Can a law firm co-own with an accounting firm an ancillary business that serves retirement plans and refers legal work back to the firm?

Plain-English summary

A law firm and an accounting firm proposed to form a jointly owned (50/50) ancillary business, staffed by non-lawyers and non-accountants, to provide retirement-plan services: interviewing clients, preparing plan documents and forms (for client's counsel to review if the client wished), filing for tax-exempt status, preparing tax and reporting filings, answering administration questions, and proposing plan amendments. The two firms would refer clients to the business, and the business would refer legal questions back to the law firm unless the client chose another attorney. The firm asked whether it could enter the arrangement.

The committee gave a layered answer. First, it cautioned that several of the business's proposed activities, such as preparing legal instruments and instructing clients on executing documents, may constitute the unauthorized practice of law (citing State v. Buyers Service Co.), and that such questions should be referred to the Bar's Unauthorized Practice of Law Committee. If the business engaged in the unauthorized practice of law, the firm's 50% ownership, which predicts significant management participation, would be prohibited under Rule 5.5(b) (assisting unauthorized practice) and Rule 5.4(b) (partnership with a non-lawyer for the practice of law), with additional bars on fee-sharing under Rule 5.4(a) and on corporate practice of law under S.C. Code Ann. Section 40-5-320. Second, a firm may own an interest in and refer clients to an ancillary business that provides only nonlegal services if it complies with Rule 1.7(b) (the lawyer's own interests) and Rule 1.8(a) (business transactions with a client, requiring fair terms, written disclosure, a chance to consult independent counsel, and written consent), as in prior opinions on title-abstracting (89-17) and life-insurance (90-16) affiliates. Third, however, the proposed agreement for the ancillary business to refer clients back to the law firm ran afoul of Rule 7.2(c): the firm's contributions of capital, management advice, employee compensation, and referrals constitute value given in part for referrals to the firm, which Rule 7.2(c) prohibits.

Currency note

This opinion was issued in 1993, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a law firm co-own an ancillary business that provides services to retirement plans?

A: Only if the business provides nonlegal services and the firm complies with Rules 1.7 and 1.8. The committee said co-ownership is prohibited if the business engages in the unauthorized practice of law.

Q: Why would co-owning the business be barred if it practices law?

A: The committee said the firm's 50% ownership predicts significant management participation, so under Rules 5.5(b) and 5.4(b) the firm cannot own a business that engages in unauthorized practice or partner with non-lawyers to practice law, with fee-sharing and corporate-practice bars also applying.

Q: Could the ancillary business agree to send legal work back to the firm?

A: No. The committee concluded that such reciprocal-referral agreement violates Rule 7.2(c), because the firm's capital, management, employee compensation, and referrals are value given in part for referrals back to the firm.

Background and rules framework

The opinion applied Rule 5.5 (unauthorized practice), Rule 5.4 (professional independence; non-lawyer partnership and fee-sharing), Rule 1.7(b) (the lawyer's own interests), Rule 1.8(a) (business transactions with a client), and Rule 7.2(c) (payment for referrals), which correspond to like-numbered Model Rules, along with South Carolina's corporate-practice statute.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 5.5(b) / Model Rule 5.5: a lawyer shall not assist in the unauthorized practice of law.
• South Carolina RPC 5.4(a), (b) / Model Rule 5.4: no fee-sharing with non-lawyers; no partnership with a non-lawyer for the practice of law.
• South Carolina RPC 1.7(b) and 1.8(a) / Model Rules 1.7, 1.8: own-interest conflicts and business transactions with a client.
• South Carolina RPC 7.2(c) / Model Rule 7.2: a lawyer shall not give value for referrals.

Statutes:

• S.C. Code Ann. Section 40-5-320 (corporations prohibited from practicing law).

Cases:

• State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987), nonlawyer preparation of legal instruments is unauthorized practice.

Other opinions cited:

• SC Bar Advisory Opinions 89-17 (title-abstracting affiliate), 90-16 (life-insurance agency), 91-04 (professional information organization); ABA Informal Opinion 556 (5/31/62).

See also

• SC Bar Ethics Op. 93-24: Backstopping an Out-of-State Lawyer
• SC Bar Ethics Op. 93-09: A Referral Service's Cut of Fees
• SC Bar Ethics Op. 04-11: Sharing Office With Own Business

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-93-05/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 93-05

A law firm and accounting firm want to form a new business entity which would provide services for retirement plans. The law firm and accounting firm will each own fifty percent of the ancillary business entity, and the new entity would have its own employees. These employees will not necessarily be lawyers or accountants. Services that would be provided include:

-interviewing clients regarding plan requirements; -preparing retirement plan documents, forms, and other related items for review by the client's counsel, if the client wishes to engage an attorney to review them; -preparing and filing forms for the plan to achieve tax exempt status; -preparing and filing tax returns and other forms to comply with government reporting requirements; -answering client questions about the administration of the plan; and -proposing amendments to plan documents as needed to comply with regulations and statutes.

