CHAPTER TWO –
FREELANCE SOLICITORS ARE SOLE TRADERS
The SRA and Law Society materials make very clear that being a freelance solicitor will mean being a sole trader. What does this actually mean? It means that you cannot be a limited company and you cannot be a Limited Liability Partnership (LLP).
You must trade in your own name and a quirk of the SRA rules means that you will not be able to utilise a trading name.
Therefore, if you wish to pursue this model, for example, John Smith a freelance solicitor/SRA-regulated independent solicitor. You will have to identify that you are not attached to a law firm and are not trading through any limited entity.
Outside of law many individuals are sole traders. If you have ever hired a painter and decorator, a plumber or a web designer you may have dealt with an individual who trades in their own name. This means that when the time for payment comes, the payment goes to that sole trader, whether it be John Smith Plumbing or John Smith freelance solicitor. So far, so simple.
The reason though that many individuals choose to trade through limited companies, or as an LLP, particularly in the professions is a balance between risk and reward. As a sole trader if you do something which causes a loss to your clients, and they successfully bring a claim against you, then unless your insurance covers it, your own personal assets are at risk.
Clearly, for John Smith limited, whether he be a plumber or a solicitor, the case is the company is at risk rather than the individual behind it.
The first thing that any potential freelance solicitor has to assess is whether or not this risk is worth the reward that is available, i.e. do the fees that can be earned, and the income derived from this justify the risk of being personally liable? This is a highly personalised decision. You should assess whether or not you are comfortable with that.
Personal liability – Is it really new?
Until the late 1980s it was strictly prohibited for law firms to try and limit their liability and to become a limited company. The Limited Liability Partnership Act 2001 introduced an additional form of business, the LLP, which could thereafter be utilised. The move away from sole trader liability for solicitors is therefore a relatively new phenomenon. However it did happen for a reason. Not everybody was comfortable with taking that risk and for some it was a risk too far. It is very much a personal decision for you to assess whether or not that risk is right for you or not.
If you undertake work in a high-risk area such as conveyancing which is known to be a source of the majority of the legal claims against solicitors then you may conclude that personal liability is not right for you.
The majority of law firms in 2019 have limited their liability in some way shape or form. My own law firm is an LLP with a corporate member i.e. has two levels of protection.
The move to introduce freelance solicitors therefore swims firmly against the tide of the last 30 years in terms of managing personal risks downwards, but there are many law firms who are sole practitioners, or small traditional partnerships under the Partnership Act 1890, who carry the same personal liability risk.
Leading international magic circle firm Slaughter & May remains a traditional partnership, although no doubt their collective resources are significantly greater than any potential freelance solicitor can aspire to on their own.
Similarly Barristers regulated by the Bar Standards Board (BSB) have, until the BSB started to regulate entities, all been traditionally individuals. The barrister model is in effect a sole trader profession as they trade only in their own name. Whilst recent rule changes have relaxed this the take up of entities under the BSB regime remains modest and almost every Barrister in the profession is therefore a sole trader, albeit most choose to work through Chambers, which as we will explore later in the book remains a potential option for freelance solicitors.
What does this mean for you?
You need to assess whether or not you are comfortable being a sole trader.
You need to assess whether or not the type of work that you undertake is high risk?
You also need to assess whether or not the personal liability risk does not sit well with you and your personal assets?
The existence of traditional partnerships, traditional sole practitioners whose firms are regulated by the SRA as a firm and the existence of the model at the Bar make mean on reflection that the risks are seen as acceptable by you. The key question though with this new model is whether or not the watered-down insurance protections offered to freelance solicitors, as opposed to law firms who are subject to the SRA Minimum Terms and Condition of Professional Indemnity Insurance is a theme that time again is raised throughout the book.
You need to assess the impact not just therefore on the risk and reward being a sole trader but also whether or not the revised insurance regime, as offered by the SRA – Regulated Independent Solicitor or Freelance Solicitor model, means that your view is impacted.
The checklist contained in Part 3 may assist you in reviewing this position.