During the past few years, private equity investors have injected significant capital into the professional services sector. Professional service firms, such as physician practices, engineering firms, and accounting firms, are often subject to ethical or regulatory requirements that limit nonprofessional ownership.1 Through the use of innovative structuring, sophisticated investors have been able to overcome these barriers that previously dissuaded third-party investment in businesses.
Until recently in the U.S., the practice of law stood as one of the last remaining professional services businesses that had not taken private equity investment, unlike in various other countries that have permitted third-party equity investment in law firms for nearly 20 years.2 However, private equity’s interest in investing in U.S. law firms (partly spurred by litigation finance firms’ recent push into law firm investments) has intensified dramatically, especially during the past 12 months, marking a pivotal shift in the legal industry.3 The attractive economics of law firms (recurrent and predictable revenues, high profit margins, and low capital costs) plus a fragmented competitive market and an improving regulatory environment have led to a surge in activity and efforts to invest not only in small law firms in specific jurisdictions but across the U.S. legal industry.4 We expect this activity to only increase.
Similar to certain other types of professional services firms, law firms are subject to strict ownership rules. In particular, Model Rule 5.4 of the American Bar Association (ABA) Model Rules of Professional Conduct prohibits the sharing of legal fees with a nonlawyer (with limited exceptions) limiting the ownership of law firms to practicing lawyers only.5 In recent years, certain U.S. states (e.g., Arizona) have modified their rules of professional conduct to remove this requirement, but the regulatory landscape governing nonlawyer investment in legal services is evolving and remains far from uniform.6 Approaches in different U.S. states include allowing outside investment through management services organizations (MSOs), alternative business structure (ABS) regimes, regulatory sandboxes, or limited exceptions.
In this article, we provide a high-level overview of the models currently being used to facilitate third-party investment (including private equity investment) in U.S. law firms.
MSO Model
In jurisdictions where Model Rule 5.4 still applies, investors have used the MSO model — an approach borrowed from the medical industry and similar to the “alternative practice structure” used by private equity to make investments in accounting firms.7 An MSO allows a law firm (and the corresponding outside investor) to separate the legal practice of a law firm from the back-office, management business. In the MSO model, the law firm is separated into two entities. One entity holds the legal practice (the “legal practice entity”). The other entity, the MSO, acquires substantially all assets of the practice entity except those required for legal practice (e.g., back-office functions, client records, engagement letters).8 Outside investors own the MSO, which manages the law firm’s business functions (HR, IT, marketing, recruiting) for a recurring fee paid by legal practice entity pursuant to a master services agreement entered into between the MSO and the legal practice entity.9
Notably, the potential upside for investors in the MSO model for law firms is limited as compared to similar models that have been used by private equity to invest in other professional services industries. In a law firm MSO, only the legal practice entity can receive legal fees under Model Rule 5.4 or the local equivalent, limiting outside investors’ potential returns to the recurring management fee. This contrasts with other models, like the accounting firm “alternative practice structure” model, where outside investors are able to generate a portion of their returns from revenue generating portions of the business.10
At least one state authority has offered insight on how the MSO affects the legal industry. The Texas Commission on Professional Ethics stated that lawyers and outside investors may hold equity in an MSO, but lawyers should ensure that the MSO is not paid a portion of the legal fee revenues and must be cognizant of and consider potential conflicts.11 It also emphasized that neither the MSO nor its owners may engage in the unauthorized practice of law by sharing legal fees or influencing the professional judgment of attorneys.12
Arizona’s ABS Model
In 2021, Arizona eliminated its version of Model Rule 5.4 from its rules of professional conduct and expressly permitted nonlawyers to have an economic ownership and decision-making authority in law firms via an ABS regime.13 To qualify as an ABS, a law firm must obtain a license from the Arizona Supreme Court and comply with audit and other compliance requirements. As of April 30, 2025, Arizona has approved 136 ABS entities.14 Of the ABSs with known ownership that were newly licensed in 2024, 59% were wholly owned by nonlawyers.15
An Arizona ABS cannot establish a branch office in jurisdictions that continue to follow versions of Model Rule 5.4.16 However, four primary approaches have developed for ABSs to operate outside of Arizona:
- Referral Fees: The Arizona ABS acts as a national referral hub and sends cases to local lawyers in exchange for a share of their fees.17
- Pro Hac Vice: Arizona ABS lawyers appear in other states via pro hac vice admissions for specific matters with court approval.18
- Temporary Practice: ABS lawyers rely on rules allowing temporary practice by out-of-state lawyers whose work fits within permitted categories.19
- Staffing Company: An ABS provides temporary lawyers to firms or clients outside Arizona, supervised by an independent lawyer for the same client. Some holding companies own both an ABS and a staffing firm; the ABS operates in Arizona while the staffing firm deploys temporary lawyers nationwide.20
Utah’s Regulatory Sandbox
In 2020, Utah created a pilot program authorizing nonlawyer ownership of law firms and relaxing unauthorized practice of law restrictions through a regulatory “sandbox.” Entities may seek waivers of traditional legal practice rules in order to deliver legal services.21 Initially, many entrants sought waivers, but the Utah Supreme Court recently determined that ABS-only entrants would no longer be eligible to use the sandbox.22 Following that decision, sandbox participants dropped from 39 in 2022 to 11 as of April 30, 2025, with many entities indicating plans to move to Arizona to adopt an ABS model.23 The pilot program remains under evaluation and will continue for two more years.
