As a construction attorney I can say that it is rare that a change is made in the law which revolutionizes the design industry. Up until now, the laws in the State of New York only allowed architectural and engineering firms to be owned solely by licensed individuals in those respective fields. In other words, an architectural or engineering firm may have employees who have worked for them for twenty years, but who have for some reason never became licensed in that field. There may be interior designers who have perhaps gone to architectural school, but never became licensed. These individuals could never become shareholders in the firm under the existing law, which limited their advancement within the company. This also caused some people to perhaps “secretly” do what they knew they could not do openly.

Design Professionals Take Note

However all of this is about to change, effective January 1, 2012, with the enactment of a new statute in the State of New York creating a new entity to be known as a “Design Professional Service Corporation.”

On September 23, 2011, Governor Andrew Cuomo signed into law Bill S2987/A4581 which significantly changes the laws regulating design professional corporations. This new entity form will require that "greater than seventy-five percent" of the outstanding shares be owned by a licensed design professional or professionals. In addition "greater than seventy-five percent" of the officers and directors must also be licensed. (The president, CEO and chairman must also be licensed individuals). However, there is an ownership interest of just less than 25% that can consist of non-licensed individuals. This bill marks the end of an era in New York where all owners of a design firm (except grandfathered corporations) were required to be licensed design professionals.

Unlicensed Individuals

Previously, state law prohibited non-licensed individuals or entities from owning any portion of a firm that provided professional architecture, engineering, landscape architecture, or land surveying services in New York.

This law would now allow individuals who are not licensed, to own shares in architectural and engineering firms, subject to the limitations within the law requiring greater than 75 percent of the shares to be owned by licensed design professionals. One possibility is that an employee stock option plan could be the largest shareholder as long as greater than 75 percent of the plan’s voting trustees and committee members are design professionals. In other words, the state still wants licensed design professionals to be in control of and running the company. The same percentage is required for the directors and officers. The president, chairperson of the board of directors, chief executive officers and the single largest shareholder must all be licensed design professionals.

This would open the doors wide open to allowing designers in other states to do business in the State of New York and would make New York a more competitive place to do business. It would also apply to combinations of the other licensed professionals: i.e., architecture, engineering, landscape architecture and land surveying.

It is interesting to note that many other states and countries already allow employees in design firms, who are not licensed, to become owners in the firm. In the past, this made New York State architectural and engineering firms less competitive with firms in other states and in other countries in the same market place. This new law came about as a result of much lobbying by design professionals, especially engineers, and opens up a whole new chapter in the design industry. It allows employees with company stock ownership plans to have a piece of the ownership and would allow outside investors to come into these firms in a limited way. There are a lot of possibilities. Of course the services would still need to be rendered through licensed individuals.

It would be set up much like architecture and engineering firms currently under the Business Corporation Law (BCL) and the Education Law. We are all familiar with Professional Corporations which have “P.C.” at the end of the name. This new entity would have “D.P.C.” at the end.

Filing Requirements

There are a number of rules and requirements under the law, such as the requirement for a certified statement to be filed every three years containing certain information about each shareholder, officer and director, such as their name and address. Shareholders leaving the firm would need to sell their shares back to the corporation. This type of restriction would have to be noted on the stock certificates. If the corporation failed to redeem the shares, there could be litigation to recover the purchase price, with an award of reasonable attorney’s fees. This is significant, because there are few areas in which attorney’s fees can be granted.

It will be interesting to see the evolution of the rules, regulations and shareholder agreements governing these companies and how it changes the practice. Anyone considering setting up such a corporation should seek legal counsel knowledgeable in this area.

C. Jaye Berger, Esq. of the Law Offices C. Jaye Berger is a Manhattan-based construction, real estate and litigation attorney specializing in co-ops and condominiums.