What is an alternative business structure?

An alternative business structure is a law firm with non-lawyers in its management and ownership structure, allowing the firm to involve people who can bring additional skills and experience. The non-lawyer can be a partner or director or involved through investment. The following are some alternative business structure examples:

• A lawyer establishing a law firm with a non-lawyer owner or partner.
• A non-lawyer manager in an established law firm wanting to become a co-owner.
• A lawyer-owned firm wishing to bring on a non-lawyer partner.

Why were alternative business structures an issue?

Any business model that is different from the standard partnership or sole proprietorship classifies as alternative, for example:

• Multi-Disciplinary Partnerships (MDPs): MDPs form when one or more non-legal practitioners partner with one or more legal practitioners. This partnership can provide legal services and non-legal services. For example, providing legal and accounting services from the same office. Ontario, Quebec, and British Columbia are currently the only provinces in Canada that allow MDPs and ILPs.
• Incorporated Legal Practices (ILPs): A corporation is a separate entity from its owner. Combining a professional practice provides the potential for retirement savings, tax breaks, minimizing capital gains by selling private company shares, and protection from legal liabilities. The Ontario Law Society and Business Corporations Act permits licensed paralegals and lawyers to provide legal services or practise law through a professional corporation.

Historically, an ABS wasn’t possible because of the prohibitions against fee-splitting with non-lawyers. Authorities put this deterrent in place in case a non-lawyer’s interest in the fee compromised a lawyer’s independence. Fee-splitting prohibitions also ensured that non-lawyers had no financial interest in swaying the lawyer’s conduct with a retainer or file.

Benefits of an ABS

ABSs can remove many barriers relating to non-lawyers owning or partnering with organizations that provide legal services, offer new opportunities for broader access to justice and innovations, and reshape legal services in the consumer’s interest. Below are some potential benefits of alternative business structures for consumers:

• More choice: Consumers have more flexibility when deciding where to obtain non-legal and legal services.
• Reduced prices: ABS firms realize savings and efficiencies through economies of scale. This can allow consumers to purchase less expensive legal and non-legal services due to the reduced transaction costs where different professionals belong to the same firm.
• Better access to justice: Alternative business structure firms may find it easier to provide services to consumers who are less mobile or live in rural or remote areas.
• Improved consumer service: ABS firms can easily access external finance and specialize in non-legal expertise to benefit consumers.
• More convenient for consumers: An ABS firm can offer services to consumers all in one place, such as auto insurance and legal services for accident claims.
• Increased consumer confidence: ABS firms with a good reputation for providing non-legal services use this as an incentive to improve the quality of legal services and help maintain that reputation.

Here are some potential benefits of ABS for legal service providers:

• Increased access to finance: Without an alternative business structure, legal service providers may face constraints on how much equity, primarily debt equity, they can raise. ABS facilitates the expansion of firms in Canada and into international markets while increasing efficiency with investment in large-scale capital projects.
• Spreads out the risk: The more owners, the less risk for each, which also reduces the required return on investment rate, facilitates more investment, and can deliver lower prices.
• Increased flexibility: ABSs give non-legal businesses, such as banks, estate agents, and insurance companies, the freedom to synergize with legal firms and offer integrated legal and associated services.
• High-quality non-legal staff are easier to hire and retain: Some standard rules for sole proprietorships and partnerships don’t apply to non-legal staff in an alternative business structure. ABS firms can similarly reward lawyers and non-legal teams, making it an incentive for hiring and retaining high-quality staff.
• More choices for legal professionals: Alternative business structures can create more opportunities and contribute to a greater diversity for newer, under-represented legal professionals to enter and remain with a firm.

Challenges of ABS

Some law professionals suggest that creating MDPs, ILPs, or listing law firms on the market presents opportunities for improving ethical practices in law firms. They can achieve this by facilitating the development of new moral practice models in the law business and establishing better models for regulating a law firm’s practice. This can entail ensuring that incorporated firms have an appropriate management system and confirming that they meet professional obligations. Others in the law profession who oppose ABSs raise concerns about three primary issues regarding the legal profession:

• Core values
• Conflict of duty
• Quality of service

Core values

Opponents of alternative business structures fear controversy over the legal profession’s core values. Core values are supposed to protect the client’s interests while guaranteeing the proper administration of justice. The legal profession’s core values include client confidentiality, lawyer independence, and avoiding any conflict of interest. While lawyers have to profit from their services, like other professionals, they operate under the assumption that their objectives aren’t purely economic but more from a professional perspective.

A lawyer’s responsibility to their client is second only to the courts. Any breach of professional conduct undermines the value of their investment and professional existence. Lawyers’ responsibilities, training, and experience temper their private concerns about profit-making. The ABS opposers can’t expect non-lawyers who invest as owners of an alternative business structure not to be in an ethical situation where client concerns are more important than profits, or refrain from influencing the firm’s policies to seek the appropriate return on investment. They may also perceive unregulated non-lawyers as a risk to clients and the administration of justice.

Non-lawyers participating as investors in an ABS can skew the public’s perception and compromise the integrity of the core values. A lawyer’s responsibilities oblige them to accept instructions that may not be profitable, such as legal aid. The client wants to feel confident that their case gets the necessary attention even under these circumstances. If a firm realizes profits, some will doubt if the firm upheld its duty to the court and if the company’s duty to its client prevailed over investors.

The Law Society of Upper Canada had concerns regarding a lawyer’s independence and whether they would be free to interact with, on behalf of, and for their client with efficacy. Questions arise in an ABS environment regarding this concern if the lawyer is only a small part of a large commercial enterprise to which interprofessional dependencies are essential to its well-being. There’s great concern over client confidentiality in the case of publicly listed firms. Securities commissions enforce strict regulations with public companies. For example, a securities commission could access confidential client information during an investigation to implement their general interest and regulatory requirements.

Conflict of duty

Conflicts of duties are particularly concerning with publicly traded alternative business structure models. A lawyer’s primary legal obligation is to the court, followed by a close secondary commitment to their client. However, the director of the ABS firm’s duty is to act in good faith and honestly in the firm’s best interest. Shareholders rely on the director to do just that and can take action when they fall short. It’s not hard to envision a circumstance where a lawyer of a publicly listed firm may find their obligations to their client or the court in conflict with shareholder interests or corporate obligations.

Quality of service

There’s a debate about the possibility of lower-quality service from ABSs. How the law applies to a client’s specific needs may vary considerably depending on the presentation of circumstances. Moving toward commoditization may mean a client receives a service with a more generic approach that doesn’t meet the consumer’s needs. The service may be less expensive for the client but not very useful. The lower cost may also affect the time the lawyer is able or prepared to give the client to explain the offering.