D.C.’s Rule 5.4 Exception
Since 1991, Washington, D.C., has permitted limited nonlawyer ownership under an exception to its version of Model Rule 5.4.24 Commentary with respect to this exception suggests that the District of Columbia likely adopted this version to allow law firms to hire lobbyists and government officials as partners in hopes that their political connections would generate business for the firm.25 Under the version of Model Rule 5.4 adopted in Washington, D.C., outside investment in a law firm is permitted if the firm’s sole purpose is to provide legal services, the nonlawyer owner complies with the D.C. Rules of Professional Conduct, and lawyers with managerial authority are responsible for nonlawyer owners as if they were lawyers.26
Other U.S. Developments
- In 2025, Puerto Rico adopted new ethical rules allowing nonlawyers to own up to 49% of a law firm, provided the firm is operated by lawyers licensed in Puerto Rico. Puerto Rico will reassess the rule in three years.27
- In October 2025, California enacted legislation prohibiting California attorneys from sharing fees with an out-of-state ABS attorney unless they meet specific criteria. However, the legislation does allow MSOs so long as they are structured in a way that satisfies prescribed requirements — an MSO must contain a flat fee structure, must not pay for referrals or lead generations and must not scale payment based on the amount recovered.28
- Washington, Indiana, and Minnesota are reportedly considering adopting regulatory sandboxes like Utah’s.
As new ownership models emerge and ethical and regulatory requirements continue to shift, the environment for nonlawyer investment in legal services remains complex and jurisdiction dependent. What is permissible in one U.S. state may be prohibited in the next. Even within permissible structures, compliance often turns on detailed requirements regarding fee arrangements, governance, supervision, and licensure. For investors and law firms exploring these opportunities, navigating this patchwork of rules, ethical considerations, and structural models demands careful consideration and planning.
Thank you to associates Austin R. Archer, Ashka Sheth, and Samayra Siddiqui for their significant contributions to this Sidley Update.
1 See e.g., Why Private Equity Firms Buy Accounting Firms: 2025 Analysis | MA, MADRAS ACCOUNTANCY, https://madrasaccountancy.com/blog-posts/why-private-equity-firms-buy-accounting-firms-2025-analysis-ma; The Corporate Practice of Medicine 50-State Guide, PERMIT HEALTH (April 29, 2025), https://www.permithealth.com/post/the-corporate-practice-of-medicine-50-state-guide; Anne-Mette E. Andersen, The Illegal Practice of Engineering or Architecture by Companies in New York — A Compliance Guide [Part One], BLOOMBERG LAW REPORTS (2010), https://www.hklaw.com/-/media/files/insights/publications/2010/10/the-illegal-practice-of-engineering-or-architectur/files/the-illegal-practice-of-engineering-or-architectur/fileattachment/55206.pdf.
2 Legal Services Act 2007, c. 29 (UK), https://www.legislation.gov.uk/ukpga/2007/29; Steven Mark & Tahlia Gordon, Innovations in Regulation — Responding to a Changing Legal Services Market, 22 Geo. J. Legal Ethics, 505-06 (2009), https://heinonline.org/HOL/P?h=hein.journals/geojlege22&i=503.
