Law Firm Business Ownership: Legalities And Ethics

Owning another business can be a great way for a law firm to diversify its income and survive downtime. However, it's a complex issue with many legal and strategic considerations. While it can increase profits and create synergies, it may also lead to conflicts of interest and ethical dilemmas. For instance, a law firm owning a debt collection agency may prioritise its financial interests over its clients'. Regulatory hurdles may also arise when dealing with different industries. Before venturing into this, it's crucial to understand the different types of business entities and their advantages and disadvantages. Additionally, seeking legal advice and consulting with other lawyers in your jurisdiction is essential to making an informed decision.

Non-lawyer ownership of law firms

In the United States, the default rule across jurisdictions has been that only lawyers can own and manage legal practices. Lawyers are also barred from offering equity interests to professionals outside the legal field, such as technologists or business specialists.

However, this is changing, with many states relaxing this prohibition. In 2020, Arizona and Utah moved forward with significant reforms of legal regulation, allowing and regulating non-lawyer investment and ownership. Arizona eliminated its version of Rule 5.4 entirely, creating a new licensing requirement for Alternate Business Structures (ABS) that can be partially owned by non-lawyers but must include at least one lawyer to serve as compliance counsel. In the same year, Utah instituted a regulatory "sandbox" to oversee non-traditional firms with non-lawyer ownership. The Utah model allows for the licensing of traditional law firms with non-lawyer ownership, as well as non-lawyer-owned entities employing lawyers to practice law.

Other states have taken more modest steps toward allowing non-lawyer-owned firms. A 2021 amendment to California's version of Rule 5.4 permits greater fee sharing with non-attorney-owned non-profit organizations that qualify as nonprofits under IRS rules. A similar amendment was passed in Massachusetts.

Despite the trend toward allowing non-lawyer ownership of law firms, most other jurisdictions in the United States are not currently following the example of Utah and Arizona. Some jurisdictions remain explicitly opposed to the idea. For example, in Florida, the Bar Board of Governors unanimously opposed a list of proposed amendments to its Rule 5.4 that would have permitted minority ownership in law firms by non-lawyer firm employees and allowed fee-splitting with non-lawyers. The Florida Supreme Court agreed with this position.

New York also does not allow non-lawyer ownership of law firms. A New York lawyer may not be a partner, associate, or employee of a law firm in New York or another jurisdiction that has direct or indirect ownership by non-lawyers, unless the lawyer is lawfully practicing in the other jurisdiction and principally practices in such jurisdiction, and the predominant effect of the lawyer's conduct is not clearly in New York.

The debate over non-lawyer ownership of law firms centres around concerns for the integrity of the legal profession and professional autonomy, as well as the potential benefits of increased innovation, competition, and access to capital and varied business plans.

Rules and ethics opinions

New York Rules and Ethics Opinions

New York has strict rules regarding law firm ownership and the involvement of non-lawyers. New York Rule 5.4(d) explicitly prohibits a New York lawyer from practising in a for-profit entity authorised to practise law if a non-lawyer owns any interest in it. This rule reinforces the principle that a New York lawyer cannot actively participate in an Alternative Business Structure (ABS) firm as a partner or through mergers unless their conduct predominantly affects another jurisdiction that permits fee-sharing with non-lawyers, and the lawyer is admitted in that jurisdiction.

The New York State Bar Association's Ethics Opinion 1234 further clarifies these restrictions. It states that a New York lawyer cannot be a partner, associate, or employee of a law firm in New York or another jurisdiction with direct or indirect ownership by non-lawyers, unless the lawyer is licensed and practising principally in the other jurisdiction, and their conduct does not predominantly affect New York.

Additionally, New York State Opinions 889 and 911, based on the analysis of NY Rule 8.5, provide insights into the "predominant effect" of a lawyer's conduct. Opinion 889 permits a lawyer admitted in New York and the District of Columbia to join an ABS law firm in the District of Columbia, provided their practice's predominant effect is in the latter jurisdiction. Opinion 911, on the other hand, concludes that if the lawyers are admitted only in New York, the New York Rules apply unequivocally.

Furthermore, New York City Opinion 2015-8 addresses the ethical considerations of a New York lawyer sharing fees with a law firm in another jurisdiction that permits non-lawyer ownership. New York Ethics Opinion 1246 provides guidance on retainer agreements and fee-sharing between law firms serving the same client, emphasising the importance of reasonable fees and compliance with rules regarding fee division.

While New York maintains stringent rules regarding non-lawyer ownership, other jurisdictions have adopted different approaches. The District of Columbia has long been an exception, allowing non-lawyer ownership and partnerships in law firms. In recent years, states like Arizona and Utah have made significant changes. Arizona eliminated Rule 5.4, allowing non-lawyer ownership in ABS entities, while Utah instituted a "regulatory sandbox" for non-traditional firms with non-lawyer ownership.

