Can a New York law firm pay an of-counsel lawyer's compensation to a Subchapter S corporation that a non-lawyer spouse partly owns?
NY State Bar Ethics Opinion 934: Paying a lawyer through a Subchapter S corporation
Short answer: A law firm may compensate a partner, associate, or of-counsel lawyer by paying the lawyer directly or by paying a professional service corporation organized to practice law; it may not treat a payment to a Subchapter S corporation with non-lawyer shareholders as compensation for the lawyer's legal services, though it may pay that corporation as a third party at the lawyer's direction if the payment is not characterized as a legal fee.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the New York State Bar Association's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
A lawyer who had withdrawn as a partner but stayed of counsel asked whether the firm could pay him for his legal services by writing checks to a Subchapter S corporation in which his spouse was a shareholder. The opinion starts from Article 15 of the New York Business Corporation Law: a lawyer may practice through a professional service corporation, and Rule 1.0(h) treats such a corporation as a "firm." But Business Corporation Law section 1503 forbids any non-lawyer from owning an interest in a professional service corporation authorized to practice law, a limit the opinion ties to Rule 5.4(d). Because the spouse is a shareholder, the Subchapter S corporation in the inquiry is not a corporation authorized to practice law.
From that, the opinion draws a line between two things the firm might be paying for. A payment that is compensation for the lawyer's legal services (or a return of the lawyer's capital contribution) must go to the lawyer or to a professional service corporation in which the lawyer practices. A payment to a third party at the lawyer's direction, by contrast, is not prohibited; the opinion treats a directed third-party payment as the same as paying the lawyer and then having the lawyer pay the third party. So the firm may pay the Subchapter S corporation as a directed third-party payee.
The constraint the opinion stresses is bookkeeping honesty. The firm's books may not characterize the payment as compensation to the lawyer for services rendered or as a return of the lawyer's capital, and the lawyer, as a shareholder of the corporation, may not characterize the corporation's receipt as compensation for legal services. The opinion grounds that limit in Rule 8.4(c), which bars conduct involving dishonesty, fraud, deceit, or misrepresentation, and in the Rule 5.4(a) prohibition on sharing legal fees with a non-lawyer.
In practice
Under this opinion, and under the New York rules as they stood at the time, a firm that wants to pay a lawyer's legal-services compensation cannot direct that payment to an entity with non-lawyer owners and call it a legal fee; the recipient of legal-services compensation must be the lawyer or a lawyer-owned professional service corporation. The opinion does permit the same money to reach a non-lawyer-owned corporation if the firm pays it as a third party at the lawyer's direction and the records on both sides show it for what it is rather than as a fee for legal services.
Common questions
Q: Can a New York law firm pay a lawyer's compensation directly to a corporation his spouse co-owns?
A: Not as compensation for the lawyer's legal services. The opinion holds that legal-services compensation must be paid to the lawyer or to a professional service corporation organized to practice law, which under Business Corporation Law section 1503 cannot have non-lawyer shareholders.
Q: Is there any way the money can still reach that corporation?
A: Yes. The opinion says a firm may make a payment to a third party at the lawyer's direction, including to a Subchapter S corporation with non-lawyer shareholders, treating it as equivalent to paying the lawyer who then pays the corporation.
Q: What is the catch on a directed third-party payment?
A: Neither the firm's books nor the corporation may mischaracterize the payment as compensation for legal services. The opinion ties that requirement to Rule 8.4(c) and to the Rule 5.4(a) bar on sharing legal fees with non-lawyers.
Background and rules framework
The opinion applies New York Rule 5.4 (Model Rule 5.4), which keeps non-lawyers out of the ownership and fee structure of a law practice, and reads it together with Business Corporation Law Article 15. Rule 1.0(h) (Model Rule 1.0 terminology) defines "firm" to include a professional corporation. Rule 1.5(g) (Model Rule 1.5) governs fee sharing among lawyers outside the same firm and is noted as the channel through which inter-firm fee division must run. Rule 8.4(c) (Model Rule 8.4) supplies the honesty constraint on how the payment is recorded.
Citations and references
Rules of Professional Conduct:
- MR 5.4 / NY 5.4(a), 5.4(d) (non-lawyer ownership and fee sharing)
- MR 1.0 / NY 1.0(h) (definition of "firm")
- MR 1.5 / NY 1.5(g) (division of fees among lawyers)
- MR 8.4 / NY 8.4(c) (dishonesty, misrepresentation)
Statutes:
- N.Y. Business Corporation Law Article 15, section 1503 (professional service corporations; non-lawyer ownership barred)
Other opinions cited:
- N.Y. State 95: a law firm may employ outside service providers (accounting/data processing)
See also
- NY State Bar Op. 942: Referrals and undisclosed fees from a non-lawyer firm
- NY State Bar Op. 976: Law firm arrangement with a non-legal service provider
- NY State Bar Op. 992: Disability-office business structure and fee sharing
Source
- Landing page: https://nysba.org/ethics-opinion-934/