MSO Design Principles for Law Firms and Investors

Recent regulatory developments, including Texas Ethics Opinion 706, California AB 931 and Colorado HB26-1421, have given firms and investors a clearer compliance blueprint for deploying capital into law firms via an MSO, and capital has flowed into the space. Industry reports indicate as many as 70 MSO transactions are currently under discussion, drawing in both law firms looking to restructure and investors looking to put capital to work.

Part 1 of this series established the mechanics of the legal MSO. Part 2 covered how investors evaluate them. This third installment focuses on building an MSO, walking through the key design decisions a firm and its investors must make to move from concept to a transaction-ready structure.

Define the MSO parameters

An MSO formation may be triggered by an investor approaching a firm or pursued proactively by a law firm seeking initially to build the structure on a smaller scale before bringing in outside capital.

Either way, the formation mechanics are the same: The law firm carves out its administrative, operational and financial support functions into a separate entity (the MSO), leaving all functions that practice law and interact with clients separate (NewCo), and then establishes a clear and compliant pricing mechanism for NewCo to compensate the MSO. This enables investment from a financial sponsor in that entity in exchange for an ownership stake.

How that MSO is designed depends on a set of foundational parameters.

Single firm or platform

A single-firm MSO is designed to optimize operations for one practice indefinitely. A platform MSO is built from the start to absorb additional firms across geographies or practice areas. The two options require meaningfully different approaches: Single-firm MSOs tend to be simpler in scope, with cleaner migration and a fee structure benchmarked to a known cost base, while platform MSOs require more infrastructure from day one to accommodate firms of different sizes and practice areas.

Practice area

Practice area shapes both the functional scope and the fee architecture of the MSO. A personal injury firm building an MSO to scale case volume has fundamentally different infrastructure requirements than a corporate firm building one to modernize its back office, driven by differences in billing models, workflow standardization and marketing dependence. An MSO designed to support multiple practice areas needs to reflect those distinctions from the start.

Geographic scope

Geographic footprint shapes both the regulatory complexity and the scaling potential of the MSO. Single-state operations are simpler to structure, with a more contained regulatory environment. Multistate platforms enable broader scaling through shared services and cross-market expansion but introduce meaningful complexity as state-level rules governing MSO structures, fee arrangements and attorney supervision vary significantly across jurisdictions.

Taken together, these three foundational parameters shape the scope and ambition of the MSO, but the structure ultimately needs to be designed around where it will create value: professionalizing operations and enabling platform scale. How those value creation levers are deployed in practice will be covered in Part 4 of this series.

Determine what moves to the MSO and what stays with the law firm

With the MSO parameters set, the firm needs to determine what moves to the MSO and what stays, a question more nuanced than a clean “legal versus business” split.

Figure 1 represents functional allocation across the law firm, supervised boundary and MSO

Legal delivery and client relationships always stay with the law firm. Legal strategy, case decisions, attorney supervision, client files, trust accounts and conflicts management involve professional duties that cannot be delegated under ABA Model Rule 5.4.

Business development and marketing, operations and technology, finance and human capital, and real estate and facilities can all move to the MSO. These are the areas where institutional capital creates leverage through bulk purchasing, specialized talent and centralized management.

Some functions sit at the boundary and require deliberate positioning. Two in particular illustrate how the same function should be treated differently depending on firm structure and regulatory context:

HR: Attorney HR is one of the more contested boundaries in MSO design. Functions like performance management, partner relations and professional development touch on attorney independence and firm governance in ways that complicate a clean transfer. HR for nonattorney staff raises fewer concerns, though how firms approach the split varies by size, culture and regulatory context.
Paralegals: Paralegals can be employed by the MSO, but their work must be performed under attorney supervision. How that supervised boundary gets built into reporting structures and day-to-day management is a design decision that varies by firm and practice area.

For a more detailed breakdown of the functional taxonomy and how each area maps to the MSO model, see Part 1 of this series.

Choose the MSO formation path

With functional scope established, the next decision is how to create the MSO entity. Two paths are available:

De novo formation creates the MSO as a new entity from scratch. The law firm retains its current structure, while the MSO builds capability in parallel and gradually absorbs functions under a new management services agreement (MSA). This path minimizes disruption, but it takes longer to establish the management-fee cash flows that drive investor returns.
Carve-out transfers existing nonlegal assets, contracts and employees from the law firm into the newly formed MSO. The MSO owns the operational infrastructure immediately, and the fee structure activates from day one, though execution is more demanding, with employee transitions, asset transfers and third-party consents to coordinate.

