Please keep in mind that this is not legal advice.  The information provided herein is for educational purposes only.  If you believe you require assistance in deciding which business structure is best for you, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).

In this blog, I’ll be discussing limited liability partnerships, which can be distinguished from general partnerships (discussed in another blog).

Defined
Ontario’s Partnership Act governs limited liability partnerships. A limited liability partnership is a partnership designated as such (s. 44.1). As of July 1998, amendments to the Partnerships Act permitted professions (such as lawyers) to practice in the form of limited liability partnerships.

Ease of Creation
Ontario’s Business Names Act provides that “[n]o persons associated in partnership shall carry on business or identify themselves to the public unless the firm name of the partnership is registered by all of the partners” (s. 2(3)).

In addition to registering the general partnership’s name in the same manner as a sole proprietorship’s, the partners will generally enter into a partnership agreement to modify the default rules prescribed by the Partnership Act. This partnership agreement will usually outline the relationship of the partners to each other and to third parties.

The partnership agreement will also deal with issues such as “term of the agreement, names of the partners, who owns which of the assets, name of the partnership and who owns the name, capital contributions if any, how profits are to be shared, how the partnership is to be managed, how holidays and illnesses are to be handled, liabilities and disability insurance, admission and withdrawal of partners, how the partnership is to be run and conditions and mechanics for dissolution of the partnership” (source: Wendy E. Oughtred, Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 51).

The partners must also establish standards for fee distribution within the firm, including the means of rewarding lawyers for bringing business to the firm, as well as the lawyers who actually work on cases.

Continuity
Unless the partnership agreement provides otherwise, a limited liability partnership can be dissolved in a number of ways, including:

• At the expiration of the partnership’s term, adventure, or undertaking (if specified) (s. 32(a) and (b) under the Partnership Act);
• By the death or insolvency of any of the partners (s. 33(1) of the Partnership Act);
• By the happening of an event which makes it illegal for the partnership to continue (s. 34 of the Partnership Act); and
• On application by a partner in respect of prescribed circumstances (s. 35 of the Partnership Act).

Liability
Unlike a general partnership – where the partners are liable for debts and liabilities arising from the negligent acts of all partners – the partners in a limited liability partnership are not personally liable for the negligent acts of another partner or an employee who is directly supervised by another partner (s. 10(2) of the Partnership Act). However, the partnership assets continue to be at risk for the negligence of the partners and employees (s. 10(3.1) of the Partnership Act). A limited liability partnership is required to carry insurance coverage for each of its member.

Taxation
Like a general partnership, a limited partnership is a flow-through entity, which means that income earned by the partnership is passed on to the partners without being taxed at the partnership level. “If a partnership earns dividend income, taxable capital gains, or realizes a business loss, these sources would be received as dividend income, taxable capital gains, or business losses in the hands of the partners” (source: Clarence Byrd and Ida Chen, Byrd & Chen’s Canadian Tax Principles, 2006-2007 ed. (Toronto, Canada: Pearson Prentice Hall, 2007), p. 863.). The income, losses, and tax credits of the firm is first determined and then allotted to the individual partners in accordance with their equity interest in the partnership (as per the partnership agreement). The income earned by the individual partners will be fully taxed at their personal income tax rate (source: Clarence Byrd and Ida Chen, Byrd & Chen’s Canadian Tax Principles, 2006-2007 ed. (Toronto, Canada: Pearson Prentice Hall, 2007), p. 862). The fiscal year end of the partnership will be same as the individual partners – namely, December 31st of each year (sources Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), ss. 96(1) and 249.1(1). See also Clarence Byrd and Ida Chen, Byrd & Chen’s Canadian Tax Principles, 2006-2007 ed. (Toronto, Canada: Pearson Prentice Hall, 2007), p. 862.

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Please keep in mind that this is not legal advice.  The information provided herein is for educational purposes only.  If you believe you require assistance in deciding which business structure is best for you, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers).

In this blog, I’m going to write about lawyer associations as an alternative to forming a partnership or having a professional corporation.

