Ethics Opinion 1289: Entity owned and operated by attorney that provides law-related services. Splitting fees from law-related services with nonlawyers. Paying referral fees to attorney owner of law-related entity

Ethics Opinion 1289: Entity owned and operated by attorney that provides law-related services. Splitting fees from law-related services with nonlawyers. Paying referral fees to attorney owner of law-related entity

12.23.2025

By Ethics Opinions

 

Opinion 1289 (12/23/2025)

Topic: Entity owned and operated by attorney that provides law-related services. Splitting fees from law-related services with nonlawyers. Paying referral fees to attorney owner of law-related entity.

Digest: When an attorney owns or controls an entity that provides nonlegal services, the attorney must comply with the New York Rules of Professional Conduct with respect to the entity’s provision of nonlegal services if any of the entity’s customers could reasonably believe (even if mistakenly) that the entity’s nonlegal services are the subject of a client-lawyer relationship. If the attorney avoids that misimpression, including by providing the entity’s customers with a disclaimer that complies with Rule 5.7(a)(4), then the attorney may permit the entity to provide a percentage of its revenue to a nonlawyer who provides services to the entity. In that event, the attorney may also permit the entity to pay a referral fee to an attorney from outside the entity who refers a client to the entity, unless the attorney who owns or controls the entity knows that a referring attorney is forbidden by Rule 1.7 or other law from accepting a referral fee or is not obtaining the necessary consent from the referring attorney’s client.

Rules: 1.7, 5.4(a), 5.7, 7.2(a), 8.4(a)

FACTS:

1. The inquirer, an attorney admitted in New York, proposes establishing a business entity that would be owned and operated by attorneys. The entity’s business would be the submission of annual tax filings on behalf of companies. The inquirer proposes that the company would: (1) pay a technology developer a percentage of the entity’s revenue as payment for building out the entity’s technology; and (2) pay a referral fee to attorneys who refer clients to the entity.

QUESTION:

2. Are the proposed payments to the nonlegal entity permissible, given that the entity will be owned and operated exclusively by attorneys?

OPINION:

Compensating a nonlawyer based on a percentage of revenues

3. If the proposed entity were to operate as a law firm, the proposed division of revenue with a technology developer who is not a lawyer would violate Rule 5.4(a) of the New York Rules of Professional Conduct (the “Rules”). Rule 5.4(a) provides, subject to exceptions that would be inapplicable here, that: “A lawyer or law firm shall not share legal fees with a nonlawyer . . ..” The purpose of the rule is to protect lawyers’ independent professional judgment by “remov[ing] incentives for nonlawyers to interfere with the professional judgment of lawyers in legal matters, and . . . remov[ing] incentives for nonlawyers to engage in other objectionable conduct.” N.Y. City 2014-1 (2014). The rule applies to business arrangements in which a law firm compensates a nonlawyer by providing a percentage of its fees from specific matters or a collection of matters, see N.Y. City 2018-5 (2018), or by providing a percentage of its general revenue or profits, id. Compensating a nonlawyer in this manner, rather than in an amount that is not tied to a law firm’s legal fees, is thought to provide an inducement to the nonlawyer to influence the firm to increase its fees in professionally impermissible ways.
4. We have been advised that, although the inquirer’s entity will be owned and operated by attorneys, their objective is to operate the entity as a business providing nonlegal services, not as a law firm providing legal services to customers in the context of client-lawyer relationships. If the attorneys effectively meet this objective, then with respect to the business’s services, they will not be subject to Rule 5.4(a) or to other Rules of Professional Conduct relating to the practice of law.
5. Attorneys who own or control an entity that provides nonlegal services must comply with Rule 5.7 to avoid applications of the Rules. Specifically, Rule 5.7(a)(3) provides that a lawyer who is an owner or controlling party of an entity that the lawyer “knows to be providing nonlegal services to a person is subject to th[e] Rules with respect to the nonlegal services if the person receiving the services could reasonably believe that the nonlegal services are the subject of a client-lawyer relationship.” For purposes of this provision, Rule 5.7(a)(4) “presume[s] that the person receiving nonlegal services believes the services to be the subject of a client-lawyer relationship unless the lawyer . . . has advised the person receiving the services in writing that the services are not legal services and that the protection of a client-lawyer relationship does not exist with respect to the nonlegal services . . ..” See N.Y. State 832 (2009).
6. A threshold question is whether the services to be provided by the inquirer’s entity – namely, submitting annual tax filings on behalf of companies – are “nonlegal services.” Rule 5.7(c), provides that “‘nonlegal services’ shall mean those services that lawyers may lawfully provide and that are not prohibited as an unauthorized practice of law when provided by a nonlawyer.”
7. The New York Judiciary Law governs whether a nonlawyer entity may provide these services but this Committee’s mandate is limited to interpreting the New York Rules of Professional Conduct. If the Judiciary Law forbids a nonlawyer entity from providing the services in question, then the inquirer may not operate the nonlawyer entity. See, e.g., N.Y. State 813 at note 3 (we do not opine on what constitutes unauthorized practice of law in New York … because the rules governing unauthorized practice of law in New York are matters of law, not the Code of Professional Responsibility. New York Judiciary Law §§ 476-a, 476-b, 478, 484-486); NY State 1068, ¶ 15 (2015) (whether particular conduct constitutes the unauthorized practice of law, which is a crime in New York, is a legal question beyond the jurisdiction of this Committee. See Rule 5.5, Cmt. [2] (definition of “practice of law” is established by law); Judiciary Law §485-a (making certain violations of §§ 478, 474, 486 and 495 a class E felony).
8. “This Committee has recognized that there are a number of services that can be performed appropriately by both lawyers and non-lawyers,” such as tax return preparation, N.Y. State 557 (1984) – but we have also consistently held that “when such services are performed by a lawyer who holds himself out as a lawyer, they constitute the practice of law and the lawyer, in performing them, is governed by the Code.” N.Y. State 662 (1994) (quoting N.Y. State 557 [1984]).
9. If the contemplated service is a “nonlegal service” that a nonlawyer entity owned or operated by attorneys may provide, then under Rule 5.7, the entity will be treated like a law firm subject to the Rules “if the person receiving the services could reasonably believe that the nonlegal services are the subject of a client-lawyer relationship.” To prevent this misimpression, at minimum, the attorney must provide the written disclaimer set forth in Rule 5.7(a)(4). If the lawyer provides this disclaimer and the customers could not otherwise reasonably believe that the entity is providing legal services subject to the Rules, then the attorney may permit the entity to enter into the proposed revenue-sharing arrangement with a nonlawyer technology builder or developer. Otherwise, the lawyer must abide by Rule 5.4(a) and not permit this arrangement.

