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How to set up a solicitor partnership

The Law Society’s Practice Management Member Services team has produced two information leaflets for practitioners, covering the steps involved in setting up a partnership and the succeeding-practice rule.

A partnership is a solicitor firm operated by more than one solicitor, and the partnership is a business that provides legal services.

The information on partnerships covers the Law Society’s requirements, which include current Practising Certificates, forms confirming PII (professional indemnity insurance) cover and a Commencement in Practice Form.

The note points out that, depending on the type of partner you are, you may or may not share in profits made by the firm.

Liability

Simon Treanor (Legal Services Regulation Executive, Law Society) also told an information session last week that a practice note published earlier this year set out that all partners in a legal practice were jointly and severally liable for debts and liabilities – even salaried partners.

“For the purposes of regulation, they are responsible for the firm,” he said, referring to salaried partners.

Equity partners will be self-employed. The leaflet points out that that this may mean several changes – including greater uncertainty on pay.

“It will not be guaranteed that you will receive an amount equivalent to your former salary. Equity partners, as owners of the firm, are always last to be paid. Other expenses – including salaries of employed staff, must be paid first,” the note says.

It adds that, in a bad year, the share of the profits as an equity partner may be less than the salary of the most junior secretary. 

Employment legislation

The member-services team also highlights the fact that equity partners are also outside the protection of employment legislation.

“If you find yourself having to leave the partnership, issues of minimum notice, redundancy or other employment safeguards are not relevant. You have no statutory rights. You are simply ceasing to be in a business with your former partners, and your rights are those associated with partnership law and the agreement between you,” it states.

Partners’ taxes will no longer be deducted under the PAYE system, and it is a partner’s own responsibility to make returns to Revenue.

Agreement

Treanor pointed out that the Law Society had a draft partnership agreement that firms could augment or amend. While a partnership could exist without a formal agreement, Treanor said that it would be “foolhardy” to do so, due to the many issues involved.

The document covers the pivotal issues involved in partnerships – including the management structure, how profits are shared, the sharing of duties among partners and mediation.

It examines the different ways of structuring partnership arrangements, and covers topics such as the distribution of profits, exit arrangements, break or review clauses and property.

Succeeding practices

A separate practice note provides guidance on the succeeding-practice rule for the 2022/23 indemnity period.

Where a firm ceases practice, valid professional indemnity insurance (PII) claims made against the firm are covered in one of two ways:

• If the ceased firm has a succeeding practice or succeeding practices, the insurance of any succeeding practice(s) covers such claims, or
• If the ceased firm does not have a succeeding practice or succeeding practices, the firm enters the Run-Off Fund. The coverage provided under the Run-Off Fund covers such claims.

The note stresses that whether or not a firm is a preceding practice or a succeeding practice in relation to any other firm will depend on a detailed analysis, taking account of the facts of the particular case.

“No generalised practice guidance can be given, and each case must be individually examined with reference to the definitions of preceding and succeeding practice as set out in the regulations,” it states.

The note sets out the definitions of ‘preceding practice’ and ‘succeeding practice’, and looks at cases where there are multiple succeeding practices.