The following article originally appeared in the April 2012 edition of The Myers Report newsletter published by the firm.
The Design Professional Service Corporation – New York’s New Alternative
By: Jane M. Myers, Esq.
It’s official!! New York State has a brand new business entity!!
On January 1, 2012, New York State’s Business Corporation law was amended. The Design Professional Service Corporation (“DPC”) was born.
So what, you say???
For New York, which typically moves at the speed of glaciers to adopt something new, the creation of the DPC can expand business development opportunities for both licensed professionals and people who don’t have a professional license. Now, with certain restrictions, they can join forces to own a design firm – but the impact goes far beyond.
In New York, a person who doesn’t have a professional license can now own shares in a corporation that offers architecture, engineering, land surveying and/or landscape architecture services.
In New York, prior to January 1st, and with the exception of “grandfathered” corporations, a non-licensed person could never own any part of a business that offered professional design services. (Note: New York’s “grandfathered” corporations allow non-licensed people to own shares in a general business corporation that provides architectural services if the corporation was formed on or before April 12, 1929 and, with respect to engineering, if the corporation was formed on or before April 15, 1935 and the grandfathered corporation has provided those services without interruption ever since it was formed. Other restrictions apply as well making it all but impossible to combine licensed and non-licensed owners. Today, there are only a few grandfathered corporations in New York, while the opportunity to include non-licensed owners continues to be very attractive. As a result, the cost to buy a grandfathered corporation can be sky-high. I know…I represented a client who sold one!)
Prior to January 1, 2012, architects, engineers, land surveyors and landscape architects (licensed design professionals) were allowed by law to practice their professions either as a sole proprietor, general partnership, professional services corporation, (“PC”), limited liability partnership (“LLP”) or a professional limited liability company (“PLLC”).
While that may sound like a lot of options, if you don’t do business as a DPC, the law makes it impossible to reward key employees with an ownership interest in the company if they are not licensed professionals. They are not eligible for profit sharing or bonus distributions. This impinges on a firm’s ability to attract and retain key people who may not be licensed. Succession planning for business owners is severely curtailed as is their ability to do estate planning.
Design professionals: keep in mind that if you practice your profession under a type of business entity that is not allowed under New York law, you may be committing a Class E felony as well as subjecting yourself to civil penalties and action by the NYS Dept. of Education’s Office of Professional Discipline.
Who Would Want to Own a DPC?
Sometimes, people other than licensed professionals are extremely important to the organization. They may be exceptional at business development, marketing, leadership and business organization– those aspects of a business that don’t involve practicing the licensed profession but which are critical to the business’s success. If you have a business partner with the business head combined with the partner who can produce the service, you have a winning combination. Now, New York allows you the flexibility to do just that.
Here are the DPC Formation Rules:
A DPC organized on or after January 1, 2012 may have stockholders who are both licensed professionals and non-licensed people if:
• More than 75% of the shares of outstanding stock of the DPC are owned by design professionals;
• More than 75% of the directors are design professionals;
• More than 75% of the officers are design professionals;
• The president, chairperson of the board of directors, CEO and officers are design professionals;
• The single largest shareholder is either a design professional or an ESOP (Employee Stock Option Plan) with more than 75% of the plan’s voting trustees being design professionals;
• An ESOP may not be part of the “more than 75%” owned by design professionals;
• Each of the shareholders is an employee of the DPC.
The formation process takes several steps including obtaining Dept. of Education consent to the creation of the new DPC and issuance of a Certificate of Authority. Non-licensed shareholders are required to file a Moral Character Attestation with the Dept. of Education. Of course, there are filing fees required to be paid to New York State. The name of the entity must include the professions that it will practice and must include the words, “Design Professional Corporation” or “D.P.C.” The formation process is a bit more involved than the process to form a PC or PLLC, but is certainly achievable.
We have the distinction of having worked with the Dept. of Education to obtain the first consent for the formation of a DPC in New York.
The Bottom Line
A DPC operates much in the same way as a PC.
It is treated the same way as a PC for accounting purposes.
It provides the same level of individual protection for its shareholders as a PC does for the licensed professional and as a regular business corporation does for the unlicensed person.
The ultimate benefit of doing business as a DPC is that it will expand business growth potential by allowing licensed design professionals and non-licensed people to combine their talents in a legally permissible way.
It’s a win-win for New York business!
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Please note that this article is intended only as a general discussion 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 and you should consult with an attorney and/or other professionals regarding the facts of your particular situation.