Everything Old Is New Again: Why Law Firm MSOs Fit Comfortably Within Existing Ethics Rules

Introduction

The business of law is evolving. Today, management services organizations (MSOs) for law firms are becoming an increasingly attractive tool to allow lawyers and law firms the ability to leverage outside investment and support.¹ Investors exploring these models are enticed by the promise of professionalized operations, scalable technology, data infrastructure, human resources (HR) and payroll efficiencies. Lawyers and law firms are interested in the ability to access outside capital and logistics support through a parallel, nonlawyer-owned entity.

These structures raise obvious ethical questions: Can lawyers partner with an MSO? Can they invest in one? Can an MSO participate in revenue? Can an MSO hire, discipline or evaluate lawyers? And where is the line between legitimate administrative services and the unauthorized practice of law?

Bar associations and state ethics committees have – implicitly and explicitly – answered these questions in various ways. The newest opinion on the subject, Texas Ethics Opinion 706, tackles these questions head on and concludes that an MSO model can be permissible so long as it is structured within the Rules of Professional Conduct. (See Holland & Knight's previous article, "Restructuring Law Firms Through Management Service Organizations," July 10, 2025.) However, the basis for this analysis has a much more storied pedigree. For decades, ethics authorities across the country have examined substantially similar arrangements under different names such as professional employer organizations (PEOs), employee-leasing companies, HR outsourcing firms and law-related services companies. Those opinions track the same core issues raised by MSOs today: maintaining professional independence, avoiding fee-splitting, protecting client confidences, managing conflicts and ensuring truthful communication about the nature of the law firm.

Taken together, this body of authority shows that partnerships between law firms and MSOs are not brand-new structures requiring brand-new rules. Instead, they are a modern tool in a time-honored industry of outsourcing and co-employment arrangements. These arrangements have been addressed by regulators and ethics authorities for decades, and the principles that made PEOs permissible (with guardrails) apply with equal force to MSOs. This Holland & Knight article traces that history, summarizes MSO-specific opinions and distills common principles for structuring a compliant law firm/MSO partnership.²

Before diving in, it is worth defining what an MSO is – and is not. An MSO is, effectively, a management company. MSOs first arose in the medical industry. There, a physician would retain and exercise control over the professional aspects of the relevant practice, such as diagnosis and treatment or the hiring and termination of providers. The MSO, which is generally owned by outside investors, would provide all of the administrative services and nonprofessional personnel needed to support the practice, pursuant to a long-term management services agreement (MSA). Likewise, for a law firm, the MSO would acquire and manage substantially all of the firm's back-office assets while preserving and safeguarding the independence of the law firm entity and its lawyers.

I. Historical Foundation: PEOs, Employee Leasing and Outsourced Operations

Long before the lawyers and law firms talked broadly about MSOs, they asked about other third-party relationships, including outsourcing back-office operations and staffing to nonlawyer-owned companies. Beginning in the late 1980s and early 1990s, ethics committees in New Hampshire, Michigan, Connecticut, North Carolina, Texas, the District of Columbia, Colorado, Ohio and New York were confronted with variations of the same question: May a law firm work with a nonlawyer entity to employ, lease or manage lawyers or staff?

Across jurisdictions, the answer was generally yes, but with conditions.

New Hampshire (1989)

The New Hampshire Bar Association Ethics Committee Formal Opinion was early and influential in permitting a law firm to lease some or all of its lawyers from a nonlawyer-owned employee-leasing company.³ The arrangement was allowed so long as: 1) the leasing arrangement was clearly disclosed to clients where necessary, 2) lawyers retained complete independent judgment, 3) there was no fee-sharing with the leasing company, and 4) the firm implemented procedures to safeguard confidentiality, avoid conflicts and maintain compliance with the Rules.

Michigan (1998)

The Michigan State Bar Ethics Opinion approved the use of temporary and "leased" lawyers, emphasizing that the firm must maintain full control over the practice of law, supervise all lawyers, avoid conflicts and ensure no fee-splitting with the leasing entity.⁴ The opinion recognized that such arrangements could present challenges, especially around conflicts and confidentiality, but insisted they were manageable with appropriate oversight.

