Illinois bill would effectively ban alternative business structures as approach to outside investment in law firms

Illinois legislators introduced identical bills in both chambers (SB3812 and HB5487) on February 6, 2026 that would amend the state’s Attorney Act to prohibit a “private equity group,” “hedge fund,” or entities “owned, operated, or controlled by a private equity group or hedge fund, including management services organizations, that is involved with a law firm or an attorney's practice” from:

• Interfering with the professional judgment of attorneys in representing clients;
• Exercising control over or being delegated the power to own or determine the content of client records, select, hire, or terminate the employment of attorneys or allied legal staff in whole or in part based on competency or proficiency, or setting competency or proficiency parameters for attorneys or allied legal staff; or
• Charging any fee to the attorney or law firm that is directly or indirectly based on the fees, revenues, or profits of the attorney or law firm.

The bills would also prohibit attorneys from directly or indirectly sharing legal fees with “an out-of-state alternative business structure” (ABS) unless:

• The attorney is also licensed in the state in which the alternative business structure is approved,
• The fees are compensation for providing legal services in that state, and
• The law of that state is controlling under the Illinois Rules of Professional Conduct or a successor rule.

Potential ramifications for the ABS Law Firm model

As noted in a previous DLA Piper alert, the ABS Law Firm model is true non-lawyer investment in, and ownership of, law firms. It permits private investors to share directly in fees earned by the firm and allows them to participate in the management of and direction of the firm’s business on a macro level, without impinging on lawyers’ professional judgment or ethical obligations in individual cases.

The Illinois law, if passed, would generally make it challenging for ABS law firms formed in other states to hold financial relationships with lawyers or law firms practicing in Illinois. The Illinois bills are similar to California’s AB 93, passed in late 2025, which provides that “[n]o attorney licensed or otherwise authorized to practice in [California] shall share legal fees directly or indirectly with an out-of-state alternative business structure[,] unless” the attorney is also licensed in the state where the ABS Law Firm is approved and the fees are compensation for the provision of legal services in that state. (Emphasis added.) These laws remove potential workarounds that might otherwise enable ABS law firms to receive revenue from legal work performed in these states, such as via referral fees.

Potential ramifications for the MSO model

The Managed Services Organization (MSO) model, in contrast to the ABS Law Firm model, is not true non-lawyer ownership of law firms. Rather, it carves out the non-legal parts of a law firm and channels outside investment into those parts only. To adopt the MSO model, a law firm restructures into two entities. One entity, the “core” law firm, continues to be owned entirely by lawyers, exclusively practices law, and receives legal fees. Another entity, the MSO, is owned by investors, entrepreneurs, or others (lawyers or non-lawyers) and absorbs essentially all non-legal business infrastructure previously handled by the law firm.

The Illinois bill does not ban the MSO model in the state and, at first glance, seems to track existing ethical requirements limiting fee sharing and control over legal decisions and client relationships in a manner that would not fundamentally change the way MSOs can be implemented in Illinois. After all, MSOs are intentionally designed to avoid running afoul of those ethical requirements.

However, the Illinois bill contains language that, if not revised during the legislative process, could create some uncertainty for MSOs. For example, the bill focuses exclusively on “hedge funds” and “private equity groups” – it does not address relationships between law firms and MSOs owned by other non-lawyer investment vehicles. That detail could potentially expose the bill to challenge that it discriminates against certain types of investment vehicles but not others.

On the other hand, the definitions of “hedge fund” and “private equity group” are arguably broader than the ordinary meaning of those terms in day-to-day parlance. Thus, although the bill appears to focus on hedge funds and private equity groups, the breadth of those definitions could cause it to apply to other types of investments as well.

In addition, the Illinois bill would prohibit an MSO from “[c]harg[ing] any fee to the attorney or law firm that is directly or indirectly based on the fees, revenues, or profits of the attorney or law firm.” This provision appears intended to capture fee formulas that tie compensation for MSO services (such as marketing or technology support) to changes in a law firm’s revenues. However, in practice, the use of the words “directly or indirectly based” could be construed to encompass a broader swath of fee payments – perhaps to the point where any sort of fee payments from a law firm to an MSO could be prohibited.

Further, the Illinois bill focuses on prohibiting MSO influence over attorney hiring and termination based solely on an attorney’s “competency or proficiency.” This narrow focus seems to permit MSOs to exercise attorney hiring and firing decisions as long as they are based exclusively on other factors, such as the firm’s financial performance or human resources issues. Of course, professional ethics rules – which apply independently from the proposed Illinois bill – might pose additional restrictions on the MSO’s ability to influence those types of decisions.

Finally, the bill would prohibit contracts between law firms and MSOs that limit the attorneys from “disparaging or commenting on that law firm or practice as to any issues involving quality of services, ethical or professional challenges in the practice of law, or revenue-increasing strategies employed by the private equity group, hedge fund, or any entity owned, operated, or controlled by a private equity group or hedge fund, including management services organizations.” For example, if an attorney at an MSO-aligned firm argues that the quality of services has decreased as a result of the MSO arrangement, the MSO cannot require the attorney’s silence on the matter. Such a non-disparagement clause specifically focused on critiques of the MSO model itself may not ordinarily be prohibited by professional ethics rules.

Conclusion

While the Illinois bill has not yet become law, its introduction could make the MSO model preferable for outside investors looking to diversify into the legal market. DLA Piper will continue to monitor the progress of this bill and report on any important developments.