Legal & Regulatory Evolution of Alternative Business Structures (ABS) in U.S. Jurisdictions—2025

I. Overview & Context

Alternative Business Structures (ABS) are entities that offer legal services and permit non‑lawyers to own, manage, or share in profits—directly challenging the prohibition under ABA Model Rule 5.4. Current U.S. jurisdictions with active ABS frameworks include:

Arizona – First U.S. state to abolish Rule 5.4 restrictions via Supreme Court rule change in 2020, fully effective 2021.
Utah – Operates a “regulatory sandbox” since 2020, extended through 2027.
District of Columbia – Permits non‑lawyer ownership under limited conditions since 1991, but without an ABS scheme.
California, Massachusetts, Georgia – Incremental reforms; do not permit non‑lawyer ownership but allow limited fee-sharing with nonprofits .

This review examines statutory, administrative, regulatory, judicial, and bar-level developments within Arizona and Utah from 2024 to June 2025, highlighting themes around eligibility, licensing, compliance, reporting, ownership models, and ethical oversight. Also included is coverage of national and multi-jurisdictional implications.

II. Arizona

A. Regulatory Updates (2024–2025)

Licensing Milestone On September 25, 2024, the Arizona Supreme Court expanded the ABS program by approving seven new entities—including accident law firms and a Rocket Lawyer unit—raising the total to 101 licensed ABS entities .
KPMG Entry (Feb 2025) By February 2025, KPMG became the first Big Four accounting firm granted an Arizona ABS license, authorized to offer basic legal services (e.g., contract review), albeit not high-stakes litigation .
ABS Oversight Structure ABS entities require:
- At least one Arizona‑licensed attorney designated as “compliance lawyer” .
- Mandatory malpractice insurance, background checks for non‑lawyer owners, and regulation under the Arizona Rules of Professional Conduct .
- Complaints are processed akin to matters against lawyers, via the Arizona State Bar .
Ethical Issues and Scrutiny Despite the success in licensing volume, concerns over outside investment surfaced. Example: Phoenix-based Scout Law Group, partnered with private equity firm 777 Partners, encountered funding default, sparking litigation and bar scrutiny. The ABS committee continued licensing renewals with minimal delay, prompting calls for enhanced vetting .

B. Statutes / Court Rules

Arizona Supreme Court SCR 31–39, repealing Rule 5.4 and implementing ABS licensing and supervision manuals—unchanged in 2024–2025.
No additional statutory amendments during the review period.

C. Administrative Rulings & Guidance

Arizona Administrative Office of the Courts Optional ABS manuals (2024‑25) elaborates application procedures, annual reporting, compliance enforcement, and discipline protocols.
Background checks and insurance thresholds for non‑lawyer owners made explicit; bar investigators may audit ABS agreements for ethical compliance.

D. Bar Association Positions

Arizona Ethics Commissions generally supportive; noted increase in legal innovation and consumer access.
Criticism emerged from some traditional personal injury lawyers and the Phoenix Bar, cautioning against prioritizing profit and raising consumer protection concerns.

III. Utah

A. Regulatory Scope & Restructuring

Sandbox Extension & Restriction (Mar 2025) Utah Supreme Court revised sandbox criteria—exiting ~27 licensed participants as of March 2025—narrowing focus strictly to initiatives serving underserved Utah consumers. Models offering only profit-sharing with non-lawyers were excluded .
Reporting & Compliance Intensified Sandbox participants must now provide data on client demographics, cost reduction, and service innovation. Additional licensing terms: deliverable-based pricing, restricted advertising channels, and empirical proof of consumer benefit.
Participants Statistics As of June 2024, Utah had authorized ~43 entities. Post-March 2025 regulations have reduced the number to approximately 16–20 active participants, all focusing on tech-enhanced access, domestic violence services, or medical-debt representation .

B. Statutory Authority & Rule Changes

Utah R. Civ. P. for Licensed Paraprofessionals & ABS Sandbox Rules, Utah Sup. Ct. Order (2020, amended Mar 2025).
No legislative act; program administered entirely under Supreme Court authority.

C. Administrative & Court Guidance

Utah Supreme Court March 2025 letter to Innovation Committee formalized exit criteria, ethical scope (Rule 5.3 supervision, Rule 1.18 disclosures).
Emphasis was placed on guardrails preventing misuse (e.g., “permission to advertise” vs. actual service delivery).