Connecticut (2002)

The Connecticut Bar Association Committee on Professional Ethics Informal Opinion addressed the use of a PEO that "co-employed" law-firm personnel.⁵ It held that the arrangement was permissible so long as the PEO did not interfere with legal judgment and so long as the firm took reasonable steps to protect professional obligations, including client confidences.

North Carolina (2003)

The North Carolina State Bar Formal Ethics Opinion addressed PEOs in a 2003 opinion,⁶ finding that PEOs are not prohibited and do not violate Rule 5.4 if they do not control, seek to influence or interfere with the professional judgment of the lawyers, as well as avoid any form of fee-splitting with non-lawyers.⁷

Texas (2005)

The Supreme Court of Texas Professional Ethics Committee Opinion approved the use of an employee-leasing company for HR and payroll functions, with familiar caveats⁸: 1) the law firm must retain exclusive control over legal work and over employment decisions involving lawyers, 2) the leasing company cannot improperly access client information and 3) fees cannot be tied to the firm's revenues.

District of Columbia (2001)

The D.C. Bar Ethics Opinion permitted law firm HR outsourcing to a PEO, again conditioned on preserving independent professional judgment and preventing the nonlawyer entity from engaging in the practice of law.⁹

Colorado (2007)

The Colorado Bar Association Ethics Committee Informal Letter Opinion Abstract approved law firms' use of PEOs for employing attorneys and managing HR functions, so long as the firm and attorneys continued to comply with the Rules and the PEO's compensation was not tied to client fees or firm revenue.¹⁰

Ohio (2011)

The Ohio State Bar Association Informal Advisory Opinion was comprehensive, synthesizing the national landscape and expressly approved both 1) law firms contracting with PEOs for staffing and HR functions, and 2) law firms owning and operating PEOs as ancillary businesses, provided that Rule 5.7 ("law-related services") and the professional independence and fee-splitting rules were respected.¹¹

New York (2015)

The New York City Bar Association Committee on Professional and Judicial Ethics issued an opinion finding that it was ethically permissible for a lawyer or law firm to use a PEO's services so long as: 1) the PEO does not interfere with the professional judgment of the lawyers, 2) the PEO did not improperly receive confidential client information, 3) conflicts of interest were avoided, and 4) the PEO was compensated only in ways compliant with the prohibition on sharing fees with nonlawyers.¹²

Law Firms Must Stay in Control

Across jurisdictions, the ethical analysis is remarkably consistent. These arrangements require the law firm to firmly remain at the helm, directing every aspect of legal work and exercising unqualified authority over professional judgment. The outside entity – whether called a PEO, an employee-leasing company, a management company or an outsourcing provider – operates strictly in a supportive role, never crossing into the domain of legal practice and never exerting pressure on the lawyer's decisions. Its function is purely administrative, not advisory, and its compensation reflects that distinction, avoiding any form of fee-splitting that would compromise professional independence. Within this framework, client confidences are treated with the same sanctity as if the lawyers were employed directly by the firm, and conflicts of interest are scrutinized under identical standards. Transparency is paramount: When required, communications about the structure must be candid and accurate, leaving no room for misunderstanding. When these elements align, the entity is not a shadow law firm, but a logistical partner – one that enables operational efficiency without eroding the ethical bedrock of the profession. These principles now serve as the foundation for the ethical analysis governing modern MSOs.

II. The First MSO-Specific Opinions: North Carolina Opinion 2 and Texas Ethics Opinion 706

North Carolina and Texas have explicitly offered opinions on the permissibility of MSOs. Although neither opinion provides an exhaustive analysis of MSOs, they both lay out the doctrinal groundwork explaining why, when structured and maintained properly, an MSO is permissible under the Rules of Professional Conduct.

North Carolina: 2001 Formal Ethics Opinion 2

In its brief 2001 ethics opinion,¹³ the North Carolina State Bar addressed a law firm's proposal that it employ only the lawyers while outsourcing all non-legal functions to a management company, including the employment of all nonlawyer staff.

North Carolina approved the arrangement so long as the management company:

• did not control or influence legal work
• did not access client confidences beyond what was necessary, and
• did not engage in the practice of law¹⁴

While specifically in the MSO context, those conclusions track precisely the previous guidelines that so many ethics committees laid out regarding the use of PEO models.