3 US Law Firm McDermott Will & Schulte Weighs Sector’s First Private Equity Tie-Up, Financial Times (November 12, 2025), https://www.ft.com/content/3a9d3c27-a692-4389-961c-f4893a80b3b7.
4 See, e.g., Natalie Rooney, The Hand of Private Equity in Accounting Firms, ILL. CPA SOCIETY (Spring 2022), https://www.icpas.org/information/copy-desk/insight/article/spring-2022/the-hand-of-private-equity-in-accounting-firms.
5 Model Rules of Pro. Conduct r. 5.4 (AM. BAR ASS’N), available at https://www.americanbar.org/groups/professional_responsibility/publications/model_rules_of_professional_conduct/rule_5_4_professional_independence_of_a_lawyer/.
6 7A Pt. 2 A. R. S. Sup. Ct. Rules, Rule 31.1, AZ ST S CT Rule 31.1; Lucia T. Pera, Operating Alternative Business Structures Across Jurisdictions, BLOOMBERG LAW, https://www.bloomberglaw.com/external/document/X3LLA3NO000000/legal-profession-overview-operating-alternative-business-structu.
7 See, e.g., Ryan Boysen and Emma Cueto, PE Firms Leap Into MSO ‘Frontier’ for Slice of Legal Industry, LAW360 (Sept. 9, 2025), https://www.crowell.com/a/web/cZ8TDM27tpnmJJciGbQFhM/pe-firms-leap-into-mso-frontier-for-slice-of-legal-industry.pdf.
8 Frederick Shelton, The Legal MSO: Less Work, More Wealth — And the End of Law Firms as We Know Them, ATT’Y AT L. MAG. (July 8, 2025), https://attorneyatlawmagazine.com/practice-management/law-firm-management/the-legal-mso-less-work-more-wealth-and-the-end-of-law-firms-as-we-know-them.
9 See Boysen and Cueto, supra note 7.
10 See Jason Jones, How Private Equity Uses APS to Acquire US Accounting Firms, TELLAN (Aug. 13, 2025), https://www.tellen.ai/post/how-private-equity-uses-aps-to-acquire-us-accounting-firms.
11 Tex. Comm. On Professional Ethics, Op. 706 (2025), available at https://www.legalethicstexas.com/resources/opinions/opinion-706/.
12 See id.
13 See Pera, supra note 6.
14 Legal Innovation After Reform: Five Years of Data on Regulatory Change, STANFORD LAW SCHOOL, DEBORAH L. RHODE CENTER ON THE LEGAL PROFESSION (June 2025).
15 The Arizona ABS Program — A Fourth Year Update, GREENBERG TRAURIG (December 31, 2024), https://www.gtlaw.com/en/insights/2024/12/the-arizona-abs-program-a-fourth-year-update.
16 See Pera, supra note 6.
17 Id.
18 Id.
19 Id.
20 Id.
21 Legal Innovation After Reform: Five Years of Data on Regulatory Change, supra note 14 at 2-4.
22 Id at 3, 6; Debra Cassens Weiss, Nearly 30 Legal Entities May Leave Utah’s Regulatory Sandbox Program After State Tightens Rules, ABA JOURNAL (March 4, 2025), https://www.abajournal.com/news/article/nearly-30-legal-entities-may-leave-utahs-regulatory-sandbox-after-state-tightens-rules.
23 Debra Cassens Weiss, Nearly 30 Legal Entities May Leave Utah’s Regulatory Sandbox Program After State Tightens Rules, ABA JOURNAL (March 4, 2025), https://www.abajournal.com/news/article/nearly-30-legal-entities-may-leave-utahs-regulatory-sandbox-after-state-tightens-rules.
24 DC Bar, Rules of Prof. Conduct, Rule 5.4: Professional Independence of Lawyer.
25 Victoria Shannon Sahani, Reshaping Third-Party Funding, 91 TUL. L. REV. 405 (2017), pp. 458-9.
26 DC Bar, Rules of Prof. Conduct, Rule 5.4: Professional Independence of Lawyer.
27 Emily R. Siegel, Tax-Friendly Puerto Rico Approves Non-Lawyer Owners of Law Firms, BLOOMBERG LAW (June 24, 2025), https://news.bloomberglaw.com/business-and-practice/tax-friendly-puerto-rico-approves-non-lawyer-owners-of-law-firms.
28 California Assembly Bill 93, available at https://legiscan.com/CA/text/AB931/id/3191034.
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