March 09, 2020
For individuals interested in starting their own business, among the first decisions to make is one of structure, namely business structure. Aspiring owners have many options when it comes to choosing a structure for their business, but which one will optimize production and minimize risk? This is a question of paramount importance, as it can have substantial consequences in terms of organization, business taxation, ownership structure, and—perhaps most importantly—liability protections.
There are essentially two classes of business structures: incorporated entities and non-incorporated entities. Incorporated entities, such as Limited Liability Companies (LLCs) and Corporations, offer owners a valuable layer of limited liability protection. Briefly, proper business incorporation effectively creates a legal distinction between the owner and their business, so that legal matters that involve the business typically don’t threaten the personal assets of the owners. Non-incorporated structures, on the other hand, are simply an extension of the owners that operate them, meaning that legal action taken against a non-incorporated structure is in-fact action taken against the owner. In other words, a successful legal claim brought against a non-incorporated business can actually endanger the personal assets of its owner, such as their home, automobiles, and personal savings accounts.
For this reason, business incorporation is often seen as a necessary step for a maturing business—particularly as the business’s liability and financial accountability grows. However, as we touched-upon earlier, there’s not one clear path to incorporation. Determining the most applicable type of business structure for your particular business will depend on:
1) your occupation or type of business, and
2) the state in which you’ll operate
States permit most types of occupations to form the traditional incorporated business entities, such as LLCs and corporations. The main exception being careers which are “professional” occupations. The “professional” designation varies state-by-state, it generally includes licensed occupations, like doctors, lawyers, engineers, accountants, architects, and chiropractors. When these individuals want to incorporate their business or private practice, they’re often required to form professional entities, such as Professional LLCs (PLLCs) or Professional Corporations (PCs).
Professional Entities: a Limitation on Limited Liability
There are four distinct types of professional entities that can be formed under New York law: PLLCs, PCs, Limited Liability Partnerships (LLPs), and Design Professional Corporations (DPCs). There are significant differences between these four structures, and the “optimal” entity will depend on your particular operation. Nonetheless, one thing they have in common is limited liability protections.
Each of these entities provides the same types of limited liability protections as regular incorporated structures with one key exception: owners of professional entities will be protected from business-associated legal claims, except when the claims arise from their own mistakes or negligence. This is expressly stated in New York’s corporate code:
“[Owners of professional entities] shall be personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her or by any person under his or her direct supervision and control while rendering professional services.”
Importantly, although regulations regarding professional entities vary by state, this “limitation” on limited liability is not specific to New York. In-fact, this is the hallmark of all professional entities; while professional entities are largely similar to their non-professional counterparts, they cannot protect an owner from their own mistakes (although they will protect them from mistakes made by their fellow owners or associates).
Forming a Professional Entity in New York
Rules regarding professional entities are mostly established at the state-level and, as a result, regulations vary tremendously state-by-state. For New York business owners interested in forming a professional entity, it’s important to first review the relevant legislation. Here are 5 things to consider before making any large structural decisions regarding your business:
1. There are Significant Differences between the Different types of Professional Entities: New York allows the formation of four types of professional entities (PLLCs, PCs, LLPs, and DPCs). The differences between each entity are non-trivial, and will likely influence how the business is taxed and it’s structural flexibility among other things.
2. The New York State Education Department Plays a Large Regulatory Role: Most occupations are subject to title VIII of New York’s Education Law, which is enforced by the Education Department’s Office of the Professions. The Office of Professions are the main licensing body for most professional occupations. They’ll require owners to submit their Certificate of Incorporation (and, of course, a filing fee), and in return, will provide a Certificate of Authority of Good Standing, which serves as the authorization to provide professional services throughout the state.
3. There are Special Naming Conventions for Professional Entities: a professional entity must indicate its structure within its business name. For example, a PC must have the words “P.C.” or “Professional Corporation” contained within the business’s registered name. This is mostly true for PLLCs, LLPs, and DPCs as well.
4. The Single-Purpose Requirement: The sole purpose of a professional entity must be related to the services that the professionals are legally licensed to provide. The Office of Professions offers an example using a hypothetical PC named "Occupational Therapists For Everyone, PC". This mock PC can only provide occupational therapy services, and providing other professional services—such as physical therapy services or speech services—is highly prohibited.
5. Only Certain Professions Can Form Certain Professional Entities: not every owner will be able to choose among the four types of New York professional entities. For example, DPCs are exclusively for occupations involved in “design”, namely engineering, architecture, landscape architecture, land surveying, and geology.
Again, structural decisions regarding your business will undoubtedly have consequences (good or bad), so it’s important to first review the relevant New York code. Perhaps a better idea is to consult an experienced and trusted legal professional. A business attorney—so long as they’re familiar with New York’s state-specific regulations—can provide invaluable guidance and insight throughout the confusing but important process of professional incorporation.