Texas: Ethics Opinion 706

Texas Ethics Opinion 706, issued by the Professional Ethics Committee for the State Bar of Texas, is the first modern ethics authority to substantively and explicitly address MSOs.¹⁵ The opinion analyzes a nonlawyer-owned, support-services company that provides a bundle of operational services, including marketing, payroll, HR and technology, and proposes to charge law firms a percentage of revenues while also offering lawyers an opportunity to hold equity in the MSO.

The opinion draws two bright lines:

First, Texas concludes that paying an MSO a percentage of the firm's revenues is impermissible fee-splitting with a nonlawyer. Even if the MSO does not practice law and even if the percentage is designed to reflect services performed, tying the MSO's compensation to the firm's legal revenues crosses Rule 5.04(a). This is consistent with every PEO opinion from the last three decades: A nonlawyer entity cannot receive a share of legal fees, directly or indirectly.

Second, Texas also affirms that lawyers may invest in or own equity interests in companies that provide law-related services, including MSOs, so long as:

• the MSO does not provide legal services
• the lawyer's investment does not impair professional judgment
• referrals between the firm and the MSO comply with conflict-of-interest rules
• the lawyer does not engage in indirect fee-sharing through dividends or profit distributions tied to legal revenues

In other words, MSO models can coexist with a lawyer's professional obligations, but professional boundaries must be maintained.

III. MSOs as the Evolution of PEOs: Same Ethical DNA, New Operational Complexity

When the PEO line of opinions is placed side-by-side with the MSO authorities, the through-line becomes unmistakable: MSOs are the next generation of law-related service providers whose permissibility hinges on preserving professional independence and avoiding fee-splitting.

The functional similarities are profound:

• Both PEOs and MSOs provide non-legal operational support, including HR, payroll, information technology (IT), data, finance, marketing and technology services.
• Both operate parallel to the law firm – but not as part of it.
• Both create the possibility of co-employment or shared services.
• Both raise risks around conflicts, confidentiality and supervision.
• Both pose dangers of fee-splitting if compensation is tied to a percentage of legal revenues.
• Both can involve lawyer investment or ownership, triggering Rule 1.7 and 1.8 concerns.

The key difference between PEOs and MSOs is not ethics, but rather operational breadth. MSOs provide broader and more sophisticated services, often across multiple firms and with substantial technological infrastructure. The ethical principles remain the same, however, and the guardrails for compliance remain surprisingly stable.

IV. General Principles for Structuring an Ethically Compliant Law Firm/MSO Partnership

Drawing from more than three decades of authority, the following general principles should guide lawyers, law firms, investors and MSOs in designing compliant structures:

Preserve the Independence of Legal Judgment

The cornerstone of any compliant MSO structure is the absolute autonomy of the law firm in all matters of legal judgment. The MSO cannot hire, fire, evaluate, discipline or control lawyers in ways that infringe on independent professional judgment. Decisions about client representation – including intake, conflicts, staffing, strategy and settlement¹⁶ – must remain with the firm's lawyers. For example, an MSO may recommend workflow tools or staffing models to improve efficiency, or assist with the development or implementation of a law firm's marketing program, but it cannot dictate which attorney handles a case or whether a matter should proceed to trial. Independence is not negotiable; it is the ethical bedrock upon which the entire structure rests.

Avoid Fee-Splitting and Revenue-Based Compensation

Financial arrangements must steer clear of any structure that ties MSO compensation to the firm's legal revenues or profits. MSO compensation must be structured as a flat fee, cost-plus arrangement, per-employee fee, subscription fee or another metric that is not tied to the firm's legal revenues or profits. Percentage-based fees remain the clearest line that lawyers cannot cross. For instance, an MSO might charge a fixed $50,000 per month for administrative support or a per-lawyer fee for HR services. What it cannot do is take 10 percent of the firm's contingency recoveries or bill based on a percentage of the firm's gross receipts. Regardless of how it is structured, the fee should be commensurate with fair market value. This principle ensures that the MSO's financial interest never compromises the lawyer's duty of loyalty to clients.

