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November 19, 2020

Why a Shareholders' Agreement to Protect Financial Interest in Your Professional Service Corporation (PC) Is Critical

Doctors, lawyers, dentists, accountants, and other professionals with an interest in a multi-member professional service corporation (PC) in New York State, take note! If you have not entered into a shareholders’ agreement that specifies how your interest in the PC is to be valued upon your death or disqualification, New York has a statutory default plan for you. And I can almost guarantee you are not going to like it.

New York’s laws governing the disposition of PC interests at death contain many restrictions on the voluntary and involuntary transfer of ownership in a PC. Those restrictions are understandable given that a non-licensed professional shouldn’t (and thankfully is not allowed to) be a member of a PC rendering services to the public. You really wouldn’t want an unlicensed spouse or child of your recently deceased doctor, for instance, making decisions about how the medical practice you use is run!

Not only does NYS law govern to whom shares in a PC may or must be transferred, it also governs how the value of those shares is determined if the partners in the PC have not set out in writing provisions for valuing those shares.

Absent a shareholders’ agreement specifying how your interest in the PC is to be valued, section 1510 of New York’s Business Corporation Law requires the PC to purchase (or redeem) your interest at the book value of such shares as of the end of the month immediately preceding death or disqualification. Book value is almost always dramatically lower than the fair market value of your interest (sometimes it’s even a negative value depending on the finances of the PC).

This is a real trap for the unwary. Any professional with an interest in a multi-member PC without a shareholders’ agreement is taking a great risk that can be easily avoided. I’m not saying that putting a shareholder’s agreement in place is simple. However, with proper planning, we can help you protect your financial interest so that on exit from the PC, you or your estate receives the proper value.

If you would like to discuss this or any other matter I’ve written about, I’d welcome your call.

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