Wednesday, July 8, 2015

NY DPC - New York Design Professional Services Corporation - What Is It and How To Form It?

New York has long been recognized as having some of the strictest laws on the books when it comes to what is known as the “professional service corporation” (a “PC” for short), a specialized kind of business entity that must be formed by individuals providing professional services, such as lawyers, doctors, or engineers.  You can recognize these corporations by the inclusion of PC at the end of their names (just like "Inc." for the traditional “C” corporation).

In particular, the NY law is very strict with regard to who may be shareholder,  officer or director of such a corporation.  In a traditional professional corporation, all of the directors and officers must be professionals licensed in New York to provide the kind of services the company is involved in (and the company can only provide one kind of service; it cannot, for instance, provide both legal and accounting services, even if it had both licensed attorneys and licensed accountants as employees.)  In addition, only licensed professionals with the company are allowed to own equity; non-licensed employees, even highly important ones, cannot. A common complaint has been that this restriction has made New York firms less competitive with out-of-state firms that do not have similarly strict restrictions when it comes to attracting and retaining key employees. Although the law includes a “grandfather” clause, it is highly restrictive and very difficult and expensive to make use of.

In January 2012, however, the NY state amended Section 1503 of its Business Corporation Law to allow for a new kind of professional services corporation, the Design Professional Services Corporation (DPC for short). In a DPC, as opposed to the traditional PC, a limited number of the company’s officers and directors (less than 25%) may be non-professionals; in addition, a limited amount of equity ownership (again, less than 25%) is permitted to be held by non-professional employees or within employee stock ownership plans (ESOPs). While any increased flexibility in the ability to choose the appropriate corporate form is welcome, the law’s changes are limited, and it will be important for anyone considering this new DPC form to be aware of those limitations. This blog post will give you a brief introduction to this relatively new kind of corporate form in New York and discuss the changes (and continuing limitations) it provides.

Although the law does provide greater flexibility than the traditional rules with regard to equity ownership and who may serve as an officer or director, it still requires that greater than 75% of both the equity ownership (i.e. outstanding shares) and officer/director positions remain in the hands of employees who are licensed professionals.  In addition, the company president, chief executive officer, and chairperson of the board of directors must be licensed professionals. With regard to the equity provisions, the “less than 25%” of equity which does not have to be held by licensed professional employees must, in the alternative, be held by non-professional employees and/or an ESOP. No other person (either a natural person or a legal entity such as a partnership or another corporation) is permitted to own any equity stake. In addition, the largest single shareholder must be either 1) a licensed professional; or 2) an ESOP where greater than 75% of the plan’s voting trustees and committee members are licensed professionals. Note, however, that even an ESOP eligible to be the largest shareholder must own less than 25% of the company’s shares, because the law explicitly says that “an ESOP... shall not constitute part of the greater than 75% owned by design professionals.”

Another important restriction to keep in mind is that the DPC form is available only to companies providing four specific kinds of professional services. These are:
  • Professional engineering
  • Architecture
  • Landscape Architecture
  • Land Surveying.
Unlike the traditional professional services corporation, however, a DPC is allowed to provide more than one kind of such service, as long as the company employs at least one professional in each service it will be providing.

Now that we’ve examined the requirements that must be met in order to form your company as a DPC, how do you go about it? Here are the steps:

  • Prepare and fully execute the Certificate of Incorporation.  The NY Division of Corporation provides a sample.  Note that there are special disclosure requirements that apply to the DPCs.
  • Prepare Moral Character Attestations for all unlicensed shareholders, officers and directors.  
  • Submit the Certificate of Incorporation, the Attestations and a filing fee to the NY State Education Department, which will then issue a Certificate of Authority (there is currently a wait of almost a month to get it).
  • Submit the Certificate of Incorporation and the Certificate of Authority to the NY State Department for filing. 
  • Finally, send a certified copy of the Certificate of Incorporation and a filing fee to the New York State Education Department.  
  • As a very final step, - all DPCs that provide engineering and/or land surveying services must also obtain a Certificate of Authorization to provide such services (and if both of these services are provided, then the DPC needs to obtain two certificates).  
  • Once every three years, DPCs must submit a statement and pay a filing fee to the NY State Education Department.

The new law also allows a currently existing PC to convert into a DPC if it meets the DPC requirements. This can be done by amending the existing PC’s certificate of incorporation to include all of the information indicated above (and the name should be changed to include the DPC signifier). The certificate of amendment must also include:
  • A tax clearance issued by the Department of Taxation and Finance certifying that the existing PC is current on all of its state tax liabilities; and
  • A certificate of good standing from the state Department of Education certifying that the existing PC is authorized to provide professional services without restriction
The state’s Office of Professions also provides a guide to converting a PC into a DPC on its website.

As you can see, the new DPC form does provide some greater flexibility for certain kinds of professional services corporations when it comes to stock ownership and officer/director positions. It will be interesting to see how popular this new form will be in the years to come and whether these initial, incremental reforms to New York’s professional services corporation law will herald additional reforms in future years.

This article is not a legal advice, and was written for general informational purposes only.  If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga.  Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate, securities, and intellectual property law.

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