49% of lawyers own their own law firms. Those law firms might be worth nothing. For lawyers who work in larger firms, 43% of them have equity in their firm. That equity is definitely worth something. These interests in law firms must be valued and possibly divided in an Illinois divorce. A Law Firm Is A Business, But It Is Not Just A Business A law firm has the potential to earn millions of dollars, employ many people, possess valuable receivables, and operate under an established name. It cannot, however, be valued exactly like a retail store, manufacturing company, or other ordinary business. Under the Illinois Rules of Professional Conduct, “[t]he practice of law is a profession, not merely a business.” Ill. R. Prof’l Conduct (2010) R. 1.17 cmt. 1. The commentary further states that “[c]lients are not commodities that can be purchased and sold at will.” Id. These are key principles. Yet, those principles do not mean that a law practice holds no value. Illinois Rule of Professional Conduct 1.17 expressly allows a law firm or lawyer to sell “a law practice, including good will.” Ill. R. Prof’l Conduct (2010) R. 1.17. Ordinarily, the lawyer must cease practicing in the relevant geographic area, the entire practice must be made available for sale, clients must receive written notice, and every client retains the right to hire other counsel or take possession of the file. Id. Other professional rules impose more limitations. Typically, a law firm or lawyer “shall not share legal fees with a nonlawyer,” and a nonlawyer generally may not own an interest in a for-profit law firm. Ill. R. Prof’l Conduct (2010) R. 5.4(a), (d). Additionally, Illinois usually prohibits agreements that restrict an attorney’s right to practice after leaving a firm. Ill. R. Prof’l Conduct (2010) R. 5.6(a). This rule protects the attorney’s professional autonomy and “the freedom of clients to choose a lawyer.” Id. cmt. 1. These rules create the main difficulty in valuing a law firm during a divorce. A law firm may possess genuine economic value, but that value cannot be calculated by assuming that its attorneys, clients, referral sources, and future legal fees can be transferred freely to a hypothetical buyer. The appraisal must determine which economic benefits belong to the firm, which depend on the continued labor of a particular lawyer, and which cannot be transferred at all. A Law Firm Does Not […]
