Law firm ownership: the fund can own the Phoenix office and none of the Dallas one

A private equity fund can own the Phoenix office of a law firm outright and not one share of its Dallas office. Arizona licenses law firms with nonlawyer owners and sets no cap on how much they hold. Texas tells its lawyers that joining a firm with a nonlawyer owner is misconduct “even if the law firm is based in a jurisdiction that expressly allows nonlawyer law firm ownership” (Tex. Comm. on Prof’l Ethics, Op. 704 (2025)). So the investor-backed firm with two offices is not one firm. It is two, and the money that crosses between them is policed by a different rule.

This page covers the rule that closes law firms to outside owners almost everywhere, the three places that have opened a door, the management company built to get around the rule, and what happens when a firm practices on both sides of the line.

In almost every state, a nonlawyer cannot own any part of a law firm, whatever entity the firm uses.

The rule nearly everywhere

The American Bar Association’s Model Rule 5.4, which most states adopt in their own words, bars a lawyer from sharing legal fees with a nonlawyer and from forming a partnership with a nonlawyer if any of its activities are the practice of law (Model Rule 5.4(a), (b)). It bars a lawyer from practicing in a for-profit firm in which a nonlawyer owns any interest, or in which a nonlawyer is a director or officer “or occupies the position of similar responsibility in any form of association other than a corporation” (Model Rule 5.4(d)).

That last phrase is what reaches the LLC. A law firm organized as an LLC or PLLC cannot have a nonlawyer member, and it cannot have a nonlawyer manager either, because a manager is the position of similar responsibility. The rule has narrow exceptions for payments to a dead lawyer’s estate, the sale of a practice, and nonlawyer employee retirement and profit-sharing plans. Outside investment is not one of them.

District of Columbia: working partners yes, investors no

D.C. has allowed nonlawyer partners for decades, on one condition that rules out the investor. A D.C. lawyer may practice in a firm in which a financial interest is held or managerial authority is exercised by “an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients” (D.C. Rule of Prof’l Conduct 5.4(b)). The firm’s sole purpose must be legal services, every nonlawyer owner must agree in writing to follow the D.C. rules, and the lawyer owners must answer for the nonlawyers as if they were lawyers. The comments name the kind of person meant: economists, CPAs, lobbyists, social workers, professional managers.

The comments also name who is not. The rule “does not permit an individual or entity to acquire all or any part of the ownership” of a firm for investment purposes (D.C. Rule 5.4, cmt. [8]).

D.C. lets the nonlawyer who works in the firm own part of it and bars the nonlawyer who only invests.

Arizona: a license for outside owners

Arizona eliminated its version of Rule 5.4 effective January 1, 2021 and replaced it with a license. A business that includes nonlawyers with an economic interest or decision-making authority, and wants to employ lawyers to serve clients, must first be licensed as an alternative business structure, and legal services inside it may be provided only by people authorized to practice law in Arizona (Ariz. R. Sup. Ct. 31.1; Ariz. Code of Jud. Admin. § 7-209). No cap on nonlawyer ownership appears in the rule. Arizona’s courts reported 114 active licenses at the end of 2024.

The license comes with fixed parts. The firm must keep an active Arizona lawyer in good standing at all times, a designated principal, an Arizona statutory agent, and a compliance lawyer with decision-making authority who serves no more than three licensed entities and runs semi-annual compliance audits (ACJA § 7-209, as amended by Admin. Order 2025-227). Any owner with 25% or more of the economic interests, or any legal right to make decisions for the firm, is an “authorized person” whose fitness the licensing committee reviews.

Arizona is now policing why a firm wants the license. On December 31, 2025, the Arizona Supreme Court rejected an application its committee had recommended, because the applicant’s purpose was raising investment capital and Arizona clients would arrive only incidentally; the order holds that “licensure must be served to benefit persons or entities located in Arizona” (Admin. Order 2025-241). Since March 18, 2026, the rule itself requires that licensure, at least in part, further the program’s objectives for people located in Arizona (Admin. Order 2026-31).

An Arizona license is not a passport: a firm built in Arizona to fund practices elsewhere is the application Arizona now rejects.

Utah: a sandbox with an end date

Utah’s regulatory sandbox lets approved entities operate under waivers of Rule 5.4. About 19 entities hold those waivers, and they end automatically when the sandbox concludes on August 14, 2027, unless an entity obtains an extension (Utah Sup. Ct. Ad Hoc Comm. on Regulatory Reform, Rule 5.4 workgroup minutes, Apr. 3, 2026). The same workgroup found “not sufficient evidence” of access-to-justice benefits and noted “a shrinking appetite for broad Rule 5.4 reform in the near term.”