IV. Multistate & National Developments

A. ABA & Model Rule Reform

APRL Proposal (Dec 2024): Association of Professional Responsibility Lawyers submitted to ABA a recommended modernization of Model Rule 5.4, permitting fee‑sharing under conditions:
- client written consent;
- supervision of non-lawyers;
- continued lawyer professional judgment;
- reasonable fees .
The ABA has not yet adopted changes; reaffirmed its 2022 Resolution 402 upholding prohibition.

B. Other States & Legislative Proposals

California AB 931 (Apr 2025): Unanimously passed Assembly; now in Senate. Seeks to curb fee-sharing with non-lawyer owners/entities and restrict PE and large accounting firm access—direct response to AZ ABS expansion .
Indiana (Oct 2024): Supreme Court created an exploratory committee to recommend sandbox structure by March 1 2025 .
Washington State & Texas: Regulatory committees exploring similar models; Texas Ethics Committee Opinion 704 (Apr 2025) held Texas lawyers cannot join non‑lawyer‑owned ABS even if licensed in D.C./AZ/UT .

C. Judicial Decisions

No published appellate court rulings specifically overturning or materially interpreting ABS programs during this period.

V. Comparative Analysis: Arizona vs. Utah

Feature	Arizona ABS	Utah Sandbox
Ownership	Permanent non-lawyer ownership; full fee-sharing allowed	Sandbox limited to 2027; ownership models vary by license
Eligibility	Applicants vetted without service-focus requirement	Must demonstrate service to underserved communities
Licensing volume	101+ licensed as of Jan 2025; continued growth	Approx. 43 participants mid‑2024; trimmed to 16–20 as of Mar 2025
Compliance	Compliance lawyers, insurance, background checks	Heightened reporting obligations; exit protocols
Scalability	Strong interest from private equity, Big 4, national companies	Focused on public-interest models; complex participant renewal
Criticism	Funding defaults (e.g., 777 Partners) prompt enhanced scrutiny	Lower scale limits exposure; success metrics tracked

VI. Key Legal Language & Citations

Arizona SCR 31(f): “An Alternative Business Structure must designate an Arizona‑licensed lawyer as compliance counsel…”
Utah Order March 2025: “Participants shall demonstrate service to underserved Utah consumers; those who do not shall be terminated effective 30 days” .
APRL January 2025: “Lawyers would be required to obtain client consent, in writing, when sharing fees with external non‑lawyer entities” .

VII. Pending Legislative and Rule Proposals

California AB 931 (Senate review): Would prohibit non-lawyer fee-sharing with entities that have non-lawyer owners, effectively challenging the AZ ABS model across state lines .
Indiana Sandbox Rule: Committee report due March 2025; no licensing yet.
ABA Rule 5.4 Modernization: APRL model submitted; no ABA adoption yet.

VIII. Implications for Stakeholders

Private Equity & Law Firm Investors

Arizona offers a scalable, permissive ABS regime with growing PE and Big Four interest but demands diligence—due diligence is critical, as evidenced by the 777 Partners incident.
Utah’s model is lower volume but provides guardrails favorable for mission-driven investments in access-to-justice services.

Law Firms

ABS licensing offers new avenues for capital infusion, multidisciplinary integration, and improved operational scalability.

Ethics Oversight

Both models depend on compliance counsel, malpractice insurance, and supervisory obligations—raising questions on enforcement consistency.

Consumers & Access to Justice

Early data suggest improved affordability and innovation (e.g., tech-enabled services, fixed fees), especially within Utah’s mandated public-interest lens.
Watch for unintended consequences: profit-driven funding models risk ethical misalignment if oversight lapses (e.g., advertising misuse or investor influence).

IX. Conclusion & Strategic Considerations

From 2024 to mid‑2025, U.S. ABS frameworks have entered a phase of tangible growth and scrutiny:

Arizona continues leading with the highest ABS licensing volume and entry of major players.
Utah shifts toward quality-focused participation, limiting ring-fencing of underserved service.
National trends include ABA rule reform proposals and contrasting interstate legislative initiatives.
Investor focus must balance rapid expansion opportunities with compliance and reputational risk management.

ABS represents a transformative shift in legal market dynamics. Jurisdictions will need to refine oversight models and data transparency to reconcile innovation with core legal ethics. Cross‑state developments like California’s AB 931 could shape national trajectories.

References

The rule change that could blow open US law, Financial Times, 2025.
A lawyer dreamed of disrupting the legal industry with private equity. It turned into a nightmare., Business Insider, June 2024.
Push by private equity and Big Four into law sparks California backlash, Financial Times, 2025.
Another US state joins legal services reform push, citing lawyer shortage, Reuters, October 2024.

Published by ABSFirms.com | June 2025

Alternative Business Structure ABS Law