Can two North Carolina lawyers each form a single-shareholder professional corporation and have the two corporations form a partnership to practice law?

Plain-English summary

Two lawyers who have practiced together since 1982 as a professional corporation have diverging financial goals (one wants to maximize 401(k) contributions, the other does not). To keep their professional relationship while accommodating each lawyer's finances, one proposes that each lawyer form a separate professional corporation as sole shareholder, and that the two corporations then form a partnership for the practice of law.

Rule 5.4(b) bars a lawyer from forming a partnership with a nonlawyer if any of the partnership's activities are the practice of law. Read literally, a partnership of professional corporations is a partnership of nonlawyer entities and would be prohibited. The opinion concludes, however, that the arrangement is permissible. Because Rule 0.2 (Scope) makes the Rules rules of reason interpreted with reference to the purposes of representation and the law, and because the purpose of Rule 5.4(b) is to prevent a person without a law license from having authority to interfere with a lawyer's client decisions, the rule is not offended where all owners of the constituent professional corporations are themselves licensed lawyers (as North Carolina law requires for a professional corporation practicing law, G.S. § 55B-4(2)). In that situation no nonlawyer can interfere with the lawyers' independent professional judgment. The arrangement does not violate Rule 5.4(b) so long as the signage and letterhead for the partnership disclose the relationship between the professional corporations and correctly identify the shareholders as required by Rule 7.1. The opinion concludes the same holds for a partnership of professional limited liability companies formed to practice law.

In practice

Under the North Carolina rules as they stood at the time of the opinion, the analysis turns on whether any nonlawyer can interfere with the lawyers' independent judgment. The opinion holds that a partnership of professional corporations (or PLLCs) whose shareholders are all licensed lawyers does not violate Rule 5.4(b).

Per the opinion, the arrangement is permissible only if the partnership's signage and letterhead disclose the relationship between the constituent corporations and correctly identify the shareholders under Rule 7.1.

Common questions

Q: Can two lawyers form a partnership between their separate professional corporations to practice law?

A: Yes. The opinion concludes this does not violate Rule 5.4(b) because state law requires every shareholder of a law-practicing professional corporation to be a licensed lawyer.

Q: Doesn't Rule 5.4(b) bar partnering with a nonlawyer entity?

A: The opinion treats the Rules as rules of reason: because no nonlawyer can interfere with the lawyers' judgment when all shareholders are licensed lawyers, the purpose of Rule 5.4(b) is not offended.

Q: What must appear on the firm's signage and letterhead?

A: The opinion concludes the signage and letterhead must disclose the relationship between the professional corporations and correctly identify the shareholders, as Rule 7.1 requires.

Q: Does the same analysis apply to professional limited liability companies?

A: Yes. The opinion concludes a partnership of PLLCs formed to practice law is treated the same way.

Background and rules framework

The opinion interprets Rule 5.4(b) (no partnership with a nonlawyer for the practice of law, corresponding to Model Rule 5.4) and Rule 7.1 (truthful identification of the firm, corresponding to Model Rule 7.1), read through Rule 0.2 (Scope) as rules of reason. It relies on G.S. § 55B-4(2) and § 57C-2-01(c), which require all shareholders or members of a law-practicing professional entity to be licensed lawyers.

Citations and references

Rules of Professional Conduct:

• MR 5.4 / NC Rule 5.4(b) (no partnership with a nonlawyer for the practice of law; cmt [2])
• MR 7.1 / NC Rule 7.1 (truthful firm identification on signage and letterhead)
• NC Rule 0.2, Scope (Rules as rules of reason)

Statutes:

• N.C. Gen. Stat. § 55B-4(2) (shareholders of a professional corporation practicing law must be licensed)
• N.C. Gen. Stat. § 57C-2-01(c) (members of a professional LLC practicing law must be licensed)

See also

• ABA Formal Op. 464: Fee Division With Lawyers Who Share With Nonlawyers
• ABA Formal Op. 01-423: Forming Partnerships With Foreign Lawyers

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/2004-formal-ethics-opinion-13/

Original opinion text

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

Inquiry:

Attorney A and Attorney B have practiced law together since 1982. Originally, they practiced together in a partnership but, after a few years, they filed articles of incorporation to form A & B, Professional Corporation. Each lawyer owns 50% of the shares of the professional corporation. Over time, the personal financial objectives of Attorney A and Attorney B have diverged, primarily with regard to their retirement objectives. Attorney A, for example, does not want to contribute to the firm's 401(k) plan. Attorney B, on the other hand, wants to contribute the maximum amount to the plan. They have reached an impasse over this issue and other business issues.

Attorney B would like to retain his professional relationship with Attorney A while accommodating each lawyer's individual financial needs. To accomplish this, he suggests that each lawyer form his or her own professional corporation in which he or she would be the sole shareholder. The two professional corporations1 would then form a partnership for the practice of law. From an accounting perspective, Attorney B has been advised that this approach will allow the two lawyers to meet their individual financial goals.

Rule 5.4(b) provides that "[a] lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law." As noted in comment [2], the rule "expresses the traditional limitations on permitting a third party to direct or regulate the lawyer's professional judgment in rendering legal services to another."

Technically, the arrangement proposed by Attorney B would create a partnership of nonlawyers—the professional corporations—and, therefore, be prohibited under Rule 5.4(b). However, by law, all of the shareholders of a North Carolina professional corporation formed for the practice of law must be licensed North Carolina lawyers. G.S. §55B-4(2)2. Therefore, all of the humans involved in the management and operation of the partnership would be licensed lawyers and there would be no risk that a nonlawyer could interfere with the independent professional judgment of the lawyers in their representations of clients. May Attorney A and Attorney B organize their law practice in this manner?

Opinion:

Yes. As noted in Rule 0.2, Scope, the Rules of Professional Conduct are "rules of reason" and "[t]hey should be interpreted with reference to the purposes of legal representation and of the law itself." The purpose of Rule 5.4(b) is to prevent the creation of law firm in which a person who does not have a law license has the authority as a partner, or otherwise, to interfere in a lawyer's decisions about the representation of a client. Where, as here, all of the owners of the constituent professional corporations are themselves licensed as lawyers, that risk is not present. So long as the signage and the letterhead for the partnership disclose the relationship between the professional corporations and correctly identify the shareholders in the constituent professional corporations as required by Rule 7.1, this arrangement does not violate Rule 5.4(b). The same would be true of a partnership of professional limited liability companies formed for the practice of law.

End Notes

• Alternatively, one or both of the lawyers could form a professional limited liability company with the same effect.

• Similarly, G.S. §57C-2-01(c) requires that all of the members of a professional limited liability company formed for the practice of law must be licensed North Carolina.