August 14, 1974
Ethics Opinon 1974-17
SUBJECT: ATTORNEY AND CERTIFIED PUBLIC ACCOUNTANT ASSOCIATIONS
1. May an attorney and a certified public accountant form a partnership or a professional corporation if legal matters are segregated from accounting questions?
2. Assuming an affirmative answer to Question 1, may each draw a salary and share a percentage of net profits?
3. May an attorney employ a certified public accountant on a salaried basis to assist the attorney in tax matters, specifically, in business planning and in preparation of income tax returns?
Questions 1 and 2: No. An attorney and a certified public accountant may not form a partnership or a professional corporation where any activity of their association involves the practice of law.
Question 3: Yes. An attorney may employ a certified public accountant on a salaried basis to assist the attorney in accounting matters, provided the attorney vouches for the work and remains fully responsible for it to his client.
STATUTES AND CANONS
Under Canon 3 of the A.B.A. Code of Professional Responsibility, Ethical Consideration 3-8 and Disciplinary Rule 3-103(A) expressly condemn the practice of law in association with a nonlawyer. EC 3-8 provides in part:
Since a lawyer should not aid or encourage a layman to practice law, he should not practice law in association with a layman or otherwise share legal fees with a layman.
DR 3-103(A) addresses itself to this question as well:
A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
The above quoted provisions apply by analogy to the formation of a professional corporation by an attorney and a certified public accountant; in addition, California Corporations Code §§ 13405-13407 disallow issuance or transfer of stock in a professional corporation to any person other than one licensed to provide legal services. The applicable code provisions follow:
§ 13405: . . . A professional corporation may lawfully render professional services, but only through employees who are licensed persons. The corporation may employ persons not so licensed, but such persons shall not render any professional services rendered or to be rendered by said corporation.
§ 13406: Shares of capital stock in a professional corporation may be issued only to a licensed person . . . No shareholder of a professional corporation shall enter into a voting trust, proxy or any other arrangement vesting another person (other than another licensed person who is a shareholder of the same corporation) with the authority to exercise the voting power of any or all of his share . . . .
§ 13407: Shares in a professional corporation may be transferred only to a licensed person . . . .
"Professional Corporations" and "Licensed Persons" are described in § 13401 (b) and (c):
§ 13401(b): "Professional Corporation" means a corporation . . . engaged in rendering professional services in a single profession pursuant to a certificate of registration issued by the governmental agency regulating such profession . . . .
§ 13041(c): "Licensed person" means any natural person who is duly licensed under the provisions of the Business and Professions Code . . . to render the same professional services as are or will be rendered by the professional corporation of which he is . . . an officer, director, shareholder, or employee.
EC 3-8, quoted above, admonishes against the sharing of legal fees. DR 3-102(A) is even more specific, stating that "a lawyer or law firm shall not share legal fees with a nonlawyer . . . ." There are several exceptions to this mandate, but they are inapplicable to the questions presented herein.
The California Rules of Professional Conduct, Rule 3, applies as well, stating in part:
. . . nor, except with a person licensed to practice law, shall [an attorney] directly or indirectly share compensation arising out of or incidental to professional employment . . . .
Standards of professional conduct embodied in the Canons and Rules mentioned above do not proscribe the employment of lay persons to assist an attorney. In recognition of the fact that it is often in the best interests of both the attorney and the public to employ lay persons, EC 3-6 describes the circumstances under which such employment is proper:
"A lawyer often delegates tasks to clerks, secretaries, and other lay persons. Such delegation is proper if the lawyer maintains a direct relationship with his client, supervises the delegated work, and has complete professional responsibility for the work product. This delegation enables a lawyer to render legal service more economically and efficiently.
Although the Formal Opinions of the A.B.A. Committee on Professional Ethics utilized in this memorandum refer to the older Canons of Professional Ethics which since have been supplanted by the Ethical Considerations and Disciplinary Rules of the Code of Professional Responsibility, it should be noted that the substance of the Opinions remains as valid today as it was under the older Canons.
In Formal Opinion No. 201 (May 24, 1940), the Committee held that a business partnership between an attorney and a layman was impermissible if the service rendered was regarded as the practice of law when performed by an attorney. While the instant question contemplates the internal separation of all legal matters from all accounting matters, it does not alter the basic fact that the business of the proposed partnership would be the practice of law and is, therefore, forbidden by DR 3-103(A), formerly Canon 33.
The Committee held in Formal Opinion No. 239 (February 21, 1942) that it was improper for a practicing attorney to form a partnership with a certified public accountant to act as consultants in federal tax matters and to represent taxpayers before the Bureau of Internal Revenue. The Opinion stated:
. . . [I]f the services performed by the partnership are such as to constitute professional employment if performed by a lawyer, it is necessary that the lawyer withdraw from the active practice of the law and refrain from holding himself out as a lawyer in connection with the partnership activities.
Formal Opinion No. 269 (June 21, 1945) reaffirmed Formal Opinion No. 239, holding that an attorney may enter into a partnership with a certified public accountant to specialize in income tax work and related accounting matters only if the attorney ceases entirely to hold himself out as an attorney at law.