Maintain a Clear Division Between Legal Services and Law-Related Services

The MSO should provide operational support but not legal services. It may handle payroll, IT, marketing and facilities management, but it cannot provide legal advice or engage in the practice of law. The law firm should remain the sole provider of legal work, and all client-facing legal decisions must flow through the law firm. This bright line prevents the MSO from becoming a shadow law firm and preserves the profession's core identity.

Protect Confidentiality and Data Governance

Client information must remain within the control of the firm. Any MSO access must be limited, necessary and subject to confidentiality and cybersecurity obligations consistent with Rule 1.6. A failure here is not merely a technical lapse; it is an ethical breach that could jeopardize client trust and professional discipline.

Manage Conflicts Thoughtfully

Firms must analyze conflicts arising from MSO relationships the same way they analyze conflicts arising from a PEO and other temporary lawyer arrangements. If lawyers have ownership interests in the MSO, referrals between the firm and MSO may require informed written consent from clients.

Supervise Nonlawyer Personnel

Lawyers must remain responsible for the conduct of nonlawyer personnel performing delegated functions. Lawyers must supervise MSO personnel who perform delegated functions and must ensure that those personnel act in ways consistent with lawyers' professional obligations.

Communicate Honestly About Structure

Firms must describe the law firm/MSO relationship accurately in marketing, engagement letters and client communications. Where required, clients must understand which entity is providing legal services and which is providing business support.

Taken together, these principles form a coherent framework for structuring MSO relationships in a manner that respects ethical boundaries while enabling innovation. They are not aspirational; they are operational guardrails that define the limits of permissible collaboration between lawyers and nonlawyer entities.

Final Thoughts: The Path Forward

The ethics analysis of MSOs is not occurring in a vacuum. It grows out of a long, consistent line of opinions that allowed law firms to contract with PEOs, employee-leasing companies, management companies and other nonlawyer service providers, and is subject to the same set of principles.

North Carolina's 2001 Formal Ethics Opinion 2 and Texas's Ethics Opinion 706 confirm what the authorities have said for decades: lawyers may partner with sophisticated nonlawyer business organizations so long as they preserve lawyer independence, avoid fee-splitting, appropriately protect confidences, manage conflicts and, where required, remain transparent about the structure.

The rise of MSOs may represent an evolution in law firm operations, but they are not a deviation from professional conduct rules. With thoughtful structuring and adherence to well-established guardrails, law firms and MSOs can build partnerships that bring meaningful innovation to lawyers and their clients, without compromising the ethical values of the legal profession.

Footnotes

1 Despite the current increased attention to law firm/MSO partnerships, this type of structure is not new. Such relationships are generally not public, so it is impossible to track the rise of the law firm/MSO relationship, but at least some date back 20 years or more.