The American Bar Association (ABA) and certain states are actively exploring the issue of non-lawyer ownership, recognising the potential benefits of innovation, competition, and improved access to capital. However, there are also concerns about the impact on the integrity of the legal profession and lawyers' autonomy.

In jurisdictions permitting ABS entities, ethical considerations remain crucial. For example, non-lawyer owners must abide by the applicable rules of professional conduct, and lawyers with financial interests or managerial authority within the firm are responsible for the conduct of non-lawyer owners.

Pros and cons of owning another business

There are several advantages to a company owning another business. Firstly, the acquiring company gains access to new resources, including manufacturing plants, marketing channels, a competent workforce, and suitably located business premises. Secondly, the buyer skips the startup phase, avoiding market cultivation, initial competition, and product and brand awareness campaigns. Thirdly, the buyer often inherits an established market and customer base for the target firm's products and services, enhancing market domination. Finally, if the acquired business is a competitor, the buyer consolidates its market power by creating a monopolistic business environment.

However, there are also several potential drawbacks to a company owning another business. Firstly, acquiring another business typically requires significant financial resources, especially if the target company offers unique advantages. This may result in the buyer paying a price far higher than the current market value of the target company. Secondly, the buyer inherits all the negative attributes of the target business, including incompetent staff, poor corporate image, lack of brand awareness, costly rental premises, and any other operational and management problems. Thirdly, there is a risk of cultural clashes and integration challenges between the acquiring company and the target firm. Finally, the process of acquiring another business can be complex and time-consuming, requiring careful due diligence and potentially involving regulatory hurdles.

In the specific case of a New York law firm owning another business, there are additional ethical and regulatory considerations. According to the New York State Bar Association, a New York lawyer generally cannot be a partner, associate, or employee of a law firm with direct or indirect ownership by non-lawyers. However, there are exceptions, such as if the lawyer is lawfully practicing in another jurisdiction with different rules or if the predominant effect of the lawyer's conduct is not in New York. The concept of "Alternative Business Structures" (ABS) is also emerging, where non-lawyer ownership of law firms is permitted in certain jurisdictions, such as Arizona and Utah, with specific requirements and ethical guidelines.

Ancillary services and businesses

There are a few things to keep in mind when it comes to ancillary services and businesses. Firstly, it is important to be aware of the regulations and ethical considerations that govern law firms in your specific jurisdiction. Secondly, prior to recommending ancillary services, it is crucial to disclose any personal interest in the business and obtain the client's written consent to any dual role. This ensures that clients are aware they are not receiving legal services and are not protected by the attorney-client relationship.

Examples of ancillary businesses that law firms can own include a recruiting firm, a legal research and writing service, and a title and escrow company. A legal billing service is another option, where a law firm can provide billing and invoicing assistance to other lawyers and firms. This can reduce overheads and save money for the firm. A virtual law firm is another option, providing legal services online and expanding the firm's reach to attract new clients.

In terms of fee-sharing, it is permissible for retainer agreements to include provisions for one firm to charge the fees and expenses of another firm as disbursements on its own invoice, as long as the fees are reasonably incurred and not excessive. This is allowed when two firms provide services to the same client on the same or ancillary matters.

Examples of businesses law firms can own

Law firms can own other businesses, but it is essential to be aware of the legal and ethical implications. While owning another business can increase a law firm's income and help it survive during slower periods, it may also present conflicts of interest. Before venturing into owning another business, law firms should carefully consider the pros and cons and consult with other lawyers in their jurisdiction.

• Recruiting Firm: A recruiting firm can help companies find qualified employees, and many law firms already have established relationships with businesses in their community, making this a natural fit.
• Legal Research and Writing Service: This type of business provides research and writing assistance to lawyers and law firms, which can be valuable for firms that lack the time or resources to conduct their legal research.
• Title and Escrow Company: This type of company facilitates the transfer of real estate ownership between buyers and sellers, and law firms often have established relationships with real estate agents and brokers.
• Legal Billing Service: A legal billing service provides billing and invoicing assistance to lawyers and law firms, helping to reduce overhead costs and save money.
• Virtual Law Firm: A virtual law firm provides legal services online, allowing traditional law firms to expand their reach and attract new clients.
• Marketing Service: A marketing service can help law firms develop and implement marketing campaigns to increase their visibility and attract new clients.

These are just a few examples of businesses that law firms can own. It is important to note that the regulations governing law firms can vary by jurisdiction, so it is essential to be familiar with the rules in your specific area.

Frequently asked questions