Closer, but no Cigar: New York State Fails to Ease PC Ownership Requirements

by James E. Robinson, Esq.

 

The 2007 session of the New York State Legislature came to a close on June 22, 2007 without the Legislature’s approving a bill which would have relaxed the restrictions on who may own stock in a professional service corporation.  As you may know, the law currently requires that all shareholders be licensed to practice in New York and that all of the corporation’s directors and officers be similarly licensed.  The idea that these restrictions should be eased is not new – bills seeking to modify the law have been introduced with some regularity since at least 1998, so far unsuccessfully.  Opposition to the change reportedly comes from medical professionals, who don’t want to see a precedent established which might ultimately lead to changes in the way their professional practices are structured.

The stated purpose of the proposed legislation was to provide design professionals with an improved ability to reward and retain key personnel, such as human resources managers, IT specialists and geologists, by granting them an equity interest in the firm.  This, in turn, would make New York more friendly to design professionals and improve the State’s competitiveness.  Most other states permit non-licensed personnel to own at least a minority interest in a design firm, many even allowing general business corporations and other business entities to engage in a professional design practice so long as the actual design work is supervised by licensed individuals.  (New York does currently permit this, but only on an extremely limited basis – practice must be through so-called “grandfathered” general business corporations which have been in continuous practice since at least April 12, 1929 in the case of architectural firms, or since at least April 15, 1935 in the case of firms practicing professional engineering and/or land surveying.)

The most recent draft of the proposed legislation (Senate Bill No. 930-A / Assembly Bill No. 2060-A) would have provided for a new type of firm called a “Design Professional Service Corporation” or “D.P.C.”  Partial ownership by non-professionals would have been permitted, provided that such ownership amounted to less than 25% of the total ownership and that the largest single shareholder was a licensed professional.  Shares of stock in such firms would have been divided into two classes: “A” shares which could be held only by licensed professionals, and “B” shares which could be held by anyone.  Non-professionals would also have been permitted to serve as directors and officers of the corporation, provided that they accounted for less than 25% of the directors and officers and that the positions of president, chairman of the board and chief executive officer were filled by licensed professionals.  Another aspect of the proposed legislation would have permitted the new firms to engage in non-professional business pursuits in addition to their professional practices.

Although the legislation did not become law, it appears that progress is being made in that at least one of the Legislature’s two houses, the Senate, did vote on and approve the measure.  In addition to the support of various groups representing design professionals, the legislation appears to be gathering support from the accounting community, so there remains hope that change may come about in the not-too-distant future.

 

 

Please note that this article is intended only as a general discussion of the described legislation and issues attendant to practice as a design professional and that it should not be taken as creating an attorney-client relationship or as legal advice with respect to any particular person, business or situation.  Circumstances and the applicable legal principles vary.