The Rise of Management Service Organizations: How Lawyers and Lawmakers are Responding

Illinois[1] and Colorado[2] recently enacted legislation to limit the ability of non-attorneys, including private equity firms, to acquire ownership interests in law firms. A similar bill has been signed into law in California[3] and will take effect on January 1, 2027. The State Bars of Texas[4] and North Carolina[5] have issued formal ethics opinions on the subject as well.

Why Non-Attorney Ownership is Restricted

Non-attorney ownership of law firms has long been prohibited. While attorneys must uphold strict ethical standards and owe duties of loyalty and care to their clients, investors’ interests may only focus on maximizing returns. Preventing non-attorneys from controlling or influencing law firms is seen as a way to ensure that attorneys’ responsibilities to their clients remain paramount.

The ABA Model Rules of Professional Conduct 5.4 “Professional Independence of a Lawyer” reflects this concern. It states that a lawyer shall not share legal fees with a nonlawyer, form a partnership with a nonlawyer to practice law, or practice for-profit in a professional corporation where a nonlawyer owns an interest therein or is a corporate officer. Rule 5.4(d) states that:

(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if:

1. 1. 1. A nonlawyer owns any interest therein, except that a fiduciary representative of the estate of a lawyer may hold the stock or interest of the lawyer for a reasonable time during administration;
      2. A nonlawyer is a corporate director or officer thereof or occupies the position of similar responsibility in any form of association other than a corporation; or
      3. A nonlawyer has the right to direct or control the professional judgment of a lawyer.[6]

What is an MSO?

To be clear, private equity firms are not directly buying law firms. Instead, law firms are forming “Management Service Organizations”(MSOs), and then selling stakes in the MSOs to investors. MSOs come in many forms and do not always involve a relationship with private equity investors.

Regardless of its form, an MSO does not employ a firm’s attorneys or share in any fees paid for legal work. Rather, it is a separate entity that can exclusively handle a firm’s non-legal business, such as managing the office space, technology, marketing, human resources, and billing—all while licensed attorneys maintain total ownership of the law firm. The law firm and the investor-owned MSO are intertwined in the business aspects of the practice of law while remaining legally distinct.

Advantages of MSOs

For all the potential conflicts that MSOs may bring, there are also advantages. The investment capital generated by selling a stake in an MSO gives a law firm’s partners liquidity they would not have otherwise. Partners no longer need to wait for retirement to receive a return on the investment they have generated for their law firm throughout their careers.

MSOs also take on non-legal administrative tasks, freeing attorneys to focus on legal work. Finally, MSOs address clients’ growing demand for law firms to offer related, non-legal services like consulting and compliance services, subject to ABA Model Rule 5.7[7] in jurisdictions that have adopted it.

The Debate Over MSOs

Given these benefits and consequences, it should come as no surprise that there has been extensive debate among attorneys about the desirability and ethics of MSOs. On one hand, an MSO would take over a large amount of administrative work that most attorneys hope to avoid because it  takes  time away from serving clients. An MSO could also bring in dedicated professionals to handle the business and managerial aspects of a law firm that is often handled by attorneys with no such training.

On the other hand, a private equity firm might use its leverage as part-owner of an MSO to encourage attorneys to offload supposedly routine legal work to non-attorneys. Equity partners cashing out via an MSO might effectively close the door to future equity partners as well. A sudden influx of cash to a law firm might also allow and even encourage the firm to take on especially risky (i.e., weak) cases because it can now afford to cover the upfront costs.

State Laws Addressing MSOs

Impact on Pending and Existing MSO Deals

California’s bill will likely impact a proposed transaction involving Wood Smith Henning & Berman, a California insurance defense firm with over 500 lawyers, assuming the deal is executed after the bill takes effect.[10] Sometime in August 2026, the firm purportedly signed a letter of intent with the private equity firm Charlesbank Capital Partners to form an MSO.

It may also impact the operations of Rimon PC, a San Francisco-based firm that pioneered the use of MSOs in a 2019 deal with the private equity firm Alpine Investors. McDermott Will & Schulte of Chicago is reported to be exploring an MSO as well, which would, of course, implicate 705 ILCS 205/13 discussed above.

Key Takeaways

Regulations such as these aim to strike a balance between allowing for the expected operational benefits of MSOs, while checking potential ethical violations these arrangements might cause through interference with the attorneys’ professional judgment.

The primary concerns of these states in regulating MSOs are the protection of client privacy and the prohibition of non-attorneys exerting control over attorneys and their cases.

A law firm could still pay an MSO a fixed fee for handling non-legal tasks and allow partners to profit sooner and more directly from the business they have developed. At the same time, those fees cannot be tied to any attorney’s or the law firm’s performance, and the law firm’s duties to the client remain paramount.

[1] 705 ILCS 205/13 (eff. Aug. 07, 2026)

[2] C.R.S. 13-93-405 (eff. Aug. 12, 2026)

[3] CA Assembly Bill 2305 (signed Sep. 20, 2026, eff. Jan 1, 2027 as Cal. Bus. & Prof. Code § 6134)

[4] TX State Bar Ethics Opinion 560 and 706

[5] NC State Bar 2001 Formal Ethics Opinion 2; 2003 Formal Ethics Opinion 6

[6] ABA Model Rules of Professional Conduct, Rule 5.4(d)

[7] ABA Model Rules of Professional Conduct, Rule 5.7: Responsibilities Regarding Law-Related Services

[8] ABA Model Rules of Professional Conduct, Rule 5.4(b) “A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.”

[9] CA Assembly Bill 2305 6134(a)

[10] CA Assembly Bill 2305 6134.14 (“This article shall only apply to contracts entered into on or after January 1, 2027.”)