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NY's New Form of Business Practice: Is it the Future of Your Firm?

08.01.12  |  By Paula M. Gart

This informative article explores New York's newest form of business entity for design professionals. It was first issued at the 2012 American Council of Engineering Companies of New York's Winter Conference, Albany, New York.

Most New York design professionals know by now that their efforts to effect legislation permitting a percentage of unlicensed equity ownership in their firm have finally paid off. Effective January 1, 2012, New York is allowing up to 25% of the equity of a design professional corporation to be owned by those who are not New York licensed design professionals.

This significant change in the law has been heralded as a major achievement, said to enhance New York's national and international competitiveness by aligning its laws with those of most other states in the country. But is what's good for New York's economic future also good business for a New York design professional firm? The answer is a resounding yes – especially in these economically-challenging times.

Availing itself of this new legislation by becoming a design professional service corporation ("DPC"), a firm could grow in a way not previously considered or pursued, opening up new and varied opportunities. This now-possible diversification of ownership should benefit forward-thinking firms by allowing its design professional owners who are trained and talented in their own disciplines, but not necessarily trained in running or marketing a business, to carefully ply their craft without the added burden of managing and growing the business. But rather than remaining as employees, those whose expertise in running a business or in marketing may operate at top management level with the input and consensus of the licensed owners who must still own more than three quarters of the firm's equity.

The new unlicensed owner(s) permitted to own up to 24.9% of the firm (as long as one of them is not the largest shareholder) may be new hires or plucked from the trusted and trained talent pool already employed by the firm. Either way, with some real skin in the profit and loss game that equity ownership offers, their performance is likely to be energized far beyond that provided in a same old day” at the office. The infusion of new ideas and heterogeneity of different professions and backgrounds into top management may propel a firm forward from the stagnancy all businesses eventually concede to at one time or another. A firm's economic growth may stagnate simply because the best people to pursue and obtain new business saw the "licensed-only" ownership ceiling when they looked up and moved elsewhere. These individuals may just as easily have become disinterested in growing the business because the law prohibited their own nests to be well-feathered in the process. If the firm's in-house accountant, lawyer, safety specialist or marketing professional has an equity interest – their skin in the game – a more tax-advanced, creative and cross-cultural spin may be included in a marketing plan or in a winning proposal, rather than if that person had been simply waiting for the licensed owners to perhaps ask for their input.

The DPC form of entity comes closer to parity with New York's approximate 120 grandfather corporations permitted to practice the design professions with no restriction on stock ownership and more closely emulates other states' permitted business entity practices. This affords key but unlicensed talent similar equity ownership advantages without having to cross state lines, or try to join a large corporation. The DPC form of practice may assist in retaining talented employees already familiar with the firm's infrastructure and culture, rather than risk losing them to other companies.

Whether a firm embraces the many advantages of this new legislation involves significant business decisions, including whether to reward current employees already familiar with the ins and outs of the practice, or to seek new talent, and possibly some investment capital, from the outside. In either case, the non-licensed personnel chosen to move into an equity position should be those needed or targeted to make the firm's current practice more successful. Otherwise, why bother?

Once the decision to pursue the advantages of the DPC law is made, the transition should run fairly smoothly as long as legal counsel and accountants familiar with the firm's business and knowledgeable about business transactions are on your team. Knowledgeable counsel will guide the transition process so that a tax-free or tax- minimized reorganization may be accomplished while retaining the firm's present name, branding and reputation.

The new DPC legislation does not permit an entity not presently legally authorized to practice in New York to become authorized by merely transferring more than 75% of its shares or interests to a New York licensed design professional. Nor does it allow a New York authorized limited liability partnership or professional limited liability company to have any unlicensed owners. The law just isn't there yet. A new entity must be formed for this purpose and the business appropriately transitioned to it.

The merger of a design firm that is registered in New York as a professional corporation or as a professional limited liability company into the newly-formed DPC is specifically contemplated in the statutes, as long as the surviving entity is the DPC. While the transition of a New York registered limited liability partnership into a DPC may not necessarily be accomplished by a merger, its transition to the DPC form of entity should not present undue hardship. The transition of an unauthorized business corporation to the DPC form may also take place once the correct licensure requirements and the permitted percentages are met. However, whether accomplished by merger into the DPC, or by dissolution and transferring the present firm's assets and liabilities to the DPC, the transition to the DPC form of practice should be a relatively smooth process.

They say that all good things are not without their price, and this adage may well apply to the transition of design professional firms to New York's newly-permitted corporate entity. Since some legal and accounting fees will be incurred and management will be investing time and effort into the transition process, each firm will need to weigh the DPC's distinct advantages that were championed for so long against the expense of achieving them in determining whether this new entity is right for its future. But this new legislation may just be the kick start many firms need in the new year.

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