 

Paying a referral fee to other attorneys

10. If the entity were to operate as a law firm, the proposed payment of referral fees to other attorneys would violate Rule 7.2(a), which provides, subject to exceptions that would be inapplicable, that: “A lawyer shall not compensate or give anything of value to a person or organization to recommend or obtain employment by a client, or as a reward for having made a recommendation resulting in employment by a client . . ..” If, as described above, the entity avoids application of the Rules by providing the necessary disclaimer and otherwise avoiding any reasonable belief on the part of customers that the entity has formed a client-lawyer relationship, then Rule 7.2(a) will not apply to the entity.
11. Rule 8.4(a) provides, in part, that a lawyer shall not “knowingly assist” another lawyer “to violate the Rules of Professional Conduct.” Therefore, the attorneys who own and control the proposed entity may not arrange for the entity to pay referral fees to other attorneys if those attorneys who operate the entity know that the Rules or other law forbid referring attorneys from accepting fees for referring clients to the entity. N.Y. State 845 ¶¶ 12-13 (2010) (under Rule 8.4(a), “an attorney functioning as a real estate broker is prohibited from paying a referral fee or partial commission to a referring attorney if the attorney-broker knows that the referring attorney’s acceptance of the payment would breach these Rules”).
12. Rule 7.2(a) would not bar other attorneys from making referrals to the entity in exchange for referral fees. By its terms, the rule applies to lawyers and law firms that accept referrals, not to lawyers and law firms that make referrals. Rule 7.2(a) thus does not bar lawyers from accepting referral fees from nonlawyer entities.
13. Under Rule 1.7(a)(2), however, there are situations where a lawyer’s expectation of a referral fee creates a conflict of interest for the lawyer. That situation would arise when, in the language of Rule 1.7(a)(2), “there is a significant risk that the lawyer’s professional judgment on behalf of [the] client will be adversely affected by the lawyer’s own financial [interest]” in the referral fee. Even in that event, however, Rule 1.7(b) would nevertheless permit the lawyer to make the referral with an expectation of receiving a referral fee if “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation” to the client, and the client “gives informed consent, confirmed in writing.” (Rule 1.7(b) has two other subparagraphs that are not relevant here.)
14. Under Rule 1.7, an attorney may or may not be permitted to accept a fee for referring a client to a nonlawyer entity. The answer depends on the circumstances, including, especially, whether the referral is related to the attorney’s provision of legal services, and whether the products or services are fairly uniform among providers. Compare N.Y. State 1200 (2020) (attorney may not refer clients to a financial advisor in exchange for a referral fee); N.Y. State 1086 (2016) (attorney has a nonwaivable conflict in referring clients to an investment firm with the expectation of a referral fee); N.Y. State 845 (2010) (attorneys for sellers and buyers may not accept and keep referral fees from real estate brokers), with N.Y. State 981 (2013) (attorney may accept referral fee for referring clients to an entity providing security services because the security services are unrelated to the legal representation and the attorney provides no opinion about their quality).
15. Because the Committee is unaware of the circumstances in which various attorneys will refer clients to the inquirer’s entity, the Committee cannot form opinions about whether those attorneys may accept referral fees, much less form opinions about whether the inquirer will “know” that the referring attorneys are forbidden from accepting referral fees. Whether referring lawyers are properly accepting referral fees will be a judgment call for the inquirer to make on a case-by-case basis. The inquirer may seek guidance in this Committee’s above-cited opinions. If the inquirer knows that the Rules forbid the referring lawyers from accepting the referral fees, or knows that the referring lawyers are not obtaining their clients’ informed consent as required by Rule 1.7, then the inquirer may not provide for the entity to provide referral fees.

CONCLUSION:

16. When an attorney owns or controls an entity that provides nonlegal services, the attorney must comply with the New York Rules of Professional Conduct with respect to the entity’s provision of nonlegal services if any of the entity’s customers could reasonably believe (even if mistakenly) that the entity’s nonlegal services are the subject of a client-lawyer relationship. If the attorney avoids that misimpression, including by providing the entity’s customers with a disclaimer that complies with Rule 5.7(a)(4), then the attorney may permit the entity to provide a percentage of its revenue to a nonlawyer who provides services to the entity. In that event, the attorney may also permit the entity to pay a referral fee to an attorney from outside the entity who refers a client to the entity, unless the attorney who owns or controls the entity knows that a referring attorney is forbidden by Rule 1.7 or other law from accepting a referral fee or is not obtaining the necessary consent from the referring attorney’s client.

(10-25)