2 Although this particular article focuses on the parallels between MSOs and PEOs, such parallels could be drawn between MSOs and many types of law-adjacent activities or other relationships between lawyers and vendors. One obvious example is litigation funding. The last two decades have seen the rise of the business of litigation funding, which also implicates some of the same concerns and ethical issues, with many ethics opinions on litigation funding arrangements centering on, among other things, the same two primary ethics issues: attorney independence and the avoidance of improper fee splitting. See, e.g., New York City Bar Ethics Op. 2018-5; California State Bar Standing Comm. on Prof. Responsibility and Conduct Op. 2020-204; Illinois State Bar Op. 19-02. Indeed, avoiding improper fee splits with third parties and avoiding improper influence by third parties is the subject of many legal ethics opinions over the course of decades. See, e.g., on fee splitting: New York County Lawyers Association (NYCLA) Ethics Op. 697 (1993) (law firm paying a landlord a percentage of gross revenue as rent constitutes an improper fee split); Ohio Adv. Op. 94-8 (June 17, 1994) (splitting a contingency fee on a percentage basis with a nonlawyer private investigator as compensation for the private investigator's work constitutes an improper fee split); Missouri Informal Op. 990019 (1999) (fee arrangement with a nonlawyer that allows the nonlawyer to direct or restrict the lawyer's professional judgment constitutes improper fee splitting); D.C. Bar Ethics Op. 284 (1998) (payments to placement agencies for temporary lawyers must be billed at cost and not as a percentage of fees; fee splitting with nonlawyers is impermissible). Compare with State Bar of Michigan Op. RI-310 (1998) (fair market value payment to vendor is not improper fee split); Virginia Legal Ethics Op. 1712 (1998) (fair market or cost-plus payment to vendor is not improper fee split); South Carolina Ethics Op. 91-09 (1991) (payment of a percentage-based administrative fee to an employee leasing company is not improper fee splitting where the company does not interfere with legal work and the law firm retains full control). See also, on lawyer independence: American Bar Association (ABA) Formal Op. 88-356 (1988) (lawyer's professional independence is preserved when the law firm retains decision-making authority and the vendor does not control or influence legal judgment); New Jersey Ethics Op. 631 (1989) (lawyer independence is preserved where the law firm maintains full professional responsibility and supervision over the temporary lawyer, and the employment agency does not interfere with the lawyer's professional judgment); North Carolina Ethics Op. 365 (1985) (holding that lawyers may compensate a collection agency on a percentage basis for collecting completed, delinquent accounts, provided the agency does not use improper means or exert influence over the lawyer's professional judgment; independence must be preserved in all arrangements with nonlawyer vendors); Virginia Legal Ethics Op. 1712 (1998) (finding that lawyers would be improperly influenced by a third party who has the power to direct or restrict the lawyer's professional judgment). In this moment, where law firm and MSO relationships are under a particularly bright spotlight, it is worth remembering that there are generations of ethics opinions on third-party relationships that largely revolve around the same two ethical issues – preserving the independence of lawyers and law firms and prohibiting improper fee splits. The decades of authority provide a clear road map on how ethically compliant law firm/MSO relationships can exist.

3 New Hampshire Bar Association Ethics Committee Formal Opinion No. 1989-90/2 (July 25, 1990).

4 Michigan Ethics Opinion RI-310 (May 12, 1998). The Michigan opinion cites ABA Formal Ethics Op. 88-356 (1988) for support but also notes at least one earlier opinion that found that "the lack of economic independence of the leased attorney impairs the ability of the attorney to exercise independent judgement on behalf of clients." North Carolina Ethics Opinion 365 (1985). North Carolina Ethics Opinion 365 was overruled in 1991 by North Carolina State Bar Ethics Adopted Opinion RPC 104. See also FN. 12.

5 Connecticut Ethics Opinion 02-08 (June 24, 2002).

6 2003 NC Eth. Op. 6 (July 25, 2003). See also the earlier issued North Carolina State Bar Ethics Adopted Opinion RPC 104 (Oct. 18, 1991), which analyzed "leasing back" attorneys to a firm under the state's former Rules of Professional Conduct. RPC 104 concluded that a written lease back agreement between a leasing company and a law firm, which had the effect of transferring payroll administration and fringe benefit responsibilities to the leasing company, was 1) acceptable, 2) did not constitute sharing legal fees and 3) was not misleading to the public.

7 The authors do not like or prefer to use the outdated term "nonlawyers," but use it here throughout to maintain consistency with the many professional authorities that use the term, including the Rules of Professional Conduct and many other ethics authorities.

8 The Supreme Court of Texas Professional Ethics Committee, Opinion Number 560 (August 2005).

9 D.C. Bar Ethics Opinion 304. This opinion is a particularly interesting one, as it contemplates that all the firm's lawyers would be employed by the PEO.

10 Colorado State Bar, Abstract No. 2007-10.

11 Ohio State Bar Association Committee on Legal Ethics and Professional Conduct ETH 2011-2 (Dec. 2, 2011).

12 NYC Ethics Opinion 2015-1 (February 2015). Note that this opinion is sometimes improperly cited as NYC Ethics Opinion 2014-1.

13 2001 North Carolina Ethics Opinion 2 (Apr. 27, 2001).

14 The approach reflected in this opinion is consistent with Restatement (Third) of the Law Governing Lawyers § 10 (2000), which likewise limits nonlawyers' involvements in law firms to ensure 1) there is no nonlawyer ownership of law firms or control of lawyers, 2) nonlawyers do not practice law and 3) lawyers do not fee share with nonlawyers.

15 Texas Committee on Professional Ethics, Op. 706 (Feb. 2025).

16 Under Rule 1.2, ultimate settlement authority lies with clients.

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