Can a South Carolina law firm form a wholly attorney-owned subsidiary to market its tax-free exchange legal services and advertise it as a legal affiliate of the firm?

Plain-English summary

A South Carolina law firm of full-time licensed attorneys formed a wholly-owned subsidiary to market its tax-free exchange legal services. It planned to buy advertising space in a newspaper and real estate trade publications for the descriptively named subsidiary, with the firm's name appearing in smaller print nearby (for example, "A legal affiliate of law firm"). It asked whether forming the subsidiary and advertising it in that manner were proper.

Assuming the subsidiary would be owned solely by attorneys, the committee concluded forming it is ethically permissible. It cited ABA Formal Opinion 91-360 for the caution that the absence of a prohibition does not eliminate the conflict risks of running a law practice and a law-related business at once, and noted prior South Carolina opinions permitting various lawyer-owned related businesses. It pointed to ABA Model Rule 5.7 (not adopted in South Carolina) for the principle that the Rules of Professional Conduct apply to a lawyer's law-related services. Because the subsidiary would be attorney-owned, Rule 5.4 (sharing fees with nonlawyers) was not implicated, and the arrangement would not assist the unauthorized practice of law under Rule 5.5.

On advertising, the committee concluded both the firm and the subsidiary must comply with the advertising rules: Rule 7.1 (no false or misleading communications, with Rule 7.5 applying the same standard to firm names and designations), Rule 7.2 (recordkeeping requirements and referral prohibitions), and Rule 7.3 (limits on direct solicitation of prospective clients). Any language advertising the affiliation would have to satisfy Rule 7.1.

Currency note

This opinion was issued in 1996, 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 Treat this page as historical context, not current guidance.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 form a subsidiary to market its legal services?

A: The committee concluded yes, assuming the subsidiary is owned solely by attorneys. It found no ethical prohibition on forming such a subsidiary to provide legal services.

Q: Does forming the subsidiary implicate the fee-sharing or UPL rules?

A: The committee concluded it does not, because the subsidiary would be attorney-owned, so Rule 5.4 (sharing fees with nonlawyers) is not implicated and the arrangement does not assist unauthorized practice under Rule 5.5.

Q: What advertising rules govern promoting the subsidiary?

A: The committee stated both the firm and the subsidiary must comply with Rule 7.1 (no false or misleading communications, and Rule 7.5 for firm names), Rule 7.2 (recordkeeping and referral limits), and Rule 7.3 (limits on solicitation).

Background and rules framework

The opinion applied the advertising rules (Rule 7.1 on false or misleading communications, Rule 7.2 on advertising recordkeeping and referrals, Rule 7.3 on solicitation, and Rule 7.5 on firm names) and the law-practice-structure rules (Rule 5.4 on sharing fees with nonlawyers and Rule 5.5 on unauthorized practice), each corresponding to the like-numbered Model Rule. It also looked to ABA Model Rule 5.7 (law-related services), which South Carolina had not adopted, for guidance.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 7.1 / Model Rule 7.1: false or misleading communications.
• South Carolina RPC 7.2 / Model Rule 7.2: advertising recordkeeping and referral limits.
• South Carolina RPC 7.3 / Model Rule 7.3: solicitation of prospective clients.
• South Carolina RPC 7.5 / Model Rule 7.5: firm names and designations.
• South Carolina RPC 5.4 / Model Rule 5.4: sharing fees with nonlawyers.
• South Carolina RPC 5.5 / Model Rule 5.5: unauthorized practice of law.
• ABA Model Rule 5.7: law-related services (not adopted in South Carolina).

Other opinions cited:

• ABA Formal Opinion 91-360: conflict risks of operating a law-related business.
• S.C. Bar Ethics Adv. Ops. 83-13, 92-03, 82-20, 75-03, 78-14, 90-16, 92-06, 92-08, 89-17, 95-30, 93-05: lawyer-owned related businesses.

See also

• SC Bar Ethics Op. 96-29: Mediator on Letterhead
• SC Bar Ethics Op. 97-05: Direct-Mail Solicitation

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-96-28/

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 96-28

A South Carolina law firm comprised of full-time attorneys licensed to practice law in South Carolina has organized a wholly-owned subsidiary for the purpose of marketing its tax-free exchange legal services.

The law firm proposes to purchase advertising space in a local newspaper and real estate trade publications for the descriptively named subsidiary. Beneath or otherwise proximate to the advertisement, the law firm's name would appear in some capacity in smaller print (e.g. "A legal affiliate of law firm").