Defined
An association is simply an arrangement whereby a sole practitioner or partnership shares space with other lawyers.  In other words, an association is an unincorporated company which allows its members (i.e. individual lawyers running their own practices) to share costs and resources.

Advantages
There are tremendous benefits to space-sharing. The most obvious is the sharing of expenses: receptionist, bookkeeper, photocopier, boardroom, library, phone system and fax. When first starting out, lawyers’ overhead costs can be daunting, and sharing these expenses can mean a significant saving. Other benefits include: each lawyer maintains much of the autonomy of a sole proprietorship, liability is prima facie not shared, there is the possibility of cross-referral work, an on-site lawyer can watch over another lawyer’s practice when the latter lawyer is on holidays or ill, expenses can be shared, and there is someone who can give a sympathetic ear to when a lawyer is in need.

Disadvantages
The main disadvantage to an association is the potential for joint liability: notwithstanding best efforts to limit liability of the individual association members, they may still be held jointly and severally liable because of the actions of other members.  To help mitigate against this, the members can draft a mutual indemnification agreement; however, the bottom line is that if one or all of the associates become insolvent or are personally judgment proof, the “last man standing” may still be stuck paying for the jointly acquired debts.

There are other, less obvious advantages to sharing space. Lawyers may have to share the burdens of administration with others — dealing with equipment suppliers, for example.

Ease of Creating
Apart from the individual associates establishing a sole proprietorship or professional corporation form the association, the association is typically created through a cost-sharing agreement with other associates.

Continuity
As per Wendy E. Oughtred in Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 49, the cost sharing agreement should deal with the following issues:

Specify a finite term of the arrangement. At the end of the term you can agree to extend it if it is working, or terminate it with no hard feelings. Provide for the means by which someone can leave the association early and how they are to be compensated if at all for their contribution to any joint assets. Specify the period of notice which must be provided by the departing member. It is also important that a mechanism for the removal of a member be detailed and under what circumstances this action may occur. An individual should be nominated to find a replacement associate under circumstances and it should specified who bears the interim expenses if there is a delay between the departure of a member and the introduction of a replacement.

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Choosing an office site can be a length and time-consuming experience.  If you’re going to invest thousands of dollars and a lot of time in a space, you really need to be happy with it.  You should also appreciate the fact that you’re going to be stuck with it because the cost of relocating is prohibitive.

There are many advantages to starting a law practice in a large, metropolitan area.  As per Judge William Huss in Start Your Own Law Firm: A guide to all the things they don’t teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), pp. 7-8:

Beginning a law practice in a large, metropolitan area has unique advantages and disadvantages. The advantages of a large city include the location of major courts and administrative bodies where the practice of law can be focused; large and easily accessible law libraries; a broad source of clients; and, easier client development due to the many ways of entertain and meeting clients.

However, it is much more difficult to determine the competition for the kind of practice that you want to begin. The number of lawyers is so large that you will have to join the sections of the local bar associations that relate to your practice in order to get some idea of who the practitioners are in that area. Frequently, only a portion of lawyers are active in their specialty section, making assessment of competition even more difficult for the beginning law firm.

In large, metropolitan areas, wages and expenses are higher. Rent, insurance, and professional services – such as accountants, insurance brokers, bookkeepers, and other specialists – will be more costly. Fees attorneys charge are higher in the metropolitan setting in order to provide for these increased expenses. Consequently, the cash flow in a firm located in such an areas has to be substantially higher than in a small town or medium-sized city.

In light of these insights, the ideal location for the law firm will be based on a number of factors, including:

• The law firm’s sustainable competitive advantage;
• Proximity to: the target market; major highways and intersections; existing and potential clients; partners/shareholders and employees; government agencies; existing and potential competitors; and the Courts.
• Internal considerations such as: electrical outlets/phone jacks; sufficiency of space; lighting and flooring; the need for renovation; and cleaning.
• External considerations such as: accessible and sufficient parking; neighbourhood and building noise; entrance to the building/security; neighbourhood demographics;
• Realty/business taxes; and the relevant zoning/by-law restrictions; and
• The terms of the lease, including: service contract; costs (i.e. net and gross lease); insurance requirements; and termination of the lease.

