Arizona’s Alternative Business Structures: Innovation Meets Neighboring Resistance

By Kami Gallagher. 

Introduction

In 2020, Arizona became the first state to officially eliminate its version of Model Rule of Professional Conduct 5.4: Professional Independence of a Lawyer. This rule traditionally bars lawyers from sharing fees with nonlawyers and prevents any nonlawyers from partnership or ownership in a law firm. By eliminating this rule and adding Arizona Supreme Court Rules 31 and 31.1(c), Arizona created the Alternative Business Structure (ABS). Nonlawyers—namely investors, technologists, and other industry professionals—can now partner with lawyers in Arizona if the entity meets ABS requirements.

Compared to over a century of traditional law firm structures, ABSs are still in their infancy. Their structure comes with both risks and benefits to the legal industry. Future obstacles must be assessed, along with the potential value to the legal community and those it serves.

ABS Overview

Section 7-209 of the Arizona Code of Judicial Administration defines an ABS as “a business entity that includes nonlawyers who have an economic interest or Decision-making Authority in the firm and provides legal services.” The format of an ABS typically lends itself to four categories: legal technology services, private equity, legacy ownership, and cross-industry partnerships. The legal technology services category focuses on technological innovation, for example, providing a service that quickly and affordably helps fill out immigration paperwork. The structure is also appealing for private equity investments in mass tort/class action firms, who incur large upfront costs to market to clients, acquire enough cases, and litigate them on contingency terms. Legacy ownership involves awarding ownership to key, nonlawyer personnel (for example, a long-term legal assistant) or heirs. Cross-industry partnerships aim to provide an efficient “one-stop shop,” and may look like a lawyer partnering with an accountant, a social worker, or patent agent. As of the publication of this blog, 151 ABS firms are licensed by the Arizona Supreme Court. Section 7-209 sets out the requirements for the ABS program. 

ABS Risks and Safeguards

With their existence tied directly to the elimination of an ethical rule, it makes sense to consider whether ABSs are more susceptible to the unauthorized practice of law, meaning a non-admitted or disbarred lawyer, or a nonlawyer, improperly engaged in practicing law. In an ABS, this may look like an investor pushing counsel to settle (or not settle), or blurred lines between the advice of an accountant partnered with a lawyer. One concern is that ABSs will operate without utilizing Arizona attorneys to practice law or serve Arizona residents. Another possible effect is that ABSs may crowd out smaller law firms who cannot compete with investor-provided capital.

However, deeming ABSs a bad idea for these reasons alone misses the broader picture. ABSs are subject to more stringent regulation than traditional law firms. An ABS cannot simply register for a business license like a traditional firm can. ABSs must apply to, be approved, and be monitored by the ABS Committee. Where traditional firms do not have to disclose their lenders, ABSs must disclose any person who has greater than a 10% ownership interest in the firm or the right to exercise decision-making authority. These “Authorized Persons” must undergo checks for credit history, criminal history, and civil liability, among sixteen other requirements, down to whether they “engaged in conduct evidencing that they are incompetent or a possible source of injury…to the public.” 

ABSs must also have a Compliance Lawyer, who is a member of the Arizona State Bar and ensures the company operates in accordance with the ABS requirements. The company is explicitly required to conduct internal audits, which the ABS Committee can request. Additionally, an ABS must re-apply every two years and can face civil penalties up to $1,000,000 for misconduct. The Committee submits annual reports to the Arizona Supreme Court which include any charges or complaints against license holders, discipline imposed, and future recommendations for the program.

Future Obstacles for and Value of ABSs

As stated on the Arizona Judicial Branch’s website, the purpose of the ABS program is to “improve access to justice and the delivery of legal services.” The initial recommendation for the ABS concept came from a report by the Task Force on the Delivery of Legal Services which noted, among other findings, that 86% of low-income Americans did not receive adequate help for their legal problems in 2017. Notably, ABS applicants must demonstrate how they will advance at least one of the program’s objectives. These goals include access to legal services, innovation or investment to support the delivery of legal services, specific instances of nonlawyer ownership (an example listed is “nonlawyer law firm employees of 10 or more years”), and multidisciplinary ownership for providing coordinated legal and non-legal services. 

There are no reports detailing how effectively these goals are being met, as ABSs have only been allowed to operate for a few years. Still, an ABS cannot be licensed without declaring which goal it advances. Unlike traditional firms, where goals are only subject to internal oversight, an ABS receives feedback from the Committee on its operation.

With such a noble cause behind its creation, one would expect to see Arizona’s ABS framework adopted, rather than attacked, in other jurisdictions. However, on October 10, 2025, California’s governor signed Assembly Bill 931 into law. Effective for contracts entered into as of January 1, 2026, the law prohibits California lawyers from sharing fees with “an out-of-state alternative business” (though this restriction is stated as “until January 1, 2030”). The law includes narrow exceptions, but it effectively blocks the way an ABS would participate in California’s legal market—with California attorneys through a contingency-fee co-counseling arrangement on a California matter. Some praise this action as protecting consumers from “deceptive practices.” However, others are skeptical of who truly benefits from California guarding its legal market at the possible expense of innovation, accessibility, and affordability for consumers of legal services.

Conclusion

California’s legislation is by no means a death sentence for Arizona ABSs. Yet, depending on the mindframe of other jurisdictions, it’s possible similar anti-ABS measures could arise. In this tension, ABSs must be analyzed in their full scope. While potential risks exist, so does strong regulatory oversight. And if this business structure creates stronger legal service providers who are able to serve more clients, it would be in the legal community’s best interests to embrace, rather than resist, Arizona’s ABSs.