Questions:
1) Whether formation of the proposed law firm subsidiary is ethically proper. 2) Whether the proposed manner of advertising is ethically proper.

Summary:
For the purpose of this opinion, we assume that the wholly-owned subsidiary will be owed solely by attorneys. It is ethically permissible for the law firm to form a subsidiary to provide legal services. Both the law firm and the subsidiary will be bound by Rules 7.1, 7.2, and 7.3 when advertising the services of subsidiary.

Opinion:
There is no ethical prohibition regarding the formation of a subsidiary business by the law firm. As noted in ABA Formal Opinion 91-360, however,

the absence of a prohibition does not eliminate the risks which are inherent in conducting a law practice and a law-related business simultaneously. The business dealings between the lawyer and (the business) could give rise to conflicts between the lawyer's duty to furnish independent legal counsel to another client and the business interests of the lawyer acting in the capacity of (business owner). When the interests of the (business) and the other client diverge, as they may at any stage of the professional relationship, the lawyer who is serving in dual capacities will be confronted by conflicting interests and loyalties. To the extent that the non-legal services by the lawyer comprise a greater portion of the services rendered, the threat to the exercise of independent professional judgment is heightened. The non-legal services being provided by the lawyer can become a separate financial and business interest which it is the continuing duty of a lawyer to disclose in a clear form to the client. A lawyer who elects to engage in a law-related business while providing legal advice to customers of that business will, as a practical matter, have the substantial burden of establishing that any legal advice given has been free of the taint of any bias created by the dual capacities in which the lawyer has acted.

Past South Carolina Ethics Advisory Opinions addressing the propriety of related businesses have permitted the creation of such relationships. See S.C. Bar Ethics Adv. Op. 83-13 (lawyer ownership of court reporting service); S.C. Bar Ethics Adv. Ops. 92-03, 82-20, 75-03 (lawyer acting as title insurance agent at clients' closing); S. C. Bar Ethics Adv. Op. 78-14 (lawyer ownership of real estate brokerage); S. C. Bar Ethics Adv. Op. 90-16 (lawyer ownership of life insurance agency); S.C. Bar Ethics Adv. Op. 92-06 (lawyer making consumer loans to clients of other lawyers); S. C. Bar Ethics Adv. Op. 92-08 (lawyer-consultant to parties defending medical malpractice claims); S.C. Bar Ethics Op. 89-17 (lawyer ownership of title abstracting company and acting as title insurance agent); and S. C. Bar Ethics Adv. Op.95-30 (lawyer ownership of long distance telephone business).

Further guidance is given by ABA Model Rule of Professional Conduct 5.7. Although not enacted in South Carolina, Rule 5.7 provides that lawyers shall be subject to the Rule of Professional Conduct with respect to the provision of law-related services. The Comment to this Model Rule cautions, however, that "(t)he recipient of the law-related services may expect, for example, that the protection of client confidences, prohibition against representation of persons with conflicting interests, and obligations of a lawyer to maintain professional independence apply to the provision of law-related services when that may not be the case." ABA Model Rule 5.7 expressly states that the Rules of Professional Conduct apply to all conduct of a lawyer, including any conduct associated with the subsidiary.

It appears from the proposed arrangement that the subsidiary will be owned solely by attorneys. Rule 5.4 prohibiting the sharing of fees with nonlawyers and preserving a lawyer's professional independence will not, therefore, be implicated. Likewise, this arrangement will not assist in the unauthorized practice of law as prohibited by Rule 5.5. See S.C. Bar Ethics Adv. Op. 93-05 (joint law firm-accountancy firm ownership of ancillary business). Under the limited facts given by the inquirer, formation of the subsidiary is ethically permissible.

Rule 7.1 prohibits a lawyer from making false or misleading communication about the lawyer for the lawyer's services. Any language advertising the subsidiary's affiliation with the law firm would need to comply with this Rule. See also Rule 7.5 ("A lawyer shall not use a firm name, letterhead or other professional designation that violates Rule 7.l."). Further, the law firm and the subsidiary are required to comply with the recordkeeping requirements and referral prohibitions of Rule 7.2. Lastly, the law firm and the subsidiary must be mindful of Rule 7.3 which prohibits direct solicitation for professional employment and limits written or recorded solicitations of prospective clients.