Being both a lawyer for and participant in a business isn’t worth the risk it presents. If you’re a partner, investor or owner, you shouldn’t be the lawyer too.
Do It the Right Way
The general rule is simple: you cannot be a business partner and lawyer for the same client. If you’re invited to do so, hire independent counsel to represent your client—and yourself if needed.
It’s understandable why clients may want you to get involved financially in a business you’ve been counseling. The two of you already have a working relationship. You know the business and can be trusted. It’s logical for them to invite you to become an investor, executive or board member, or to accept stock as part of your fees.
On the surface, the arrangement looks like a win-win. But it creates a significant risk of conflicts of interest. The biggest problem: there’s no guarantee of what will happen in the future. Trouble may come whether the venture fails or succeeds.
Alta Pro Practice Pointers
- Clients will blame you if things go wrong. When the business has problems, your partners may look for money to keep the business going – and your liability policy is a tempting target. Every piece of advice – everything you’ve done or said – will be scrutinized and second-guessed for possible malpractice. Sometimes the mere fact that you assumed an additional role while continuing to serve as counsel is the basis for a claim.
- Clients will resent you if things go well. The converse is sometimes true as well. Success brings out the greed in partners. Infighting ensues. Which do you want to be: lawyer or investor? Choose one. Lawyers have had to walk away from substantial profits because they wanted to be both at the same time.
- Agreements you draft after getting involved will be suspect. They will be challenged if you try to enforce them.
- Conflicts of interest will be unavoidable. How can you advise a board that wants to take action adverse to the interests of minority owners—if you are a minority owner?
- You will be blamed for breakups. Businesses dissolve all the time. As both lawyer and investor you’ll get twice the blame – even if you did nothing wrong, The last thing you want is to become both a witness and party in a messy divorce.
- You will be without malpractice protection. Your professional liability policy excludes claims from businesses in which you are a partner, investor or owner. Avoid nullifying your coverage.
- Don’t try to have it both ways. If you want to go into business with a client, stop being their lawyer. If you want to join an organization as a principal, fire yourself as the lawyer. Use your skills to find a great replacement so that the organization continues to get effective representation. Document the evolving relationship. Make sure everyone understands you are no longer the entity’s lawyer.
The Bottom Line: Don’t become a business partner with a client.
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This information is intended for informative purposes for members of Alta Pro Lawyers Risk Purchasing Group. It is not intended as legal advice. Lawyers should always refer to local and state rules and statutes for applicable standards and rules. These guidelines are designed to help lawyers avoid professional liability claims and are not intended for any other purpose. No legal or fiduciary relationship is intended to be created by receipt of this material.
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