Getting Licensed as an “Alternative Business Structure” in Arizona
Arizona’s Leading Business Attorneys Explain How To Apply Your Law Firm For An ABS License
The Arizona Supreme Court recently amended the Rules of Professional Conduct, which regulate the legal profession in Arizona, in a major way. Under the new rules, starting in 2021 non-lawyers (individuals not licensed to practice law in Arizona) are now allowed to have an ownership interest in legal partnerships or businesses providing legal services for which a license to practice law would normally be required. This means that investors, entrepreneurs, or other individuals interested in getting into the legal market (but previously barred by licensing requirements and the Rules of Professional Conduct) are now allowed to participate in the providing of legal services in Arizona.
As should be expected in such a highly regulated profession, however, there’s a catch: for an entity owned in whole or in part by a non-lawyer to be allowed to provide legal services in Arizona, that entity must obtain a license from the Arizona Supreme Court to operate as an “Alternative Business Structure.” According to the Supreme Court, this is to ensure that those providing legal services in Arizona are providing them in compliance with the ethical and professional rules governing the legal profession.
The regulation of Alternative Business Structures (“ABS”) is governed by Section 7-209 of the Code of Judicial Administration. Section 7-209 outlines the application requirements for an entity to become licensed as an ABS by the Arizona Supreme Court. Because the new ABS designation (and licensing process) is so new in Arizona, it’s not yet clear exactly how the application process will operate in practice. However, based on Section 7-209 and the Application for License of Alternative Business Structure, here’s what is necessary to get licensed as an ABS.
1. The Entity Needs To Be Authorized By The Arizona Supreme Court To Do Business
Not surprisingly, the Arizona Supreme Court requires that an entity seeking a license to operate as an ABS be authorized to transact business in Arizona. According to Section 7-209 of Arizona’s CJA, “each applicant for licensure as an ABS must . . . submit articles of incorporation and letters of good standing from the Arizona Corporation Commission or otherwise demonstrate authorization to do business in the State of Arizona.” Although the application form for license of ABS shows an option to indicate that the entity is not registered to do business in Arizona, such an answer must be accompanied by an explanation as to why the entity is not registered. It’s unclear at this point what explanations might be sufficient to warrant the issuing of an ABS license to a non-registered entity. In any event, registering to do business in Arizona can be a straightforward process, and it is probably a good idea to register prior to application for an ABS license.
2. The Entity Is Required To Have a Designated “Compliance Lawyer”
As an ABS, an entity is required to comply with the rules and regulations governing any other licensed provider of legal services within the State of Arizona (i.e., licensed attorneys). To that end, the Arizona Supreme Court requires that each ABS have a designated “compliance lawyer,” an attorney in charge of overseeing the entity’s compliance with ethical and professional rules regulating the provision of legal services. Pursuant to Section 7-209, a compliance lawyer shall:
“(1) meet the requirements of Supreme Court Rule 31.1(a)(1) [an active member of the Arizona Bar]; (2) be a manager or employee of the ABS; (3) consent to the designation; (4) not have been subject to discipline by the State Bar of Arizona or any similar agency in any other jurisdiction during the past 10 years; and (5) possess credentials and experience in the legal field to ensure that ethical obligations, protection of the public, and standards of professionalism are adhered to.”
The compliance lawyer is tasked with ensuring compliance by lawyers in the ABS with all ethical and professional responsibilities. Additionally, the compliance lawyer is responsible for ensuring the ABS’s authorized persons and others employed and associated with the ABS comply with these rules, and “do not cause or substantially contribute to a breach” of the regulations governing legal service providers in Arizona.
3. The Entity (And All Authorized Persons) Must Meet Certain Ethical And Other Standards to Be Part Of Arizona’s Legal Profession
According to 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.” As part of these considerations, the ABS, and each authorized person thereof, can expect to be investigated by the committee to determine their fitness to be part of Arizona’s legal profession. Standard questions found on the ABS application form discuss have to do with past acts of the entity, designated principal, compliance lawyer, and any authorized persons. Examples include past criminal conduct, past fraudulent behavior or misrepresentations, loss of or discipline against any professional licenses, and other standard background questions.
4. The Legal Entity Must Have Policies In Place To Ensure Compliance With All Professionalism And Ethical Standards
As an ABS, an entity is part of the legal profession in Arizona. As such, the entity is bound by the rules that govern the legal profession in the state. When applying for licensing as an ABS, an entity must demonstrate that it has implemented policies and procedures that ensure compliance with these rules, and that allow for full compliance with these rules by the ABS’s compliance lawyer. For example, entities applying for ABS licensing must explain how they will comply with Arizona Trust Account Rules, how the business will comply with Arizona’s Rules of Professional Conduct for lawyers, Code of Conduct for Entities and for Owners and Managers, what policies and procedures have been implemented for the protection of client information and confidentiality, what policies and procedures have been implemented for checking conflicts of interest, and what policies and procedures have been implemented to ensure the confidentiality of client records.
5. The Entity Needs To Pay An Application Fee To The Arizona Supreme Court (And a Renewal Fee Every Year)
Finally, every application for an ABS license must be accompanied by an application fee payable to the Arizona Supreme Court in the amount of $6,000. The ABS license must also be renewed annually, and renewal includes a $3,000 renewal fee. Applications will not be considered without the accompanying fee.
6. Contact Experienced Attorneys In Scottsdale To Maximize Your Chances Of An ABS License With The Arizona Supreme Court
Although the new rules allowing for the licensing of entities as ABS in Arizona is considered a step towards less stringent regulation of the legal profession, those entities that obtain ABS status, and the application process relating to ABS status, are still highly regulated by the Arizona Supreme Court. Considering the high level of self-regulating within the legal profession, this is not surprising. Furthermore, since the ABS designation and licensing process is still brand new, it’s very likely that changes to the process will be made as the idea works through its growing pains.
If you are contemplating starting an ABS, or would like to license an existing entity as an ABS, the business attorneys at Denton Peterson Dunn can help you navigate the process to help maximize your chances of successful licensing with the Arizona Supreme Court.
1) For more information view The Arizona Code Of Judicial Administration & 2) The Arizona Supreme Court Application For Initial License Of Alternative Business Structure. 3) According to Section 7-209, an “authorized person” is a person “possessing: 1. An economic interest in the alternative business structure equal to or more than 10 percent of all economic interests in the alternative business structure; or 2. The legal right to exercise decision-making authority on behalf of the alternative business structure. Examples may include: a sole proprietor of a sole proprietorship, a manager of a limited liability company, an officer of a corporation, a general partner of a general or limited partnership, or a person possessing comparable rights by operation of law or by agreement.”