In what is to follow, I’ll touch briefly on some internal and external considerations.

With respect to internal considerations, the question often comes up: “How much office space does a lawyer require?”  The general rule of thumb is about 400-600 square fee of space per lawyer which includes 150 square feet for the lawyer, 150-200 square feet for the secretary, and 100-200 square feet for reception, photocopier, fax, storage, etc. (see Wendy E. Oughtred, Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 64; and Felicia S. Folk, Getting Started: Opening Your Law Office (updated September 2004), Law Society of British Columbia, p. 12: online: Law Society of British Columbia.

As Wendy E. Oughtred notes in Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), pp. 60-66, external considerations are important because they touch on the law firm’s sustainable competitive advantage, public image, accessibility to clients, and business/realty tax considerations.  Adequate and accessible (and hopefully inexpensive) parking should be located nearby. Parking spaces should be made available as part of the lease. Parking lots can be prohibitively expensive (e.g. downtown) to certain clients and proximity next to them may be noisy and distracting.  On the issue of noise, the building’s interior may not be noise-proof and sounds (e.g. walking, talking, elevators moving, etc.) may permeate through the office, causing significant distractions. Neighbourhood noise is also an important factor.Worth mentioning here is that footsteps on wooden floors are very loud. Being close to a busy road or major intersection may generate a lot of noise. Construction, schoolyards, and shopping areas all have the potential to generate a lot of unwanted noise. If an office is located higher up in a building, noise may be less of an issue.  The entrance to the building should be attractive and well maintained. There should, ideally, be some kind of security in place. Insurance is no answer to insufficient security. Outsiders should not be able to gain access to the law firm’s office after hours and on weekends. It’s a costly mistake not to have sufficient security in place. The law office should fit with the neighbourhood demographics. For example, if the law firm’s objective is to be easily accessible to low and middle-class individuals facing family and criminal law issues, then the law firm should be located in a suburban strip mall or small building and close to recreation centres and courthouses or government buildings. On the other hand, if the law firm is going to cater to middle and upper-income individuals and small and medium-sized business run by persons of a certain ethnic descent, then the law firm should be situated in a modern or upscale office building in the heart of that ethnic community. Realty and business taxes affect both the law firm and its clients’ bottom lines.

With these things in mind, happy office hunting…

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As I have stated previously: businesses don’t plan to fail, they fail to plan.

There are a number of advantages for preparing a business plan. Before establishing my own law practice, Carabash Law, and before I set out to develop Dynamic Lawyers, I not only wrote comprehensive business plans for each, but I also came across different authors’ rationales for having a business plan to begin with.  I think that reiterating their views here is important, so here I go…

The most obvious reasons for a sole practitioner to have a business plan are noted in the following passage taken from Wendy E. Oughtred, Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book Inc., 1995), p. 15:

At the outset it will help you get organized, provide you with important information for use in making critical decisions and give focus and direction to your efforts. As your business grows, your business plan can help you in deciding when to make major changes, such as hiring a secretary or clerk. It can also assist you in keeping an eye on the overall financial health of your business as external circumstances change, a most crucial function. Many sole practitioners are barely getting by financially and it must be stressed that you cannot afford to lose overall financial perspective. Most importantly for business start-up purposes, a well thought out financial plan may play a pivotal role in your proposal to the bank for financial assistance in the form of a term loan and/or credit line.

Here are some additional passages which should help sole practitioners understand the importance  of having a business plan (taken from William Huss, Start Your Own Law Firm: A guide to all the things they don’t teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), pp. 25-26):

Your business plan will not only help you steer your firm’s development and keep it on track, but it will also assist you when you are seeking credit, applying for financing, taking on new lawyers, and managing your public image.

The most important reason for creating a business plan is that it motivates you to focus on the entirety of the scope of your business. It not only acts as a roadmap, but also it acts as a means of evaluating your strengths and weaknesses as a business owner.

For example, you may find that one of your strengths is the location of your office and its proximity to potential clients. You may also find that your weakness is as existing client base. You may want to reschedule the opening day of your offices until you have a client base that will support the renting or leasing of spaces, acquiring equipment, and hiring support staff.

