Private equity firms and other sponsors have long sought opportunities to invest in professional services businesses, and the legal industry is now squarely in their sights. For sponsors, law firms represent a large, fragmented, and historically under-capitalized market with attractive growth characteristics. For law firms, the appeal runs the other way: access to institutional capital, operational expertise and scale that few firms can generate from partner capital alone. The obstacle has always been structural. Direct investment in law firms remains restricted in most U.S. jurisdictions due to rules governing attorney ownership and independence. The Management Services Organization (MSO) model has emerged as a potential pathway that lets sponsors deploy capital and law firms access it, provided the structure is carefully designed to comply with those requirements, which vary by state and must be assessed on a jurisdiction-by-jurisdiction basis.
The MSO structure is not new, and that track record matters to both sides of the transaction. It has been used for decades in highly regulated industries, including healthcare, dental, veterinary and accounting services, to separate the delivery of professional services from the business operations that support them. For sponsors, this history offers a proven playbook and a body of operational and governance experience to draw on. For law firms, it offers reassurance that the model has been tested and refined elsewhere, rather than being a novel or untried concept. In healthcare, for example, physician practices often retain ownership and control of the clinical practice while contracting with an MSO to provide non-clinical administrative services, such as finance, human resources, technology, marketing and facilities management.
A similar framework is now attracting attention in the legal industry, and understanding the division of roles is essential for both law firms and sponsors evaluating the structure. Under a typical law firm MSO structure, the law firm remains owned and controlled by licensed attorneys, who exercise exclusive authority over legal services, client relationships, professional judgment and ethical obligations. The affiliated MSO, which may receive investment from a private equity firm or other sponsor, provides administrative and operational services to the law firm in exchange for a fee pursuant to a management services agreement. For the sponsor, the MSO is the investment vehicle and the source of economic return. For the law firm, it is a services provider and capital partner, not an owner or operator of the practice. The MSO does not practice law or interfere with the firm’s professional independence.
For law firms evaluating whether an MSO structure may be appropriate, preparation is critical. Firms should assess their existing corporate structure, governance framework, operational functions and service arrangements to determine which activities may appropriately reside within an MSO. They should also carefully evaluate applicable ethics rules, fee-sharing restrictions and state-specific regulations, which vary by jurisdiction, so that the structure is designed to preserve attorney independence and comply with professional responsibility requirements. Sponsors, in turn, should expect this diligence process and should be prepared to structure the management services agreement, fee arrangements and governance rights in a way that respects those same ethical boundaries. Thoughtful planning at the outset, by both the firm and the sponsor, can help avoid operational and regulatory challenges as the model evolves.
For private equity firms and other sponsors, the MSO model presents an opportunity to invest in the business infrastructure supporting legal services, earning a return through the fees paid for the administrative and operational services the MSO actually provides, without acquiring an interest in the practice of law itself. For law firms, access to institutional capital may provide meaningful strategic advantages, including investments in technology, artificial intelligence, cybersecurity, data analytics, talent acquisition and business development. Additional capital may also facilitate operational efficiencies, geographic expansion, succession planning and acquisitions of complementary businesses where permitted. In this sense, the model is designed to align two distinct sets of interests: sponsors seeking durable, scalable investment opportunities, and law firms seeking capital and operational support without ceding control over legal services.
California has added a statutory development worth watching. Governor Gavin Newsom signed Assembly Bill 2305 on September 20, 2026, a new law aimed squarely at “corporate legal funders” that try to steer litigation. It applies to contracts entered into on or after January 1, 2027, so sponsors and firms with existing MSO arrangements should review their agreements and make adjustments as necessary before the new year.
The statute covers litigation practices, including arbitration and administrative proceedings, so a purely transactional firm likely falls outside its scope, while a full-service firm with a litigation group is covered.
The core rule: a corporate legal funder that interferes with, or tries to influence, an attorney’s independent judgment on litigation strategy, settlement, client selection, discovery or similar calls is treated as engaging in the unauthorized practice of law. The consequences are civil, not criminal. Under new Business and Professions Code Section 6134.12, clients can sue both the attorney and the corporate legal funder for the greater of $10,000 per violation or three times actual damages, along with attorneys’ fees and costs and injunctive or declaratory relief, and the attorneys involved can still face State Bar discipline.
For MSOs, the prohibited conduct includes setting client engagement financial terms and controlling litigation budgeting that may affect case strategy, areas that can overlap with an MSO’s finance role. The statute also bars specific contract terms that: (i) prevent an attorney or client from withdrawing from representation when a nonlawyer engages in the unauthorized practice of law described in the statute (ii) bar public statements or reporting of that conduct, and (iii) impose financial penalties for reporting or resisting it. Any contract provisions that permit or facilitate that unauthorized practice are void and unenforceable.
Who counts as a “corporate legal funder”? The definition is broad by design: any entity, however organized or labeled, whose primary purpose is raising or managing capital and that has an ownership, service, financing or management tie to a litigation practice. Label and corporate form don’t matter. An MSO established primarily to raise or manage capital may therefore fall within the definition even if its agreement describes its role as administrative.
The line that matters for sponsors and firms is primary purpose. An MSO whose job is raising or managing capital looks different, under the statute, from an MSO whose job is running the firm’s back office, such as finance, HR, technology, marketing and facilities. Reasonable people read AB 2305 differently: some see it as codifying rules that already applied, others see real new exposure from the added private right of action. Either way, the practical takeaway is the same: firms and sponsors who can show attorneys are actually calling the shots are well positioned, while those who can’t now face a plaintiff, not just a regulator. For firms and sponsors alike, investment and services arrangements should preserve attorneys’ independent judgment over substantive litigation decisions. The statute also restricts contracts entered into by an entity that a corporate legal funder controls, so a services-focused MSO owned by a sponsor fund should not assume it falls outside the law.
Although the legal industry remains in the early stages of adopting the MSO model, interest continues to grow on both sides of the table: among sponsors seeking new avenues for investment in professional services, and among law firms seeking innovative ways to finance growth while preserving the core principles of the legal profession. As regulatory frameworks evolve and both sponsors and law firms gain experience with these structures, the MSO model is expected to become an increasingly important feature of the legal services landscape.