New York State Bar Association
Compensation by law firm, third-party payments
Committee on Professional Ethics
Opinion 934 (9/7/12)
Topic: Compensation of lawyer by law firm; third-party payments
Digest: A law firm may compensate a partner, associate or counsel by making a payment directly to the lawyer or to a professional services corporation as described in Article 15 of the New York General Business Law. A professional services corporation for the practice of law may not have non-lawyer shareholders. Consequently, a law firm may not pay a lawyer’s compensation to a subchapter S corporation with non-lawyer shareholders. A law firm may make payments to a third party at the direction of the lawyer, as long as it does not treat such payment as payment for legal services. Thus, the firm may make payments to a Subchapter S corporation with non-lawyer shareholders, but neither the law firm nor the Subchapter S corporation may mischaracterize the payments as compensation for legal services.
Rules: Rules 1.0(h), 1.5(g), 5.4(a) and (d), 8.4(c).
 May a lawyer who has withdrawn as a partner in a firm, and who remains of counsel to the firm, receive compensation for the lawyer’s legal services by check from the firm to a subchapter S corporation in which the lawyer’s spouse is a shareholder?
 Under Article 15 of the N.Y. Business Corporation Law, N.Y. Bus. Corp. Law § 1503, a New York lawyer, whether practicing as a sole practitioner or in a law firm, may practice law as a professional services corporation. See also Rule 1.0(h)(defining “firm” or “law firm” to include a professional corporation).
 Under § 1503 of the Business Corporation Law, however, a non-lawyer may not own any interest in a professional services corporation authorized to practice law. Thus the subchapter S corporation in this inquiry is not a professional services corporation authorized to practice law. See also Rule 5.4(d)(lawyer shall not practice with or in the form of an entity authorized to practice law for profit, if a nonlawyer owns any interest therein.)  The law firm in this case may have occasion to pay the “of counsel” lawyer either as compensation for legal services rendered or as a return of the lawyer’s capital contribution. If the law firm is willing to make payments to a third party at the direction of an employee — for example to a creditor of the employee or, in this case, to the subchapter S corporation — such a payment would not be prohibited by the Rules. The Rules do not prohibit a law firm from making payments to third parties, as long as they are accounted for properly, and as long as the payment does not constitute an impermissible sharing of a legal fee. Third party payments effectively are the same as payments by the firm to the lawyer with a second payment from the lawyer to the subchapter S corporation.
 The law firm’s books and records may not mischaracterize the nature of the payments made – that is, as compensation to the lawyer (not the Subchapter S corporation) for services rendered or return of the lawyer’s capital contribution. Similarly, the lawyer, as a shareholder of the subchapter S corporation, may not mischaracterize the nature of the payments to the subchapter S corporation as compensation for legal services. See Rule 8.4(c) (a lawyer or law firm shall not engage in conduct involving dishonesty, fraud, deceit or misrepresentation). A payment for legal services would need to be made to the lawyer or a professional services corporation authorized to practice law in which the lawyer practices.
 A law firm may compensate a lawyer who is a partner, associate or counsel to the firm by making a payment directly to the lawyer or to a professional services corporation as described in Article 15 of the New York Business Corporation Law. Because a professional services corporation authorized to practice law may not have non-lawyer shareholders, the law firm may not treat as compensation a payment that it makes to a Subchapter S corporation in which a non-lawyer is a shareholder. The lawyer may direct the law firm to pay over the lawyer’s compensation to a third party, including a Subchapter S corporation with non-lawyer shareholders, but neither the law firm nor the third party may mischaracterize such payment as a fee for legal services.