Publications

Design Professional's Practice Bulletin

Volume 1, Number 2 — May 1997

This Bulletin addresses recent developments affecting Design Professionals as well as business concerns as important as the specific professional and technical issues they face.

Editors: Neil P. Clain and Richard J. Davies

Firm Ownership and Succession for Design Professionals

By Malcolm B. Jacobson, Esq.

Proper structuring of the Design Professional's operating business entity can streamline management, provide for the owners' orderly succession and can minimize both income and estate taxes. The firm should have a clear understanding of its and the owners' goals. What is appropriate for unrelated owners of a professional firm may not be appropriate for a family oriented practice.

Areas of concern include the following: Is the firm's growth properly handled by appropriate legal provisions in the owners' agreement? Do the owners have an "exit" strategy (i.e. how and when are they to receive the value of their investment or ownership in the firm upon retirement, disability or death)? Is the firm fairly valued in the owners' agreements so that the valuation will pass IRS muster for income, gift and estate taxes? Are there any investments the firm or any of its members have in related assets, for example, real estate, patents or other intellectual property for which proper planning can minimize the impact of ownership changes and taxes?

The owners' goals are reviewed and analyzed with a view towards recommended solutions to best accomplish those goals with the least possible disruption and cost. Small changes may sometimes be all that is necessary to achieve the stated goals and speed transitions in ownership transfer. Sometimes, however, substantial restructuring is required to accomplish the stated goals.

Of course, changes in the form of the operating entity must comply with applicable licensing laws. These changes should be designed to make the professional firm's operation more efficient by providing for a smooth succession to the next generation of professionals, reducing the owners' liabilities wherever possible, and by better positioning the firm for possible sale or merger.

One of the most important requirements for professional practices is that the owners limit their liability for the firm's debts and for professional claims against the firm and them for alleged negligence. Many professionals do not realize that they can protect themselves and their assets from civil judgments (in excess of insurance liability limits) for professional negligence against their copartner, and from other debts of their firm, and still enjoy the advantage of not being taxed at the firm level. In Pennsylvania, as in most states, this has traditionally been accomplished by operating as a business corporation or professional corporation. More recently, the legislature has authorized ownership as a limited liability company, or limited liability partnership. Each of these entities has advantages and disadvantages. Also important is choosing a form of entity which is the most efficient arrangement from a management perspective.

Following this article is a short chart describing the attributes of a general partnership and various "limited liability" entities under Pennsylvania law. This chart is intended to be a brief summary of a few of the characteristics of these entities and cannot, for space limitations, detail all criteria or all differentials. Thus, it is not intended to be the sole basis for choosing such an entity, or to be a substitute for the appropriate legal analysis that must be undertaken.

©1997 Powell, Trachtman, Logan, Carrle & Lombardo, P.C.

This bulletin is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how laws, suggestions and illustrations apply to specific situations.