In Formal Opinion No. 272, the Committee held that:
It is entirely ethical for a firm of lawyers to employ a public accountant (whether a C.P.A. or not) on a salaried basis to advise the law firm on matters of accounting and to assist the firm in connection with accounting problems arising in its law practice. For a law firm to employ an accountant on the basis of a division of the fees of the law firm would violate Canon 34, forbidding the division of legal profits or fees with those not lawyers. To permit such an accountant to certify statements under his own name as a C.P.A. for the use of clients of the law firm would violate the provision of Canon 35 requiring the lawyer's relation to the client to be personal and direct, without the intervention of any lay intermediary.
The questions addressed in Formal Opinion No. 272 included the following:
1. Does it make any ethical difference if the . . . services of the accountant are billed separately, and the law firm participates in no way in the compensation received for the said accounting services?
2. Does it make any ethical difference if, by leave of absence or other temporary arrangement, the law firm considers that the accountant renders the said services on his own time, and the accountant bills client independently?
The Committee answered, "The relations of the law firm, the accountant and the clients contemplated by these questions, are, in our opinion, too close to be insulated by any such artificial arrangement."
Formal Opinion No. 297 (February 27, 1961) proposed to put to rest the question regarding propriety of attorney-accountant relationships.
The Opinion stated:
The employment by a firm of lawyers of a public accountant on a salaried basis for the purpose of doing accounting work for the law firm in its practice of the law does not in and of itself result in the law firm being engaged in unethical conduct . . . .
Canon 34 is not violated if the accountant-employee is paid a regular salary computed without regard to fees collected for legal services rendered to particular clients . . . .
The partnership's employment does consist of the practice of law within the meaning of Canon 33 if the partnership furnishes services which if rendered by one holding himself out as a lawyer would be deemed the practice of law.
It would also be a clear violation of Canon 34 . . . for a lawyer-partner to divide fees for legal services with an accountant-partner . . . .
Formal Opinion No. 303 (November 27, 1961) applied the Canons to the corporate form of law practice. The Opinion stated:
Canon 33, though in terms it refers to partnerships, promulgates underlying principles that must be observed no matter in what form of organization lawyers practice law . . . [A]ny centralized management must be in lawyers . . . .
Permanent beneficial and voting rights . . . must be restricted to lawyers while the organization is engaged in the practice of law.
An organization practicing law may employ many nonlawyers. The source of funds to pay them for their services will be fees for legal services rendered. The use of the fees to pay agreed salaries to nonlawyer employees, of course, is not a violation of Canon 34. However, if the salary of a nonlawyer employee is to be based on a percentage of the net profits, a division of fees for legal services would be involved and Canon 34 would prohibit it.
If the professional association or professional corporation organized to practice law permits the transfer of permanent beneficial and voting interests to nonlawyers, Canon 35 would be violated. It would be an organization that would countenance the intervention of laymen between the lawyer and the client. Mere membership by a lawyer in an organization that would tolerate this is a violation of Canon 35 even though at the moment there are no laymen who own any permanent beneficial and voting interests.
Canons 31, 37 and 47 would also be violated by a lawyer who became a member of an organization engaged in the practice of law that permitted permanent beneficial and voting interests to be transferred to nonlawyers. The lawyer-member of such an organization would have put himself in the position to accept direction from nonlawyers as to what he should do for a client (a violation of Canon 31), the confidences he elicited from clients might not be preserved (a violation of Canon 37), and he would have undertaken to assist a lay agency, personal or corporate, in the practice of law (a violation of Canon 47).
See also Drinker, Legal Ethics, p. 204 (1953):
. . . [A] lawyer may not be in partnership with . . . an income tax expert, or certified public accountant unless the practice of the firm is confined to activities permitted to the lay members and the lawyer ceases to hold himself out as such; nor may a layman be held out as an associate.
In its Informal Decision No. C630 (February 27, 1963), the Committee held that an association between lawyer and public accountant is unethical if it is or could be used as a "feeder" of legal business to the lawyer, as an indirect method of advertising the lawyer's services, or as a method of sharing fees or responsibility for legal business between the lawyer and the layman.
It reemphasized its viewpoint in Informal Decision No. C756 (March 12, 1964) when it stated, "A partnership with an accountant, in which the practice of law is performed, will be unethical on the part of the lawyer."
The Code of Professional Responsibility of the American Bar Association, the Formal Opinions of the Committee of the American Bar Association, and the California Rules of Professional Conduct all condemn lawyer-accountant relationships where fees may be shared and where management of the law practice would be governed in part by a nonlawyer. There is, however, no proscription against an attorney or firm of attorneys employing a public accountant to assist the firm with its accounting problems as long as compensation is not based upon the fees received for the legal service.
This opinion is advisory only. It is not binding upon the State Bar, the Board of Governors, its agents or employees.
EDITOR'S NOTE: The Committee reviewed this opinion on 8/11/76 and determined that the conclusion is still valid. Rule 3 of the Rules of Professional Conduct of the State Bar of California was superseded by Rules 2-104 and 3-101 through 3-103, effective 1/1/75.
Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.