evidence of insurance with the authorisation application.

For a new firm, the first premium can be hard to predict. Without a claims record or trading history, insurers rely heavily on the proposed work mix, the experience and claims history of the principals, and the firm’s risk management and supervision arrangements. Conveyancing and other higher-risk work can affect both the premium and the number of insurers willing to quote.

Speak to a specialist insurance broker early, and budget for the premium as a substantial cost falling before much fee income arrives. Our PII premium finance guide explains how the cost can be spread.

Client account and the Accounts Rules

If the firm will hold client money, it must comply with the SRA Accounts Rules from day one. That means a properly designated client account with a bank or building society in England and Wales, accounting records with client ledgers, reconciliations at least every five weeks and, in most cases, an annual accountant’s report.

Opening a client account can take time, so start the process early. Some new firms decide not to hold client money at all and use a third-party managed account instead, which the Accounts Rules allow subject to conditions. That reduces the compliance burden but has its own costs and practical limits, particularly for conveyancing.

Whatever you choose, the COFA will need reliable systems. Weak client account controls are one of the most common regulatory problems for new firms.

Systems, premises and the way you will work

Practice management and case management software sits at the centre of a modern law firm, handling time recording, billing, client account, document management and compliance records. Choose it with the Accounts Rules in mind, and budget for set-up, data migration and training as well as the licence. Cyber security, anti-money laundering procedures, client identification and complaints handling also need to be in place before the first client is taken on.

On premises, the choice is between a traditional office, serviced space or a largely virtual model. A virtual firm keeps fixed costs down, but you still need a suitable registered address, secure arrangements for meeting clients and storing files, and a credible presence for referrers. A physical office adds rent, fit-out and a longer commitment, and can be funded with fit-out finance or equipment and technology finance rather than from launch capital.

Costs to plan for

A realistic budget covers the costs before launch and the months before fee income is collected. Typical items include:

• SRA application fees and the costs of professional advice on structure and authorisation.
• The first PII premium, often payable at or near the start of cover.
• Practising certificate fees for the solicitors in the firm.
• Practice management software, IT, telephony and cyber security.
• Premises: deposit, rent, fit-out and furniture, or serviced office fees.
• Accountant’s report, bookkeeping and payroll costs.
• Marketing, website and professional memberships.
• Salaries and drawings until fees are billed and paid.

The last item is often the largest. Most matters generate WIP before they generate cash, and some work types, particularly litigation, can take many months to bill. A month-by-month cash flow forecast for the first year is the most useful planning tool you can prepare, and it is the document lenders will ask for first. Build in a contingency for slower billing than planned, a higher PII quote or a delay in authorisation, because each of these is common in a firm’s first year.

Funding the first months

Start-up funding for a law firm usually combines a few elements rather than one loan.

• Working capital to cover salaries, rent and overheads while fee income builds. See new practice finance and practice working capital.
• PII premium finance, so the first premium is spread rather than paid from launch capital. See professional indemnity finance.
• Practising certificate funding, to spread the annual fees. See practising certificate finance.
• Equipment and technology finance for IT, software and office equipment, matched to its useful life.
• Disbursement and WIP funding once the caseload is established, particularly for litigation practices.

Without trading history, lenders put more weight on the founders’ experience, their personal financial position and contribution, the business plan, the work pipeline and the strength of the forecast. The choice of lenders is narrower than for an established firm, which makes a well-prepared case more important. Our guide to preparing a practice finance application covers what to assemble.

We arrange funding for new and established law firms across the whole of the market. We help shape the funding plan, approach lenders whose criteria suit a start-up and manage the process. Finance is subject to status, lender criteria and approval. Where the borrower is a sole trader or a small partnership, finance of £25,000 or less can be regulated consumer credit, and we will say at the outset if that applies. See our starting a practice hub, our work with solicitors and law firms, or make an enquiry.

Common questions

This guide is for general information only and should not be treated as legal, tax, accounting or financial advice. Funding availability and lender requirements depend on individual circumstances.