The alternative business structure (ABS) for law firms offers additional opportunities to expand access to justice for underrepresented communities. It encourages innovation in the way law firms operate. ABS gives attorneys ownership of law firms, allowing them to combine efforts with private equity. Read on to understand alternative business structures and their meaning for your law practice.
Understanding Alternative Business Structure (ABS)
An Alternative Business Structure (ABS) is a partnership between lawyers and possibly non-lawyers. It’s an alternative instead of an LLC or PLLC. This structure has been around in the United Kingdom since 2007 but is new in the United States.
Arizona was the first state to legally create this business entity in 2022, although other states are primed to follow. According to the Arizona Supreme Court, the ABS structure is “rooted in the idea that entrepreneurial lawyers and nonlawyers would pilot a range of different business forms.”
Obtaining an ABS license means your non-legal organization is allowed to provide legal services. This allows law firms to be managed by non-lawyers and to offer more than just legal services. One of the biggest attractions to creating an ABS is that it enables your firm to have outside investors and combine forces with various professionals.
The two main aspects of ABS are non-lawyer funding (i.e., investors) and that it allows an ABS to offer different services within the same business structure. For example, the increasing popularity of co-op legal service firms is a perfect example of the alternative business structure in action.
An ABS primarily practicing real estate law could offer mortgages and insurance services, conveyancing, and even have a real estate agency as part of one business. Likewise, the company could offer legal advice while providing legal services for will writing, employment law, probate, and personal injury, as well as family law and divorce.
One of the main purposes of ABS law firms is to provide greater access to the justice system. At the same time, they offer more opportunities for people with diverse backgrounds to participate in the legal services industry.
Common working arrangements of an ABS can include:
- An established lawyer-owned firm can convert to an ABS to take on a non-lawyer partner.
- An established law firm converts to an ABS so that a non-lawyer manager can become a co-owner.
- A lawyer sets up a law firm with a non-lawyer partner or co-owner.
- A non-legal business sees legal services as complementary and sets up a standalone business.
- A group of lawyers decides to secure outside investors and build a co-op legal service with other services offered within the business.
Pros and Cons of an ABS for Law Firms
There are pros and cons to an alternative business structure for law firms. Here’s what you’ll want to consider.
- Offering multiple services in one location can increase customer trust and loyalty
- ABS firms can offer lower prices for legal costs
- Get an edge over competitors
- With multiple services, there are also more opportunities for growth for investors
- Possibility of better employee retention and a better business environment
- Strengthen management with a broader range of talent
- Enabling family share ownership as part of a tax-planning strategy
- ABS firms may have difficulty in expanding overseas as some foreign countries don’t recognize the ABS structure
- Some worry that ABS firms may drive out smaller firms with fewer options for customers
- There’s a risk for an ABS if non-lawyers underestimate the obligations of solicitors, such as regulatory compliance
How to Apply for an ABS License?
Applications for an alternative business license are state-based. You can only apply for an ABS license in Arizona, although the ABS business structure has existed for years in the United Kingdom and Australia. Florida and other states may follow Arizona in the coming years.
You can apply for an ABS license with the Arizona state judicial branch. You must apply for an alternative business structure with the Arizona Supreme Court by mail, email, or in person. They are not currently accepting online applications. Every application for an ABS license must be accompanied by an application fee in the form of a check payable to the Arizona Supreme Court for $6,000 or a money order for the same amount. You can email your application to ABSProgram@courts.az.gov.
Applications and checks can be mailed or dropped off at:
Arizona Supreme Court
1501 W. Washington St., Ste 104
Phoenix, AZ 85007.
You can find the initial application here. You will also need to fill out a designated principal application, a compliance lawyer application, and an authorized person application for individuals or entities. The business must also pay an annual renewal fee with a renewal application.
How Much Does an ABS License Cost?
The alternative business license through the Arizona Supreme Court costs $6,000. The renewal fee is $3,000.
How Is the Approval of an ABS License Obtained?
In addition to an application and application fee, an alternative business structure must meet compliance requirements. First, according to Arizona law, Section 7-209, when determining whether to grant ABS licenses, the licensing committee is to take into consideration “the following regulatory objectives: (A) protecting and promoting the public interest; (B) promoting access to legal services; (C) advancing the administration of justice and the rule of law; (D) encouraging an independent, strong, diverse, and effective legal profession; and (E) promoting and maintaining adherence to professional principles.”
In addition, as an entity that is part of the legal profession in Arizona, it must meet all rules that govern the legal profession in the state. For that reason, the ABS applicant must demonstrate that it has implemented policies and procedures that ensure compliance with these rules, and full compliance with all state rules with a specialized compliance lawyer within the company.
Creating an Alternative Business Structure
Creating an ABS can open many business opportunities and offer greater services to clients. However, legal compliance and filing can be a lot of work, along with getting an EIN and opening a business bank account. Get doola so you can focus on building the business. And once you’re up and running, get doola books for stress-free bookkeeping!
What are the prerequisites for an ABS Compliance Lawyer?
An ABS compliance lawyer’s duties include ensuring that the ABS complies with requirements, including policies and procedures to prevent nonlawyers in the business from interfering with lawyers’ ethical duties to clients. This is outlined in code 7-209(G)(3) of the Arizona law.
Who is an “Authorized Person” in an ABS?
An authorized person in an ABS possesses an economic interest in the business, the legal right to exercise decision-making for the business, or make either long-term or day-to-day decisions for the business. This is detailed in Arizona law section 7-209(A).
Can all members of an ABS be non-lawyers?
An ABS must provide legal services. Therefore, at least one member of the ABS must be a lawyer. You need a lawyer to start this type of business.
Is it possible for a disbarred lawyer or an individual who failed the character and fitness process to have ownership or partnership in an ABS?
The lawyer must be in good standing to create an ABS. However, it’s possible that a disbarred lawyer can retain ownership in an ABS, like any other non-lawyer professional or owner. To do this, the ABS will need at least one other lawyer in good standing.
Is it mandatory to disclose the lawyer owners in the ABS application?
The ABS application requires that the firm offers legal services. The compliance lawyer sub-application also requires the name of the compliance lawyer. In the initial application, you’ll also need to provide the designated principal’s full name and all authorized persons’ names.