Many of your important decisions can be made much more easily and intelligently when you develop your business plan early in your planning for starting your law practice. Your business plan defines the nature of your business, your customers, your resources, your competition, your short- and long-term financial projections, and your marketing. It should be built on specific and realistic terms – measurable objectives identified responsibilities and deadlines, and practical budgets. Avoid hype, jargon, superlatives, and uncontrolled optimism when preparing your plan. Work toward a plan that is straightforward and simple, so it is easy to implement and easy to update as your business grows.

Finally, L. Joseph Schmoke and Richard R. Allen note the following 7 reasons why every business should have a business plan in their book entitled Vital Business Secrets for New and Growing Companies, (Illinois, U.S.A.: Dow Jones-Irwin, 1989) at p. 23:

1. It is virtually impossible to raise money for a business without a business plan.

2. A business plan forces you to examine and consider each and every facet of your proposed venture, including the details which can make or break you in business.

3. Once you begin running a business, you will be constantly distracted by little details which are non-productive. These distractions tend to obscure your original objectives, and a business can begin to drift without direction. A specific plan focuses your time and energy on the original business objectives.

4. Business is ‘doing battle’ with the competition for the consumer dollar. Successful generals do not enter a war, or even a minor battle, without planning their strategy. A complete business plan is a clear, written strategy for winning a battle in the marketplace.

5. The ‘concept’ for a business is an intangible thing. You can’t see it or touch it, and neither can other people, such as investors, partners, or key employees. A written business plan is tangible evidence of your thoughts, concepts, and research. It can be seen, touched, and studied. This is a tremendous psychological advantage.

6. A business plan tells people – investors, lends, you – where you are going and how you intend to get there. It is your roadmap, and without it you might end up traveling in circles.

7. A business plan makes the difficult task of starting, running, and building a business much easier. Just ask those who have attempted start-ups both ways: they can attest to the value of this essential tool.

written by admin \\ tags: advantages of business plan, business plan, business plans, critical decisions, external circumstances, financial assistance, financial health, important information, law school, preparing a business plan, Sole Practitioner, start-up

There are 5 possible legal structures a lawyer could choose from when deciding whether or not to go out on their own or in combination with others: (1) Sole Proprietorship, (2) Association, (3) General Partnership, (4) Limited Liability Partnership, or (5) Professional Corporation.

Each structure has its own advantages and disadvantages with respect to ease of creation, continuation (e.g. administrative paperwork), ownership, taxes, liability, and ease of dissolution.

Over the course of the next few posts, I’ll discuss the advantages and disadvantages of each of these legal structures – beginning with the sole proprietorship.

Sole Proprietorship

Defined
If you are the sole lawyer/owner of the law practice, then the law practice will carry on business as a sole proprietorship – an unincorporated business organization that has only one owner. There is no separate legal existence between the owner and the sole proprietorship. With a sole proprietorship, “[y]ou will have complete control over your expenses your work load, your trust account, and your revenue. There will be no need to consult others if you choose to expand your business and you have the freedom to work out of your home to keep your overhead to a minimum” (Wendy E. Oughtred in Going It Alone: A Start Up Guide for the Sole Practitioner, (Aurora, Canada: Canada Law Book  Inc., 1995), at p. 43).

Advantages and Disadvantages
The advantages and disadvantages of running s sole proprietorship are clearly spelled out in the following sources: Judge William Huss, Start Your Own Law Firm: A guide to all the things they don’t teach in law school about starting your own firm, (Illinois, U.S.A.: Sphinx Publishing, An Imprint of Sourcebooks, Inc., 2005), p. 13.  See also Felicia S. Folk, Getting Started: Opening Your Law Office (updated September 2004), Law Society of British Columbia, p. 5: online: Law Society of British Columbia.

According to those sources, the advantages of running a sole proprietorship include:

• The freedom of making all of the decision;
• All profits going to the owner/operator;
• Work can be done where and when the owner/operator desires;
• More client contact;
• No partners meetings;
• Flexibility;
• The freedom from wrangling over fees and distributions; and
• The personal satisfaction of achieving success by the use of one’s own knowledge, skills, and experiences.

