Publication

The ESOP Alternative for New York Design Professionals

05.20.2022

Michael Vardaro, Managing Partner, shares his thoughts on Employee Stock Ownership Plans for NY design professionals.

It is no secret that the licensing (or ownership and management) rules regulating engineers, architects and other design professionals in New York are amongst the strictest in the nation. One restriction that has greatly impacted ownership transition strategies is the inability of an ESOP to own a firm registered to provide design professional services (architecture, engineering, land surveying, landscape architecture, and geology). However, hope may soon be on the way. ESOPs are an exit strategy that result in a direct route for employees to be vested in a business with consequent recruitment and retention advantages, create owner liquidity while preserving cash, and can result in significant tax advantages.

Both houses of the New York State Legislature have passed a bill that would allow design professional corporations (DPC) to be entirely owned by an ESOP provided the professional services are adequately supervised by licensed design professionals. More than 75% of the ESOP’s voting trustees or committee members would need to be licensed design professionals. The bill (A.1891D (Lupardo) /S.5261B (Kennedy)) passed the Assembly on May 3, 2022, after it received it from the Senate, which passed it in April. The bill has been delivered to the Governor for her consideration and she has the authority to sign the bill into law.

This revision to the current statutory scheme, which currently allows something less than 25% ownership by the ESOP, is a significant change. In most cases the less than 25% piece is not large enough for the creation of the ESOP to achieve the financial benefits that may make the ESOP an attractive alternative in ownership transition plans. With the change included in the bill allowing 100% ownership by an ESOP, New York entities will be able to take advantage of the ESOP structure used by design professionals in other states.

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