March 18, 2020
Businesses come in many different forms or structures, oftentimes called business entities. The entity is chosen by the owners upon formation of the businesses, a decision that has huge implications for everything from taxation to operational flexibility. Many owners, depending on their particular situation, find the idea of business incorporation particularly appealing, as a properly incorporated business effectively creates a legal shield between personal assets of the owners and the debts/liabilities of the business.
Importantly, the rules regarding this shield of liability protections vary slightly depending on your particular occupation. Namely, individuals of professional occupations (such as doctors, architects, financial professionals, and lawyers) cannot form the traditional incorporated entities, such as LLCs and corporations, and instead must form what are called “professional entities”. Professional entities are similar to their non-professional counterparts, with one notable exception related to limited liability protections: an owner of a professional entity is protected from claims brought against their business, unless the claim is a result of their own mistake or negligence.
Professional entities are regulated at the state-level and, consequently, their governing rules vary tremendously state-by-state. For New York business owners interested in forming a professional entity, it’s important to first gain an understanding (ideally with the guidance of a legal professional) of the structure and legal framework associated with New York professional incorporation before making any drastic decisions. For example:
- There are different types of professional entities in New York, such as PLLCs, PCs, RLLPs, and DPCs
- Only certain professions can form professional entities
- Professional entities can only provide the service that they’re licensed and registered to provide (also called the Single-Purpose Requirement)
- There are special naming conventions for professional entities
- The owners of professional entities are usually required to be licensed professionals themselves
This last point is of particular importance, as it’s related to the relatively recent creation of the New York Design Professional Corporation, or DPC.
DPCs in New York
Among the most popular types of professional entities in New York—and perhaps throughout the country—are Professional LLCs (PLLCs) and Professional Corporations (PCs). Notably, owners/shareholders of these types of entities must be licensed in the state of New York to offer the services that the company is registered to provide. In other words, a non-licensed professional is not allowed to own stock or ownership shares of a PLLC or PC.
Over the past few decades, certain states have taken measures to differentiate between “design” and “non-design” occupations, with the aim to allow some non-licensed ownership for “design” professional entities. What is considered a “design” occupation depends on the state, but generally includes occupations like architects and engineers. The issue is that for many of these design-based entities, certain employees (especially long-term, high-ranking workers) are integral to the success of the business but cannot be rewarded with ownership of the operation.
Thus, many states adopted a special design-based professional entity, highly similar to regular PCs, but with the exception that a certain percentage of entity’s ownership can be held by non-licensed individuals. New York, however, was initially reluctant to make any exceptions for these design occupations. In-fact, the New York legislator has a reputation for being among the strictest states when it comes to design-based disciplines.
This changed, however, in with a 2012 amendment to Section 1503 of New York’s Business Corporation Law. According to the New York Department of Education:
“Section 1503 of the Business Corporation Law was amended to permit the incorporation of design professional service corporations (engineering, architecture, landscape architecture, land surveying, and geology or any combination thereof)…in which non-professionals may own less than 25 percent of the shares and may constitute less than 25 percent of director and officer positions.”
There are a few things to note here: first off, the name of this new type of structure is a Design Business Corporation. Likewise, it can only be used by design-based occupations which, according to New York’s definition, is limited to engineers, architectures, landscape architectures, land surveys, geologists, or “any combination thereof”. Secondly, there are “strings attached” to this non-professional ownership. Namely:
- more than 75% of the stock must be owned by the design professionals
- more than 75% of the directors and officers must be licensed/registered design professionals
- the president, chief executive officer, and the chair of the board of directors must be the licensed/registered design professionals
- An Employee Stock Ownership Plan (ESOP) can own stock, but must amount to less than 25% of the total
- the largest single shareholder must either be a licensed/registered design professional or an ESOP
Lastly, it’s possible for individuals in design occupations (engineers, architectures, etc.) to own PLLCs or PCs, however, those businesses are subject to the regulations associated PLLCs and PCs, not the rules associated with DPCs. In other words, to allow non-licensees to have ownership, a DPC must be formed. To accomplish this, PCs can actually transition or convert to DPCs, so long as they meet the DPC requirements and make the according amendments to their formation documents. The Department of Education provides an online guide for doing so.
