Looking at New Geographies?

The Five Toughest Licensing States for Ownership and Management Requirements

By Christian Haring

Being able to capitalize on opportunities in new geographies is a key competitive advantage. Yet with so many licensing variables from state to state, it can be hard to predict how much time and effort it will take to qualify in a new jurisdiction. This article examines five states that are particularly challenging due to stringent management and ownership requirements. Firms often need to make significant adjustments, such as forming a new entity, to meet them.

The Role of Firm Ownership in Licensing

Many states require engineering and land surveying firms to meet ownership and management requirements before obtaining a certificate of authorization (COA). Since many engineering firms are not wholly owned by engineers or other licensed professionals, these requirements can pose major challenges. Ownership and management requirements are tied to different legal structures in each state, further complicating the picture for out-of-state firms. More than a dozen states, for example, require professional corporations (PCs) or professional service corporations (PSCs) to be fully owned or majority-owned by licensed professionals. Depending on the state, PCs and professional limited liability companies (PLLCs) may be optional, required, or forbidden structures for engineering firms. California and Kansas, for example, permit engineering firms to form PCs, but not PLLCs, while New Jersey provides PCs for domestic entities but bars foreign PCs.

These overlapping requirements can make entry into new states a complex process, as the following examples illustrate. By understanding the biggest challenges and knowing what to look for, firms can approach new jurisdictions with greater ease and confidence.

#5 Minnesota

Engineering firms wishing to offer services in Minnesota must elect to become a Professional Firm under Minnesota Statute 319B. The election is made as part of registration with the secretary of state. Joint practice of engineering, land surveying, geoscience, architecture, landscape architecture, and interior design is permitted. Corporations, LLCs, LLPs, and other entity types may qualify as Professional Firms under the statute, but they must adopt specific name endings.

To qualify, firms must generally be owned and governed by professionals licensed in one or more services provided by the firm, or by partnerships, firms, voting trusts, or employee stock ownership plans (ESOPs) owned by licensed professionals. This requirement can make licensing in Minnesota challenging for out-of-state firms.

#4: Michigan

While Michigan does not have a formal license requirement, the state can be difficult thanks to its requirement that two-thirds of an engineering firm’s principals be licensed in Michigan. Michigan defines principal as a “sole proprietor, partner, the president, vice-president, secretary, treasurer, or director of a corporation, or a member or manager of a limited liability company.” For PCs, all shares must be owned by licensed professionals or by entities that are fully owned by licensed professionals.

Firms that want to provide services in Michigan must apply to the Department of Licensing and Regulatory Affairs and show that they meet these requirements, among others. Once the ownership requirements are met, however, Michigan offers one of the simpler and faster qualification processes, landing it at number four on the list.

#3 Connecticut

Engineering and land surveying firms may practice in Connecticut through PCs, corporations, and LLCs. For all of these structures, the state requires firms to be at least two-thirds owned and controlled by Connecticut-licensed professionals. Firms that provide joint practice of architecture, landscape architecture, engineering, and land surveying must be two-thirds owned by licensed professionals, with each discipline holding a minimum of 20 percent of the voting stock or voting interest of the company.

On top of these requirements, Connecticut’s licensing process is not particularly quick or easy. Firms with Connecticut in their sights will want to plan ahead and allow ample time for licensing.

#2 North Carolina

North Carolina requires engineering firms to qualify as PCs, PLLCs, general partnerships, limited partnerships, or limited liability partnerships (LLPs). PCs and PLLCs must be at least two-thirds owned by licensed professionals. In addition, PCs must have at least one North Carolina licensee for each profession who is a director and one who is an officer and shareholder, while PLLCs must have at least one North Carolina licensee who is a member and one who is a manager. For both entity types, the balance of ownership (up to one-third) may be held by non-licensed employees individually, or in limited cases, via ESOPs. This combination of entity restrictions and ownership requirements, coupled with a challenging application process, earn North Carolina second place in the top five toughest states.

The licensing process begins with an application to the engineering board for approval. The board provides a certificate to be submitted to the secretary of state along with registration. Many firms have to adopt a fictitious name in North Carolina, adding further steps, and everything has to be notarized. North Carolina also requires a comprehensive list of shareholders to be entered into its online form. For large firms with hundreds of shareholders, this can be a very time-consuming task!

#1 New York

New York lands the top spot on the list, with a high ownership bar and some of the most complex licensing and registration processes in the country. Engineering firms can qualify as design professional corporations (DPCs), professional service corporations (PSCs), PLLCs, partnerships, or LLPs. For PSCs, all officers, directors, and shareholders must be licensed design professionals in some jurisdiction. For PLLCs and partnerships, the bar is higher yet: all members of PLLCs, and all partners in a partnership, must be licensed in New York State.

New York introduced the DPC structure in 2012 to allow greater flexibility in firm ownership, but the requirements for DPCs are substantial nonetheless. More than 75 percent of ownership of a DPC must be held by design professionals licensed in New York. In addition, more than 75 percent of officers and directors must be licensed in New York, as must the president, chief executive officer, and chair of the board of directors. The largest single shareholder must be a New York-licensed design professional or, with certain restrictions, an ESOP.

On top of these requirements, New York’s licensing and registration processes are so complex that more than 80 percent of applications for certificates of authority are rejected, and processing times are measured in months instead of weeks. New York is definitely a state to be approached with time, patience, and attention to detail!

Other Factors That Affect Timing

While ownership and management requirements represent some of the more significant hurdles to clear when expanding into new states, there are other factors that determine the speed and ease of licensing. In some of our top challenging states, as previously noted, the licensing process can be relatively quick and painless for firms with ownership and management structures that meet the requirements. At the same time, there may be states with no ownership or management requirements that nonetheless have rigorous or lengthy processes to navigate on the way to offering services. A good example of this is California, which doesn’t even have a formal license requirement, yet requires in its place an organization record that can take longer to complete than many license applications. Illinois is another state that makes the list for sheer difficulty in the application process.

The Key to Successful Applications

Firms can set themselves up for success when entering new states by researching the structures available to engineering firms and the corresponding ownership and management requirements early. Also pay close attention to name requirements such as required endings for each entity type. By planning ahead and leaving plenty of time for the licensing and registration process, firms can enter new states faster and position themselves to capture more business.

Harbor Compliance is not an accounting or law firm and does not provide tax, financial, or legal advice.

Christian Haring is an Account Executive at Harbor Compliance (www.harborcompliance.com/compliance-solutions-engineering-firms) specializing in professional licensing for engineering (www.harborcompliance.com/information/engineering-firm-license-certificate-of-authorization), architecture, and construction firms. With a focus on mid-sized and large firms, Christian understands the need for precision and clarity in managing multi-jurisdictional licensing. Christian’s core focus is providing compliance as a growth enabler for his clients. He is available to answer your questions at 717-298-8128 or charing@harborcompliance.com. www.harborcompliance.com.