Alternative Business Structures Law Firms
There are many alternative business structures law firms that business owners need to understand when forming a business.3 min read
There are many alternative business structures law firms that business owners need to understand when forming a business. To understand what business structures are allowed you must first understand which forms are prohibited. Except for the state of Washington and the District of Columbia, the following prohibitions exist.
- Nonlawyers owning law firms
- Nonlawyers managing law firms
- Lawyers sharing their fees with nonlawyers
While there are some restrictions from nonlawyers owning a law firm, there are benefits to nonlawyers investing in law firms. Some of the benefits that can be expected include:
- An increased access to legal services
- Financial flexibility for a law firm
- Increased operational flexibility
- Better quality of services and cost effectiveness
There are also some drawbacks when nonlawyers participate in the structure of a law firm including:
- A threat to the independence of the lawyer's professionalism and core values
- Fewer options for pro bono work
- Threats to the attorney-client privilege
- Benefits that are promised but unlikely to happen
In the ABA Journal, the stats of California created a report that might amend the rules of the ABS which they believe would allow for:
- Lower costs
- Improve legal access
- Increase the transparency and predictability of legal services
- Provide for business growth
- Elevate the reputation of the field of law
Vermont Rule of Professional Conduct
Under the Vermont Rules of Professional Conduct, there are certain restrictions placed on lawyers that prevent for-profit firms from forming if:
- There is interest in a firm by a nonlawyer
- A nonlawyer holds an influential position such as a director, officer, or partner
- A nonlawyer is in a position that can affect a lawyer's professional judgment
The Commission on the Future of the Legal Profession
Under the definition of an alternative business structure for law firms by The Commission on the Future of Legal Profession, there are certain prohibitions as well.
- Lawyers cannot share their fees with nonlawyers
- A partnership cannot be formed between a lawyer and nonlawyer if the business activities include practicing law
- Practicing in the professional legal field if a nonlawyer has ownership investment in the company
- Practicing in the professional legal field if a nonlawyer is on the board or hold an officer position
The District of Columbia allows a firm to organize with a nonlawyer as an investor or has management authority if the following requirements are met.
- The partnerships only purpose is to provide legal services to their clients
- All those holding financial and management interest abide by the D.C. Bar Rules of Professional Conduct
- The lawyers who have management and financial stake take responsibility for nonlawyer participants
England and Wales Legal Services Act of 2007
Under the England and Wales Legal Services Act of 2007, alternative business structures for law firms is allowed under two major regulatory requirements which include:
- All nonlawyers that have ownership must pass a fitness-to-own test
- There are effective controls and systems in place to ensure that all the principals and rules are followed under the Solicitors Regulation Authority Handbook
There are other Canadian Provinces and European Countries that follow similar patterns with a recent Commission's report, showing that:
- Europe permits alternative business structures on a more limited scale with 49 percent of Scotland, 33 percent of Italy, 25 percent of Spain, and 10 percent of Denmark requiring lawyers to have primary control of legal firms.
- Various forms of MDPs are allowed in Germany, Poland, Belgium, Spain, and the Netherlands.
- Multiple Canadian Provinces has allowed alternative business structures for a while.
- Quebec allows up to 50 percent of their law practices to engage in an MDP, or multidisciplinary practice.
- In Ontario, a group is still considering minority ownership in firms by nonlawyers, though they have recommended against majority ownership.
The Impact of Alternative Business Structure
Nick Hood has been vocal on the impact of the Legal Services Act of 2007. He states that the primary reason that an alternative business structure was introduced was to increase the competition between more traditional law firms. It is also believed that it will introduce new suppliers to provide consumers with:
- Better choices
- Higher quality
- Lower cost
When new companies are entering the market, it can be a costly external investment which makes seeking out private equity and venture capital more imperative even if it comes from nonlawyer investors.
If you need help with alternative business structures law firms, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.