The management company, and why its fee cannot float

Outside the three openings, investors use the model medicine and accounting already use. The law firm stays lawyer-owned. A management services company the investor owns supplies the staff, space, technology, marketing and back office under a long-term agreement. The fee is where ethics regulators have drawn the line.

Texas says a firm may not pay a nonlawyer-owned support company “based on a percentage of the revenues of the lawyer or the lawyer’s firm,” because a fee “not based on the amount of services provided or the actual cost of those services” is “in practical effect a split of the fees” (Tex. Op. 706 (2025)). North Carolina reached the same place in 2001: a percentage of the firm’s revenue is the danger, and “a flat fee or other means of payment that is not tied to profits” is acceptable (N.C. 2001 Formal Ethics Op. 2).

Take a Dallas firm collecting $10,000,000 a year whose management company incurs $2,400,000 of costs to support it. A fee of 30% of collections would pay the company $3,000,000, and it is the fee Texas forbids. A fee of cost plus 15% pays $2,760,000. The investor’s profit on that structure is the $360,000 margin, and it does not grow when the firm’s revenue grows unless the services grow with it.

In Texas and North Carolina, the investor’s return has to come from the management company’s margin on services, never from the law firm’s revenue line.

The structuring consequence is valuation. A buyer pricing a law firm management company at a multiple of the firm’s earnings is paying for a revenue share the fee is not allowed to be. What the buyer can lawfully own is a services business with a services margin, and the purchase price should be built on that.

When the firm practices on both sides of the line

Texas answered the two-state question directly. A Texas lawyer practicing in Texas violates the Texas rules by joining a firm with a nonlawyer owner even if the firm is lawfully organized somewhere that allows it (Tex. Op. 704). In the Phoenix and Dallas example, the Dallas office cannot be a branch of the Arizona firm. It has to be a separate firm, 100% lawyer-owned, typically a Texas PLLC, buying its support from the investor’s management company at a fee measured by services or cost.

New York gave a different answer to a New York lawyer. A lawyer admitted in New York may hold a financial interest in an out-of-state licensed firm and may practice through one, as long as the legal services do not have a “predominant effect” clearly in New York (NYSBA Ethics Op. 1291 (2026)). New York lawyers may also now divide a fee with a firm that has nonlawyer owners where that ownership is lawful (N.Y. Rule of Prof’l Conduct 5.4(a)(4)). New York still bars its lawyers from practicing in a nonlawyer-owned firm inside New York.

California went the other way by statute. For contracts entered on or after January 1, 2026, a California lawyer may not share fees, directly or indirectly, with an out-of-state alternative business structure unless the lawyer is also licensed where it is approved and the fees are for legal services in that state, with statutory damages of $10,000 per violation or three times actual damages, whichever is greater (Cal. Bus. & Prof. Code § 6156). The section is set to repeal on January 1, 2030.

A firm with offices in more than one state is governed office by office, and the strictest state decides whether the offices can be one firm.

The ABA’s own guidance covers only the passive case: a lawyer in a Model Rules state may invest passively in a licensed firm elsewhere, without practicing through it or seeing client confidences (ABA Formal Op. 499 (2021)). Its footnote says it does not address a lawyer practicing in one.

The bottom line

Nearly every state bars nonlawyers from owning any part of a law firm, and the bar on nonlawyer managers reaches LLCs and PLLCs.

D.C. allows nonlawyer owners who work in the firm and bars passive investors.

Arizona licenses firms with outside owners, sets no ownership cap, and now requires that the license serve people in Arizona.

Utah’s ownership waivers end on August 14, 2027, with nothing yet decided after that date.

In Texas and North Carolina, a management company’s fee cannot be a percentage of the firm’s revenue, so the investor’s return is the management company’s margin.

Texas lawyers may not practice in a firm with a nonlawyer owner anywhere, so a Texas office of an investor-owned firm has to be a separate, lawyer-owned firm.

What this page does not cover

Professional LLCs generally and how each profession caps outside ownership are on licensed professions. The private equity structure in accounting, which law firm deals often copy, is on accounting firms. The four ownership models across licensed businesses are on who is allowed to own a licensed business. How a professional practice is structured as a business, apart from licensing, is on the professional practice playbook.

Last verified October 2026.