GPSolo Magazine - July/August 2005

Leaving a Large Firm: Less is More

There are as many reasons that lawyers go from a large firm to a small or solo practice as there are lawyers who have made the transition. Frustration with office politics, the need for more independence, the desire to focus a practice on a specific area of law, the desire to build a business, and the desire to do things your own way are just a few of those reasons. If carefully considered and planned, the move can lead to a long and satisfying legal career.

Should I Make the Move?

Any lawyer contemplating such a move must first undertake a careful and thorough self-assessment. Joan Bibelhausen, in “Who Should Go Solo” (in Starting and Building Your Own Law Practice, MSBA CLE, April 1996), suggests completing a “Solo Practice Choice Exercise”—an exercise that also could apply to those starting up a small firm. In the exercise, you first list all the factors that will figure in the decision to either start a practice or be an employee. Next, indicate whether the factors in each category, going solo or working for someone else, are positive or negative factors. Rank in order at least the top five factors in each category and then take a close look at the choices and consider 1) how strong are the positive and negative factors among the top choices, 2) are the factors fact-based or based upon assumptions (if the latter, do your best to investigate these assumptions), and 3) are the top choices more related to substantive legal work, running a business, or something else? Then determine which category, going solo or working for someone else, has the most and strongest positives. Let the positives drive your decision.

Developing the Plan

Now that the assessment is complete and the decision is made to make the move, the real work begins. Building the new practice on a strong foundation will give it the best chance to succeed. The initial step in building that foundation is the development of a business plan. Every aspect of the new practice can and should be covered in the plan, including but not limited to the considerations discussed in this article. The plan should include enough detail so that it could be executed without further explanation.

Starting with the structure of the new practice, will it be a solo practice or a small firm? If the latter, will it be formed as a partnership, a professional corporation, a professional limited liability partnership, or a limited liability partnership? The manner in which the practice is structured can have far-reaching implications, and new entrepreneurs should seek the counsel of an accountant or other tax expert before making the decision as to the structure.

Because striking out on your own may mean splitting up an existing firm, paying attention to the structure of the legal organization you are leaving must be addressed in the plan. For example, if you are a partner, leaving a partnership dissolves that partnership. There are tax implications and possibly firm name implications. Again, the counsel and advice of a transactional lawyer and/or accountant will be invaluable. Leaving a professional corporation requires that a number of details be considered, such as making certain all of your interests in the PC are transferred back to the PC and ensuring that you receive from the PC everything you are entitled to receive. Other details—for example, cutting off all long-term obligations, lease obligations, and firm lines of credit obligations—cannot be overlooked.

New Clients/Old Clients

The business plan must also address where the new firm’s business will come from and how that business will be generated. Remember, lawyers do not own clients. Clients are not “your clients” and a case is not “your case.” Attorneys handle their clients’ cases. It is ultimately up to clients to decide who will handle their cases. The clients must be advised of the impending departure of a lawyer from the firm and must be given the opportunity to make the decision on who will go forward with their representation.

When leaving a firm, reach agreement with the firm on what will be said to the clients you have been representing. Lawyer leaving the firm should deal with only one of the firm’s remaining lawyers. It is more efficient and effective to deal one-on-one, rather than “one-on-committee.” The negotiated statement should be reduced to writing to ensure that all clients receive the same message; this letter should be sent to all clients of the departing lawyer. (See the sidebar on page 20 for a sample letter.)

A written script should also be negotiated so a consistent message is relayed to those calling the former firm. For example: “Mr. Lawyer is no longer with this firm. He is pursuing other interests. He can be reached at 999-999-9999.”

Develop a Budget

You must also develop a detailed operating budget, which will include a projection of income for the practice. The expected income projection should be conservative. It is from that projection that expenses can be calculated. The income derived from the practice must be sufficient to pay all salaries and expenses associated with the practice.

A key factor in the budgeting process is office location and office type. It might be most cost effective for a firm with a heavy trial practice to locate close to the courthouse. On the other hand, a transactional practice might choose office space outside the central city area, where space is usually less expensive. In order to control costs, consideration can be given to office sharing and staff sharing arrangements. Renting a single office in a suite of offices may significantly reduce costs. Some attorneys rent space within the office of an existing firm. These arrangements certainly offer advantages, but they can present both ethical and malpractice risks, especially in maintaining client confidences. When contemplating this type of arrangement, make certain to carefully review the ethical rules relating to client confidentiality. ABA Model Rule 1.6, Confidentiality of Information, is a good place to start.

Sharing staff with other lawyers can also produce cost savings. Some office arrangements provide for shared secretaries, receptionists, and general clerical staff. Again, close attention must be given to client confidence issues. In addition, a review of your professional liability policy is necessary with respect to any office sharing or “of counsel” arrangements as coverage (or a lack thereof) is implicated in any such arrangement.

Another factor in the budgeting process is furnishing the office. The manner in which an office is furnished can impact how a practice is perceived. You do not have to break the bank purchasing furniture, but the office must be furnished to look professional. The reception area is the first thing prospective clients see. It must be clean, neat, and professional looking, as should your office. The furniture does not have to be brand new, but it should be comfortable. A client’s first impression will be a lasting impression.

