In a strong construction environment, industry participants are often looking for ways to expand their business. Growing a business often includes looking for work in other states. This is much easier for some industry participants than for others. In particular, those providing professional design services – architects, engineers, surveyors and landscape architects – can face difficult restrictions when looking to move across state lines. Understanding these restrictions is not only important for the design professionals themselves, but also for contractors and project owners who need to ensure that any design professionals they hire are appropriately authorized to perform work in that state.

Why is business mobility more difficult for a design professional than for others? The reason lies in the name – professional. Corporate structure requirements vary across the country when the provision of professional services is involved. At one end of the spectrum, there are many states that place no more corporate form restrictions on design professional firms than they do on any other business. At the other end of the extreme, there are a handful of states with Professional Corporation Acts that require a design professional firm to operate under the professional corporation or professional limited liability company form. In between those two extremes, there are states that, while having Professional Corporation Acts, make operation under the PC or PLLC form an option rather than a mandatory requirement.

Using the PC or PLLC form, whether by decree of the state or by election in those that allow (but do not require) such form, is more than simply a difference in name. The PC and PLLC forms typically carry very stringent requirements on who can be a shareholder, officer, director, member or manager of the entity. Additionally, some states limit a PC or PLLC to the provision of only one type of professional service, which can present a roadblock to a combined architectural and engineering firm. What do these restrictions mean in real life?

For example, a South Carolina company providing architectural and engineering services ownership and corporate governance structure is made up largely of unlicensed individuals, although, any professional services are performed by individuals who are appropriately licensed architects and engineers. With an abundance of business opportunities across the border in North Carolina, the company decides to expand work northward. It is a mistake to assume it is as simple as making sure the individuals actually providing the professional services are themselves licensed in North Carolina.

In North Carolina, no business entity may provide architectural and engineering services unless it meets the requirements of the Professional Corporation Act. For North Carolina, that means at least two-thirds of the issued and outstanding shares must be held by licensees, and the remaining one-third may only be held by non-licensed individuals if they are employees of the company. Additionally, at least one stockholding officer must be a licensee of each service being offered (in our example, that means the company’s officers much include at least one stockholding and licensed architect and one stockholding and licensed engineer). Unless the South Carolina company is willing to completely restructure itself, it will not be able to provide the services it would like in North Carolina. Instead, a new entity would have to be created that meets the ownership and corporate governance requirements for North Carolina.

Setting up a new separate company to provide design services in order to meet the corporate formation and governance requirements of different states is, itself, not as simple as it may sound. Many concerns must be considered and addressed, including how reasonable control can be maintained over the new company if desired; the use of the existing company’s intellectual property in a way that does not render that intellectual property open to free use by others; the ability of the new company to access administrative services, such as payroll and human resources, without the establishment of completely new departments for the new company; and the structure and content of websites and other advertising, which are typically the subject of regulation by licensing boards and generally must be presented in a way that does not mislead the consuming public as to which company is appropriately authorized to perform which professional services in which states.

In summary, there are a variety of issues design firms need to consider before attempting to do business in a new state. Finding the appropriate corporate structure to use across multiple states, or establishing a new corporate entity altogether, can feel like putting a 10,000-piece puzzle together. It may be tempting to simply ignore the corporate requirements of the new state, but that is a temptation that must be avoided unless the company is prepared to deal with fines, disciplinary action by the licensing boards involved and, in some cases (New York, for example), criminal penalties. Instead, start expansion planning early to allow enough time to either ensure corporate formation compliance in the new state or to establish an appropriately structured new company.