New York Authorizes the Formation of Design Professional Service Corporations

 
Unlike most states, New York has historically prohibited individuals who are not licensed as architects, landscape architects, engineers, or land surveyors from becoming owners, directors or officers of professional design firms.  Not any more! This is no longer the case.
 
In an effort to improve New York’s competitiveness domestically and internationally, Governor Cuomo approved a bill this past September to allow design professionals to set up a new entity called a “design professional service corporation” in which non-licensed employees can become part owners, directors or officers.  This way design professionals will be able to attract and retain key personnel who are not design professionals, such as chief financial officers, human resource managers, IT personnel and other valued employees, with the never-before-permitted incentive of an ownership interest or a director or officer position. 
  
But as with everything legal, there are rules that need to be followed.  These include:

1)   The name of your new corporation must end with the words “design professional corporation” or “D.P.C.”

2)   Non-professionals must own less than 25% of the shares of the corporations

3)   Non-professionals must hold less than 25% of the director and officer positions.

4)  The president, chairperson of the board of directors and chief executive officer or officers must be design professionals.

5)  The single largest shareholder must be either a design professional or an ESOP (employee stock ownership plan), of which more than 75% of the plan’s voting trustees and 75% of the plan’s committee members must be design professionals.

6)  After the employment of a non-licensed shareholder has been terminated, he or she must transfer his or her shares back to the corporation or to the other shareholders.

The law goes into effect January 1, 2012.
 
The new rules require that you set up a new entity.  If you have an existing professional services entity you may be able to merge it into a new design professional services corporation, but you cannot form a design professional services corporation by merely renaming your existing professional services entity. 
 
The new rules do not apply to partnerships or professional limited liability companies.  Non-professionals are still barred from ownership interests in such entities.  Nor do the new rules change the requirement that professional service entities in New York only provide the professional services for which they are formed.  The shareholders of a design professional service corporation continue to be personally liable for their own professional negligence and that of firm personnel under their direct supervision and control.
 
The New York State Education Department is currently putting together a Q&A relating to design professional service corporations.  Among the issues they are still reviewing is whether unlicensed shareholders of a design professional service corporation can have their names included in the firm’s name.  We will continue to be in touch with the Education Department and report as further information becomes available.
 
If you are interested in exploring the benefits of setting up a design professional service corporation or have any other questions regarding your practice, please contact Robert F. Herrmann of our Construction Law Group or Michiel A. Bloemsma of our Corporate Law Group.

This Bulletin is for informational purposes only and does not constitute legal advice. Under the rules of some states, this Bulletin may be considered advertising.