Mitch McDeere (Tom Cruise) is a young man from an impoverished background, but with a promising future in law. About to graduate from Harvard Law School near the top of his class, he receives a generous job offer from Bendini, Lambert & Locke, a small, boutique firm in Memphis specializing in accounting and tax law. He and his wife, Abby (Jeanne Tripplehorn), move to Memphis and Mitch sets to work studying to pass the Tennessee bar exam. Avery Tolar (Gene Hackman), one of the firm's senior partners, becomes his mentor and begins introducing Mitch to BL&Ls professional culture, which demands complete loyalty, strict confidentiality, and a willingness to charge exceptional fees for their services. Seduced by the money and perks showered on him, including a house and car, he is at first totally oblivious to the more sinister side of his new employer, although Abby has her suspicions. Mitch passes the bar exam and begins working long hours that put a strain on his marriage. Working closely with Avery, Mitch learns that most of the Firm's work involves helping wealthy clients hide large amounts of money in off-shore shell corporations and other dubious tax-avoidance schemes. While on a trip to the Cayman Islands on behalf of a client, Mitch lets himself be seduced by a local woman. But the encounter is a set-up and their tryst on the beach is photographed by people working for the firm's sinister "head of security", Bill DeVasher (Wilford Brimley), who uses it to blackmail Mitch into keeping quiet about what he knows.
Mitch realizes he is now trapped, but after two associates of the firm die under mysterious circumstances, he is approached by FBI agents who inform him that while some of BL&L's business is legitimate, their biggest client is the Morolto Mafia family from Chicago. The firm's senior partners are all complicit and have any junior employees who threaten to betray them murdered. They warn Mitch that his house, car, and office have probably all been bugged. The FBI pressures Mitch to provide the Bureau with evidence they can use to go after the Moroltos and bring down BL&L. Mitch knows he faces a stark choice. If he works with the FBI, he believes that even if he stays alive, he will have to disclose information about the firm's legitimate clients—thus breaking the attorney–client privilege and risking disbarment. However, he believes that if he stays with the firm, he will almost certainly go to jail when the FBI takes down both the firm and the Moroltos. Either way, his life as he knows it is over.
Mitch devises a plan that allows him to cooperate with the FBI by finding proof that the firm's partners are guilty of overbilling. By mailing these bills to their clients, they committed mail fraud--thus exposing them to RICO charges. He begins secretly copying the firm's billing records, but is eventually discovered by De Vasher. Evading De Vasher and his thugs, he finds the Morolto brothers and, offering himself as a loyal attorney looking out for his clients' best interests, leads them to believe that his contact with the FBI and copying files at the firm was merely an attempt to expose illegal overbilling. If they agree to let him turn over their billing invoices and guarantee his safety, he assures them that as long as he is alive, any other information he knows about their legal affairs is covered under attorney-client privilege and will never be revealed. Understanding the deal he is offering them, the Moroltos agree to let Mitch go and he is able to give the FBI all they need to prosecute the partners of the firm. He does all of this without breaking any laws, thereby being able to keep his status as a lawyer.
The film ends as the McDeeres leave their house in Memphis and return to Boston, driving the same car in which they arrived.