Building a Business in New York: An Overview of Entity and Tax Considerations

Design professionals all over the world have taken to heart the words famously crooned by Frank Sinatra, "I want to be a part of it, New York, New York." And New York has traditionally welcomed those bringing their design and construction talents to our proverbial shores. In this mutual enthusiasm for a world-class built environment, the realities of "doing business" in New York are sometimes forgotten or at least put off until trouble arises. This article presents an overview of business considerations and tax issues that you should be aware of in advance of taking on a project in New York.

Design professionals must interact initially with two New York State agencies in order to qualify to do business in New York, the New York State Education Department and the New York State Division of Corporations. The Education Department oversees licensed professionals and professional practices within the State. The Division of Corporations manages New York entity formation and the qualification of non-New York firms to do business here.

Three types of foreign entities can qualify to do business in New York: the professional corporation (PC), the professional limited liability company (PLLC)and the limited liability partnership (LLP). In the case of the PC, any individuals who are intending to practice in New York must be NY-licensed and currently registered, and all shareholders/officers/directors must be licensed by the home jurisdiction. The requirements for the PLLC and the LLP are somewhat more onerous. All members/managers of the PLLC must be licensed both in New York as well as in the jurisdiction of formation. All partners in the LLP must also be licensed in New York.

In terms of process, a Certificate of Authority is issued for the foreign PCs and PLLCs by the Education Department upon inspection of the entity formation documentation, certain information to be provided regarding ownership and management structures, and the relevant professional licenses. Upon approval by the Education Department, the Application for Authority, along with a Good Standing Certificate for the entity, is submitted to the Division of Corporations for approval. In the case of an LLP, the entity is first registered with the Division of Corporations by submitting evidence of registration in its jurisdiction of formation and then filing a notification of such registration, along with the appropriate licensing documentation, to the Education Department. In the event that business has been conducted in New York in advance of qualifying the entity,there will also be required a clearance from the New York State Division of Taxation and Finance.

In the event that a non-NY domiciled entity does not fit within the above three categories, the design professional firm will have to form a New York entity. Other than a sole proprietorship, New York design professionals are permitted to practice through four entity types: the PC, PLLC, LLP and the design professional service corporation (DPSC). The DPSC is the only entity type that allows ownership (not more than 24.99%) by non-licensed professionals. In addition, more than75% of the directors and officers of the DPSC including the president, the chairperson of the board and the chief executive officer(s) must be licensed in New York.

All shareholders/officers/directors in the New York-formed PC must be licensed in New York and the same is true of all partners in the New York LLP and all individual members/managers in the New York PLLC. All non-individual (entity) PLLC members must show that they are authorized to practice architecture either in New York or their home jurisdiction, and all must be authorized to do business in New York. The PLLC is a popular option when a firm based outside of New York is pursuing a project that requires a New York entity jointly with a New York-based architect.

In order to “be a part of it,” New York State and City are also going to want you to pay a part of it. New York State and City present the design professional with a considerable array of taxes and rules that must be factored into your decision making. The first comes in the form of two potentially expensive New York City entity level taxes. The City does not recognize the“flow-through” treatment afforded to an S Corporation and those not accustomed to paying tax at the entity level will be surprised with their newly generated corporate tax obligation. For pass-through entities, the City requires you to pay the Unincorporated Business Tax.

It comes as no surprise that rents are high in New York City, but many may not be aware of the 3.9% Commercial Rent Tax. Once annual rent reaches $250,000, lessors are obligated to file and pay the tax.

Interior decorating and design services do not include — as defined by the State Education Law — the practice of architecture and engineering. However, when architects and engineers perform a service outside the scope of the definition, these services are subject to sales tax. Examples of such services include layout drawings of interior spaces, lighting design, furniture arranging and any other similar services. In these cases, you will be subject to the New York State (but not the New York City) portion of the tax.

Attention must also be paid even if a partner never sets foot in New York State or City. If your New York operations are going to be part of the same entity as your existing business, chances are all of your partners are now going to be subject to New York State personal income tax. As a partner in a flow-through entity, one is considered to be earning income in each and every state that the entity is conducting business in. Accordingly, if one or two partners spend all of their time in New York State and others spend no time there, all might have a New York State tax obligation. Fortunately, you will likely receive a credit for some or all of the tax paid to New York on your resident state return. However, this is of little value for those who live in a state where there is no personal income tax.

As the crooner said, “If I can make it there, I can make it anywhere” and the glittering potential for success in New York remains within reach — for those who are thoroughly prepared.