The disadvantages of running a sole proprietorship, however, include:

• Lack of specialization, leading to lack of knowledge about various subject areas and the risk of making mistakes
• Succumbing to financial problems;
• Not being able to handle large or complex matters (and the large fees that go with them);
• Having responsibility over all administrative details;
• No income-balancing with partners;
• Not being able to have anyone in the office to handle emergencies while the owner/operator is absent;
• Isolation from other lawyers; and
• High overhead expenses for equipment.

Ideally Suited
Overall, a sole proprietorship may be ideally suited for small towns or suburban areas, where everyone tends to know everyone else, and the problems are rarely so catastrophic that a large firm has to be brought in. The sole practitioner can make a very good living taking care of small criminal cases, traffic and drunk driving matters, wills and probate matters, small business contracts,leases, and other services that fulfill people’s needs in that kind of environment.

Ease of Creation
By and far, creating a sole proprietorship is easier than creating any other type of business organization. Ontario’s Business Names Act provides that “[n]o individual shall carry on business or identify his or her business to the public under a name other than his or her own name unless the name is registered by that individual”18. Registering a sole proprietorship’s name can be done by completing and submitting an on-line application for a Master Business
License to:

Companies and Personal Property Security Branch
Ministry of Government Services
393 University Ave., Suite 200
Toronto, Ontario M5G 2M2

The cost is $60.00 and the Master Business License must be renewed every 5 years at a cost of $60.00.

Continuity
If a sole proprietorship’s owner stops working (e.g. retires, dies, goes bankrupt, etc.), then the business will cease to exist. In other words, a sole proprietorship has no continuity above and beyond the owner’s.

Liability
The owner is exposed to unlimited personal liability for the sole proprietorship’s debts and obligations. That being said, a sole proprietor will not be incurring liability as a result of anyone else’s negligence or malpractice (which may be the case with a partnership).

Taxation
Income earned by a sole proprietorship flows to the owner, where it is fully taxed at the owner’s personal income tax rate. Despite this downside, the owner will be able to offset losses and business expenses from the sole proprietorship or any other source of income (e.g. businesses or property) against his or her personal income from any source of income. The fiscal year end for the sole proprietorship will be the same as for the individual owner – namely, December 31st of each year.

written by admin \\ tags: administrative paperwork, business organization, complete control, dissolution, going solo, legal existence, legal structures, limited liability partnership, oughtred, professional corporation, Sole Practitioner, sole proprietorship, sourcebooks inc, start your own law practice, toronto lawyers, trust account, unincorporated business

Going solo is not for the feint of heart.  I knew I was going to go solo long before I even finished articling.  I prepared myself for months.  I wrote a 200 page business plan (which, although remains incomplete to date, did help me focus my ideas at the time).  The bottom line is that endless preparation is one thing, good execution is another.  Here are 6 good reasons why any lawyer would want to go solo.  In fact, these are precisely the reasons that made me do it:

1. allow me to earn a significantly higher income vis-à-vis being employed for someone else;
2. expose me to clients and interesting/challenging work;
3. provide me with new legal and business knowledge, skills, and experiences;
4. create new income-generating opportunities;
5. give me significant control over my working environment; and
6. provide me with an unmatched level of overall personal satisfaction.

These things being said, there are also 6 reasons why some avoid the prospect of going out on their own:

1. Lack of specialization, leading to lack of knowledge about various subject areas and the risk
   of making mistakes;
2. Succumbing to financial problems (e.g. having to pay for high overhead expenses all by yourself);
3. Not being able to handle large or complex matters (and the large fees that go with them);
4. Having responsibility over all administrative details;
5. Not being able to have anyone in the office to handle emergencies during your absence;
6. Isolation from other lawyers.

Overall, a lawyer should do a lot soul searching before deciding whether going off on their own is the best thing for them.

written by admin \\ tags: execution, hanging a shingle, lawyer, lawyers, Sole Practitioner, solo