Outside Money Is Coming for Law Firms. Here Is What Texas and New York Practices Can Actually Do
By Hari Nathan Kalyan, Managing Attorney, Warren Kalyan.
Five Key Takeaways
- Most states still bar non-lawyer ownership of a law practice. Texas and New York, like most states, still follow the rule against fee sharing and partnership with non-lawyers. Only Arizona and Utah have gone further, and Washington, D.C. allows limited non-lawyer ownership on narrower terms.
- Texas will not let its lawyers shop for a friendlier state's rule. A standing Texas ethics opinion holds that a Texas lawyer cannot join a non-lawyer owned structure even if that structure is organized in Arizona or D.C., because Texas Disciplinary Rule 5.04(b) controls once the lawyer is practicing in Texas.
- New York opened a narrow door in March 2026. New York State Bar Association Opinion 1291 permits a New York lawyer to hold a passive financial interest in an out of state alternative business structure, but only if the lawyer is a true passive investor and the predominant effect of the legal work is not happening in New York.
- The managed services organization is the practical workaround. A separate company, which can have non-lawyer owners, holds the lease, the software, the marketing function, and the back office, then charges the law firm a fee for those services while the firm itself stays owned entirely by licensed lawyers.
- Three questions decide whether an arrangement holds up. Does any non-lawyer get a share of legal fees or a vote over legal judgment, is pricing flat or market rate rather than revenue based, and where is the predominant effect of the legal work actually happening.
Every few months another headline announces that private equity has bought into a law firm, or that a legal tech company has rolled up a string of practices. For the owner of a five lawyer firm in Austin or Brooklyn, that can feel like news from a different planet. It is not. The same pressure that is pulling outside capital into big firms, the need for growth funding, technology spend, and a succession plan that does not depend on finding another lawyer willing to buy in, applies just as much to a small firm. The difference is that Texas and New York lawyers operate under real limits on who can own a piece of the practice, and those limits recently got clearer.
Why This Matters to a Small or Midsize Firm
Most firm owners eventually face the same set of problems. A partner wants to retire and there is no obvious buyer. The firm needs money for a new case management system or a marketing push and the bank is not interested in lending against goodwill. A firm wants to bring on a non-lawyer chief operating officer or a marketing lead and give that person real equity, not just a salary, to keep them.
Every one of these situations runs into the same rule. In most states a non-lawyer cannot own a piece of a law practice or share in its legal fees. Knowing exactly where that line sits, and where it does not, is what separates a firm that can raise money and retain talent from one that cannot.
The National Picture
Arizona and Utah have gone the furthest. Arizona now certifies what are called alternative business structures, or ABS entities, that let non-lawyers hold equity in a licensed law firm and share in its profits, subject to court approval and ongoing regulation. Utah runs a similar regulatory sandbox. Washington, D.C. permits limited non-lawyer ownership as well, though on narrower terms than Arizona.
Those jurisdictions have drawn real investment, including from companies built around legal technology and from private equity firms testing the model. Most states, including Texas and New York, have not followed. The American Bar Association's Model Rule 5.4, which bars fee sharing and partnership with non-lawyers, is still the default almost everywhere.
What Texas Requires
Texas has taken one of the more restrictive positions in writing. The Texas Center for Legal Ethics has issued opinions holding that a Texas licensed lawyer, practicing in Texas, cannot join or invest in a firm structure that includes non-lawyer ownership, even if that firm is organized in a jurisdiction like Arizona or D.C. that expressly allows it.
The reasoning is straightforward. A lawyer does not get to shop for the most permissive rule across state lines. If the lawyer is licensed and practicing in Texas, Texas Disciplinary Rule 5.04(b) controls, and that rule prohibits partnership with non-lawyers where the partnership's activities include the practice of law.
The same opinions have looked closely at revenue sharing arrangements with non-lawyer service companies, the vendors that provide case management, intake, marketing, or back office support to firms, and have generally allowed flat fees or fair market value pricing for those services while drawing a hard line at percentage of revenue arrangements that start to look like disguised fee splitting.
What New York Allows, as of This Year
New York moved to clarify its own position in March 2026, when the New York State Bar Association's ethics committee issued Opinion 1291 on lawyer participation in alternative business structures. The opinion permits a New York lawyer to hold a passive financial interest in an ABS entity organized in a state that allows it, so long as the lawyer is a true passive investor and is not practicing law through that structure.
The opinion draws its own line, though. When the predominant effect of the legal work is clearly happening in New York, New York's professional conduct rules apply regardless of where the entity is chartered, and a lawyer cannot use an out of state ABS as a workaround for New York's fee sharing restrictions. For a firm with clients and lawyers on the ground in New York, that predominant effect question deserves real analysis before anyone signs a term sheet.
The Workaround Most Small Firms Actually Use
Between full ABS ownership and doing nothing, there is a structure that has become common in restrictive states, the managed services organization, or MSO. In an MSO arrangement, the law firm itself stays owned entirely by licensed lawyers and continues to provide legal advice and appear for clients. A separate company, which can have non-lawyer owners and outside investors, owns the non-legal assets, the lease, the software licenses, the marketing function, the back office staff, and contracts with the law firm to provide those services for a fee.
Done correctly, this lets a firm bring in outside capital and non-lawyer talent for the business side of the practice without crossing into fee sharing or non-lawyer ownership of the legal work itself. Done carelessly, an MSO fee that is really a disguised profit split, or a services agreement that gives the MSO control over legal judgment, staffing of matters, or client relationships, can draw the same scrutiny as a straight ABS violation.
What We Would Ask Before You Take Outside Money
Before any firm signs on to bring in outside money, whether it is a friend, a family member, a private equity fund, or a key employee who wants equity instead of salary, we recommend mapping the arrangement against three questions.
Does any part of the structure give a non-lawyer a share of legal fees or a vote over legal judgment. If the answer is yes, no amount of careful drafting fixes it.
If pricing is based on revenue rather than a flat or market rate fee, can that arrangement survive a look from the state bar as something other than fee splitting. This is the question that undoes the most otherwise well intentioned service agreements.
Where is the predominant effect of the legal work actually happening. That answer decides whose rules apply, and it does not move just because the entity is chartered somewhere else.
Firms that answer those questions honestly, in writing, before money changes hands tend to avoid the disciplinary problems that show up later.
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General information only, not legal advice for your specific situation.