Can lawyers form a professional service corporation and give its employees a profit-sharing or retirement plan without improperly splitting fees?

Plain-English summary

Following the 1962 General Assembly's adoption of a chapter providing for professional service corporations, the committee was asked two questions: whether one or more attorneys may organize such a corporation under that chapter, and whether a corporation owned by lawyers may adopt a profit-sharing or other retirement plan for themselves and other employees. It answered yes to both.

On the first question, the committee noted that the American Bar Association had not yet adopted an opinion on the propriety of such a corporation for lawyers, and that the principal purpose of professional service corporations is to let professionals receive the same tax treatment of their retirement plans as the IRS accords plans adopted by other corporations. On that basis, it held it is not improper to organize and operate a professional service corporation for lawyers, so long as the provisions of the Act are carefully observed.

On the second question, the committee addressed the contention that a retirement plan would, in effect, split the lawyers' fees with their employees. It viewed the plan as merely a means of providing deferred compensation for covered employees, and reasoned that this would no more constitute fee-splitting than giving the employees a pay increase. Treating it as simply a means of providing additional compensation, the committee deemed the plan proper.

Currency note

This opinion was issued in 1962 under the former Canons of Professional Ethics (in effect in Kentucky from 1946 to 1971) and predates both the 1990 adoption of the Rules of Professional Conduct (SCR 3.130) and the substantial 2009 revisions to those rules. Subsequent rule amendments and later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against the current rules before relying on any specific point mentioned here.

Common questions

Q: Can lawyers organize a professional service corporation?

A: Under this opinion, yes. The committee held it is not improper to organize and operate such a corporation under KRS Chapter 274, so long as the Act's provisions are carefully observed.

Q: Is an employee retirement or profit-sharing plan improper fee-splitting?

A: No. The committee treated the plan as deferred compensation, no different from a pay raise, and concluded it does not constitute fee-splitting.

Q: What was the corporation's purpose?

A: The committee said the principal purpose is to let lawyers receive the same tax treatment of retirement plans that the IRS accords plans adopted by other corporations.

Background and rules framework

The opinion addressed the professional-corporation form of practice under KRS Chapter 274 and the fee-splitting concern raised by an employee retirement plan, an early treatment the committee later built on in Opinion E-25. The modern analog is Model Rule 5.4 (professional independence, including the rules on sharing legal fees and on practice in a professional corporation), with Kentucky's counterpart at SCR 3.130(5.4); Rule 5.4 expressly permits a profit-sharing or retirement plan that includes nonlawyer employees.

Citations and references

Rules of Professional Conduct:

• Canons of Professional Ethics (fee division; form of practice); modern analog Model Rule 5.4

Statutes:

• KRS Chapter 274 (professional service corporations)

See also

• KBA Ethics Op. E-25: Practicing Law as a Corporation
• KBA Ethics Op. E-92: Interstate Law Partnerships

Source

• Landing page: https://kybar.org/For-Members/Rules-Ethics-Information/Ethics-Opinions
• Original PDF: https://kybar.org/Portals/0/Admin/Ethics%20Opinions/KBA_E-007.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

KENTUCKY BAR ASSOCIATION
Ethics Opinion KBA E-7
Issued: November 1962

Question:

May one or more attorneys organize a Professional Service Corporation
under state statutes and adopt a profit-sharing or other retirement plan for
attorneys and other employees?

Answer:

Yes.

References:

KRS Chapter 274
OPINION

Some questions have arisen with relation to the Chapter adopted by the 1962
General Assembly providing for Professional Service Corporations. They are:
1.
2.

Is it proper for one or more attorneys to organize a Professional Service
Corporation in accordance with that Chapter of the Statutes?
Is it proper for such corporation, the stockholders being lawyers, to adopt a
profit-sharing or other retirement plan for the benefit of themselves and other
employees?

The American Bar Association has not as yet adopted an opinion relating to the
propriety of a corporation, such as this, for lawyers. The principal purpose of Professional
Service Corporations is to permit professional men to receive the same tax treatment of
their retirement plans as is accorded by the Internal Revenue Service to retirement plans
adopted by other corporations for their officers and employees. Under these circumstances,
we hold that it is not improper to organize and operate a Professional Service Corporation
for lawyers, so long as the provisions of the Act are carefully observed.
The question relating to a retirement plan adopted by such a corporation arises
because there are those who contend that the lawyers in question would, in effect, be
splitting their fees with their employees. We consider that the retirement plan would merely
be a means for providing deferred compensation for the employees covered by the plan.
We do not conceive that this would constitute splitting fees, any more than if the attorneys
were to give the employees an increase in pay. It is purely a means of providing additional
compensation, and we deem it proper.

Note to Reader
This ethics opinion has been formally adopted by the Board of Governors of the
Kentucky Bar Association under the provisions of Kentucky Supreme Court Rule 3.530
(or its predecessor rule). The Rule provides that formal opinions are advisory only.