The law firm and accounting firm would refer clients in need of these services to the ancillary business. The ancillary business would refer questions of law to the law firm unless the client prefers another attorney.

Question:
May the law firm enter into the proposed arrangement without violating applicable ethical rules?

Summary:
A law firm that provides legal services to retirement plans may own interest in and refer clients to an ancillary business that provides services to retirement plans if the services provided do not constitute the unauthorized practice of law and the law firm complies with the provisions of Rules 1.7 and 1.8.

If the services rendered by the business entity constitute the unauthorized practice of law, the attorneys or law firm may not assist that unauthorized law practice by referring clients to the entity.

A lawyer may not give anything of value in return for a referral for legal services. Therefore, a law firm that provides value to an ancillary business entity and its employees in the form of capital, management, advice, employee compensation and client referrals may not enter into an agreement providing referrals for legal services from the ancillary business.

Opinion:
At the outset, the inquirer is cautioned that the proposed activities of the ancillary business may constitute the unauthorized practice of law. The preparation of legal instruments or even giving instructions to clients on how to execute legal documents by nonlawyers constitutes the unauthorized practice of law. See State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987). The purpose of the prohibition is to protect the public from the consequence of erroneous advice.

The proposed actions of the ancillary business in preparing retirement plan documents, preparing and filing documents for the purpose of achieving tax exempt status and proposing plan amendments may constitute the unauthorized practice of law. Adverse consequences to customers of the ancillary business could result form improper preparation or filing of these type documents. Activity allegedly constituting the unauthorized practice of law should be referred to the S.C. Bar's Unauthorized Practice of Law Committee. This committee expresses only its concern to the inquirer for his consideration.

A law firm's ownership of an interest in a business that engages in the unauthorized practice of law is clearly prohibited. South Carolina Rule of Professional Conduct 5.5(b) prohibits a lawyer from assisting in the unauthorized practice of law and Rule 5.4(b) prohibits a lawyer from forming a partnership with a nonlawyer for the practice of law. Rule 5.4(b) applies not only to partnerships, but also to other organizations that lawyers are involved in managing. S.C. Bar Advisory Opinion 91-04. In the present situation, the law firm's fifty percent ownership of the ancillary business is a predictor of significant participation by the law firm in managing the ancillary business and in assisting its employees in their activities. Thus, the law firm's ownership of the ancillary business would be prohibited if the business engages in the unauthorized practice of law. Other ethical concerns raised if the new entity's actions constitute the unauthorized practice of law are the prohibition against lawyers sharing legal fees with nonlawyers, Rule 5.4(a), and the prohibition of corporations from practicing law S.C. Code Ann. Section 40-5-320 (Law Co- op. 1976).

A law firm may own an interest in and refer business to an ancillary business that provides nonlegal services. South Carolina Rule of Professional Conduct 1.7(b) prohibits representation of a client that may be "materially limited ... by the lawyer's own interests, unless (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after consultation." Rule 1.8(a) prohibits business transactions between a lawyer and client unless the terms are "fair and reasonable," fully disclosed in an understandable writing, the client has an opportunity to engage independent counsel, and the client consents in writing.

This committee has applied these conflict of interest rules in concluding that lawyers may refer clients to a wholly owned title abstracting company that issues title insurance, S.C. Bar Advisory Opinion 89-17, and may refer estate planning clients to a partially owned life insurance agency, S.C. Bar Advisory Opinion 90-16. In both of these opinions, the committee noted concern about the difficulty of serving the client's best interest while having a contrary financial interest. See also ABA Informal Opinion 556 (5/31/62).

A law firm that provides legal services to retirement plans may own an interest in and refer clients to an ancillary business that provides nonlegal services to retirement plans if the law firm complies with the provisions of Rules 1.7 and 1.8.

The existence of an agreement that the ancillary business will refer clients to the law firm, however, runs afoul of Rule 7.2(c)'s prohibition regarding attorneys giving value for referrals to the law firm. Rule 7.2(c) prohibits a lawyer from giving "anything of value to a person for recommending the lawyer's services" except for "a not-for-profit lawyer referral service or other legal service organization." S.C. Bar Advisory Opinion 89-17 warns law firms against soliciting clients from fully owned title abstracting or title insurance companies. In S.C. Bar Advisory Opinion 91-04, this committee addressed a plan by a lawyer to participate in an organization made up of accountants, trust officers and other professionals. The proposed purpose of this organization was to provide to paid subscribers estate and tax planning information through seminars and newsletters as well as some free and other reduced fee professional consultations. This committee opined that the lawyer's role in organizing and maintaining the organization constituted value contributed by the lawyer in return for his name being on a referral list.

In the present situation, a law firm proposes to help organize and participate in an ancillary business that will provide referrals to the law firm for legal services. The law firm's role in providing capital for the ancillary business, management advice, compensation to the business' employees, and referrals to the business constitute value to the ancillary business in return, in part, for referrals to the law firm. The proposed relationship therefore violates Rule 7.2(c).