Insurance

Although it is sometimes difficult to contemplate the risks associated with a new practice, a comprehensive insurance program must be established to protect your investment and the interests of your clients should something happen. Oftentimes, this step in setting up a practice is either overlooked or viewed as an unnecessary expense. While this process can seem daunting to someone trying to get a new business going, engaging the services of a qualified insurance professional is well advised.

There are a number of different types of insurance that must be considered. Many insurance companies offer business-owner packages tailored to specific needs. These package policies often contain multiple coverages within one product and might include property and liability coverage along with employee dishonesty coverage. Other coverage may be added, and limits on all the coverages adjusted to fit an insured’s particular needs and budget. Health insurance and life insurance for lawyers and staff also must be considered. Again, a qualified insurance professional will offer options that can be tailored to fit a particular situation.

The purchase of professional liability insurance must also be considered. At this time, only one state ( Oregon) requires lawyers to carry professional liability insurance. Several states, however, require lawyers to disclose to clients whether they are or are not insured for professional liability, and this requirement is currently under study in a number of other states. In fact, in August 2004 the ABA adopted “A Model Court Rule on Insurance Disclosure,” which states, in part, “Each lawyer admitted to the active practice of law shall certify to the [highest court of the jurisdiction] on or before [December 31 of each year]: 1) whether the lawyer is engaged in the private practice of law; 2) if engaged in the private practice of law, whether the lawyer is currently covered by professional liability insurance. . . .”

Lawyers’ professional liability insurance is written on a claims-made basis. Someone not well versed in insurance might find this a confusing concept. In fact, the concept often confuses even insurance professionals. It is, however, extremely important to gain some understanding of the concept to make sure that you and your clients are protected in the event that an error occurs.

The coverage under a claims-made policy is triggered when the claim is made, as opposed to when the error giving rise to the claim occurred. Gaps in coverage can occur if care is not exercised in administering the coverage. Understanding the coverage provided by your previous firm’s policy and the coverage you are purchasing will assist in avoiding these gaps. Most insurance carriers offering professional liability insurance coverage have staff available to assist in purchasing the coverage that is right for your practice. Here again, the services of a qualified insurance professional can be invaluable.

Technology

Today’s technology can enable a sole practitioner or a small firm to operate in an extremely efficient manner. An up-front investment in technology properly geared to a specific practice type will pay for itself in a short period of time. The key to making the investment pay off is to match the technology with the practice. Spending some time and money consulting with an expert in the legal technology field is well advised. The consultants will guide you through the myriad hardware and software choices that are available. The equipment suitable for a general practice might not work at all for a lawyer engaged in a specialized area of practice.

Bank Accounts

A law firm needs bank accounts. Once a business plan and budget have been developed, choose a bank. At least two accounts need to be established: a business account from which operating expenses will be paid and operating income will be deposited, and a trust account, which will hold funds in trust. Make sure that you are intimately familiar with the ethical rules dealing with trust accounts. See ABA Model Rule 1.15: Safegaurding Property, and the corresponding requirements in the state where the practice will be established.

With a solid business plan and budget in hand, a bank will likely establish for the firm a line of credit. As part of this business plan, list your existing matters as “inventory” for your banker. Design this inventory to give your banker a clear understanding of the work your practice will undertake and a realistic view of fees it will generate. In preparing this inventory, be careful to protect client confidentiality. Generic descriptions will satisfy the needs of your lender. Be conservative when the line of credit is established. Overextending yourself can quickly lead to trouble.

Resources

There are a number of resources available to assist in the move from a large firm to a solo or small practice. Many state bar associations publish helpful information in this regard. For example, the Oregon State Bar Professional Liability Fund publishes A Guide to Setting Up and Running Your Law Office by Carol Wilson (1994). The book contains, among other things, sample forms and letters, as well as information on time management, billing, and collections.

The American Bar Association also offers a number of resources relating to setting up a solo practice or small firm. The Law Practice Management Section ( www.abanet.org/lpm) publishes a number of books relevant to this topic, and the General Practice, Solo and Small Firm Division ( www.abanet.org/genpractice) is a tremendous resource in this regard. Joining the ABA sections and local bar association sections relevant to solo and small firm life will provide the support and a good deal of the expertise necessary to make the transition into the solo/small firm world a success.

Professional liability insurance carriers are another resource that should not be overlooked. For example, the Minnesota Lawyers Mutual website ( www.mlmins.com) contains many articles that can be helpful in establishing a practice. The website also contains a number of sample forms and letters and checklists that can be valuable tools for any practice.

Starting a small firm or solo practice can be a great adventure. When properly planned and executed, the move can lead to a profitable and, most importantly, satisfying career. The use of experts and consultants, while initially an expense, will allow you to make the move most efficiently and will let you concentrate on what you do best: the practice of law.

Letter to Clients of a Departing Lawyer

Dear Client:

I am leaving XYZ Firm, effective immediately, to establish my own practice. As you are aware, I have been the attorney primarily responsible for handling your case. I am available to continue handling the matter. Please indicate your preference in the space provided below. It is up to you to decide who will continue to represent you. I have enjoyed working with you and hope to continue our relationship.

Please return this letter with your preference indicated in the enclosed envelope as soon as possible.

Feel free to call with any questions.

Sincerely,

Your Lawyer

***

____ Your Lawyer should continue to handle my case

____ XYZ Firm should continue to handle my case

 

Timothy J. Gephart is vice president of claims at Minnesota Lawyers Mutual in Minneapolis. He can be reached at tjg@mlmins.com.

 

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