A formation can also be staged, with the organization establishing the entity and MSA first and then phasing in asset and employee transfers over time. This approach lets the parties get the structure right before taking on the full operational complexity of a carve-out.

The right path depends on how much operational infrastructure the firm already has. A firm with a large nonattorney staff, established marketing and built-out back-office systems has more to move than to build, which may make a carve-out the simpler and more economical path. The existing infrastructure can be transferred into the MSO intact so the management fee applies from close and investor cash flows begin immediately. A firm with a leaner footprint, where the MSO’s job is to build new capability such as technology and professionalized finance, has more to build than to move, which may make de novo formation a better fit.

Build the MSO governance architecture

Governance is one of the most consequential design decisions in an MSO formation. A compliant structure requires deliberate design across entity separation, board composition and operational oversight.

Structure

The foundational requirement is genuine entity separation. The MSO and the law firm must operate as distinct legal entities with separate financials, governance structures and personnel. A paper separation that collapses in day-to-day operations is the primary enforcement risk in legal MSOs. The California attorney general’s March 2026 amicus brief in the Art Center Holdings case, albeit in a healthcare MSO context, signaled stepped-up enforcement against structures where separation exists on paper but not in practice.

Two additional protections reinforce that separation: The MSA must allow the law firm to exit without financial penalty if the MSO interferes with attorney independence or professional judgment, and the financial sponsor may not transfer its MSO interest without written law firm consent.

Governance

The law firm and MSO must each have a separate board. Law firm representatives may sit on the MSO board, but MSO investors may not sit on the law firm board. The MSO board should include at least one independent director with deep ethics and professional responsibility experience and no economic relationship to the sponsor. That director should chair a standing ethics and professional independence committee with veto authority over any action that threatens attorney independence.

Operations

A chief compliance officer reporting to the ethics committee monitors day-to-day operations for boundary violations and serves as the primary state bar liaison. An annual independent ethics audit confirms that the fee structure avoids functioning as de facto fee-sharing, that information flows are appropriately controlled and that operational changes have not altered the risk profile of the arrangement. Audit results go to the ethics committee and the law firm’s governing body, not to MSO management (see Figure 2).

Figure 2 represents governance principles checklist for a compliant legal MSO

Set the MSO pricing architecture

The MSA fee structure must satisfy two requirements: generating durable returns for the investor and reflecting fair market value without functioning as prohibited fee-sharing.

Three compliant structures are most prevalent:

Flat fee: A fixed annual or monthly payment regardless of firm performance. Works well when the MSO’s cost base is predictable and the firm’s revenue is large enough to support market-rate pricing.
Cost plus: Reimburses the MSO’s operating costs plus a predetermined margin. That margin must be fixed, not a percentage of legal revenues.
Hybrid: Combines a flat base fee with a cost-plus component for growth investments in marketing or technology. Increasingly common as the market matures, and consistent with healthcare MSO precedent, where tiered and hybrid fee structures are accepted when supported by fair market value documentation and benchmarking

Regardless of which structure is chosen, fair market value documentation is required. MSOs should maintain cost accounting records, benchmark fees against comparable market data and retain pricing methodology documentation in a form that can withstand regulatory scrutiny. Annual independent ethics audits provide an additional layer of protection.

Recent legislation is moving this pricing standard from professional guidance into statute. In June 2026, Colorado signed into law HB26-1421, the first state statute to address legal MSOs directly. It permits the MSO model but prohibits any management fee tied to a percentage of the firm’s legal fees, revenues or profits. Illinois is close behind with a comparable bill of its own. These laws preserve the structures described above, as none of them tie the management fee to a percentage of legal revenue, and Colorado’s law carries a private right of action for noncompliant arrangements.

Sequence the MSO build

These design decisions come together in a consistent implementation sequence. Firms should begin with a situation assessment and objective alignment, mapping existing operational infrastructure, workforce composition, contract obligations and the state-level regulatory requirements that shape what the structure can look like. From there, the process moves through functional scoping, entity formation and governance design, pricing and fee architecture, and finally implementation and migration.

Firms and investors navigating these decisions work with L.E.K. Consulting across the full MSO life cycle, from initial design and feasibility through transaction structuring and postclose implementation. Contact us to discuss how we can help.