When a professional forms, operates, or transfers a firm, compliance requires more than simply following the laws governing corporations, limited liability companies, or limited liability partnerships. If the firm provides certain professional services, it may also be subject to the Minnesota Professional Firms Act (“MPFA”), codified at Minn. Stat. ch. 319B, which establishes the framework under which professionals may provide professional services through a professional firm in Minnesota.
The MPFA imposes requirements that govern the entire lifecycle of a professional firm. These requirements address: whether a firm’s services qualify as “Professional Services,” how a firm elects professional firm status, the naming requirements applicable to professional firms, the services a professional firm may provide, who may own an interest in the professional firm, how ownership interests may be transferred, what happens when an owner dies or becomes disqualified, and who may exercise governance authority over the professional firm. Failure to comply with these requirements can result in the loss of professional firm status and the ability to offer professional services.
The discussion below summarizes the key requirements that every professional should understand when forming, operating, or transferring a professional firm under the MPFA.
What Constitutes “Professional Services”?
The first question any firm should answer before considering the MPFA’s requirements is whether the services it provides qualify as “Professional Services” under the statute.
Section 319B.02, subd. 19, defines “Professional Services” to mean services of the type required or permitted to be furnished by a professional under license, registration, or certificate issued by the State of Minnesota to practice:
- medicine and surgery;
- as a physician assistant;
- chiropractic;
- registered nursing;
- optometry;
- psychology;
- social work;
- marriage and family therapy;
- professional counseling;
- dentistry and dental hygiene;
- veterinary medicine;
- architecture, engineering, surveying, landscape architecture, geoscience, certified interior design;
- accountancy; or
- law,
as well as under a license or certificate issued by another state under similar laws.
Whether a firm’s services fall within this definition is the first step in determining whether the firm is subject to the requirements imposed by the MPFA.
Electing Professional Firm Status
One of the most common misconceptions about the MPFA is that forming a corporation, limited liability company, or limited liability partnership automatically creates a professional firm. It does not.
Instead, Section 319B.03, subd. 2, requires a firm to affirmatively elect to become a professional firm. To make this election, the firm’s organizational document must:
- State that the firm elects to operate under the MPFA;
- Acknowledge that the firm is subject to the MPFA; and
- Specify, from the list of professional services, the category, or categories of professional services the firm is authorized to provide.
This election may be made when the firm initially files its organizational document or later by amending that document. Likewise, a professional firm may rescind its election by amending its organizational document to remove the required election language.
Although Section 319B.03, subd. 1, permits firms to furnish professional services without making this election, those exceptions are limited and highly fact-specific.
Professional Firm Names Must Meet Naming Requirements
A professional firm cannot simply select any available name because the MPFA imposes specific requirements governing the names professional firms may use.
Section 319B.05, subd. 1, prohibits firm names that imply professional superiority. In addition, Section 319B.05, subd. 2, requires a professional firm’s name to end in a prescribed phrase, word, or abbreviation, such as:
- “Professional Corporation” or “P.C.”
- “Professional Limited Liability Company” or “P.L.L.C.”
- “Professional Limited Liability Partnership” or “P.L.L.P.”
This requirement provides notice to the public that the firm is organized and operating as a professional firm subject to the requirements of the MPFA.
Limitations on Furnishing Professional Services
Electing professional firm status does not give a firm unlimited authority to operate. Instead, the MPFA limits both the professional services a firm may provide and the manner in which those services may be furnished.
Section 319B.06, subd. 1, limits a professional firm to furnishing only the category of professional services specified in its election. In addition, every owner of the firm must satisfy the ownership requirements applicable to those professional services, which are discussed in the next section below.
Although a professional firm may exercise the powers granted under the statute governing its formation, it may do so only to furnish its pertinent professional services or accomplish tasks ancillary to furnishing those services. Accordingly, a professional firm may not conduct any other business or provide services beyond those authorized under Section 319B.06, subd. 1.
Section 319B.06, subd. 2, further requires that professional services be furnished only through professionals who are licensed or otherwise authorized by the State of Minnesota to furnish the pertinent professional services.
Ownership of a Professional Firm Is Strictly Limited
Unlike ordinary firms, professional firms are subject to strict ownership restrictions designed to ensure that control remains with professionals.
Section 319B.07, subd. 1, strictly limits who may own an ownership interest in a professional firm. Specifically, an ownership interest may not be owned or held, directly or indirectly, except by:
- Licensed professionals;
- General partnerships, other than limited liability partnerships, authorized to furnish at least one category of the professional firm’s pertinent professional services;
- Other professional firms authorized to furnish at least one category of the professional firm’s pertinent professional services;
- The surviving spouse of a deceased professional who was the sole owner of the professional firm at the time of the professional’s death, but only for the one-year period following the professional’s death; or
- A voting trust or employee stock ownership plan that satisfies the statutory requirements.
Section 319B.07, subd. 2, further provides that a professional firm may not transfer an ownership interest except to parties who satisfy these requirements. These restrictions apply regardless of whether the transfer is voluntary or involuntary, and a transfer made in violation of Section 319B.07 is void.
Death or Loss or Disqualification of an Owner
Because ownership of a professional firm is limited to qualified parties, the death or disqualification of an owner can create significant compliance issues that require prompt action under the MPFA.
Section 319B.08, subd. 1, requires that if an owner dies or becomes disqualified from furnishing all the firm’s pertinent professional services, then either:
- Within 90 days after the owner’s death or the beginning of the disqualification, all the owner’s ownership interest must be acquired by the professional firm, by parties permitted in the section above, or by a combination thereof; or
- At the end of the 90-day period, the professional firm’s election is automatically rescinded, the firm loses its status as a professional firm, and the authority created by that election and status terminates.
These requirements are satisfied if all rights and title in the deceased or disqualified owner’s interest are acquired before the expiration of the applicable period, even if some or all of the consideration is paid afterward. In addition, Section 319B.08, subd. 4, extends the 90-day period to one year following the death of a professional who was the sole owner of the firm if the surviving spouse owns and controls the firm during that period.
Section 319B.08, subd. 2, establishes the order governing the acquisition of a deceased or disqualified owner’s interest. The acquisition is governed first by the professional firm’s existing buyout mechanism, then by a mutually agreed-upon arrangement if no such mechanism applies, and finally by the statutory default procedure.
Governance of Professional Firms Must Remain with Licensed Professionals
The MPFA strictly regulates who may possess and exercise governance authority within a professional firm and limits the delegation of decisions requiring the exercise of professional judgment.
Section 319B.09, subd. 1, requires a professional firm’s governance authority to be vested in either:
- One or more professionals, each licensed to furnish at least one category of the firm’s pertinent professional services; or
- The surviving spouse of a deceased professional who was the sole owner of the professional firm, while the surviving spouse owns and controls the firm, but only during the one-year period following the professional’s death.
If the professional firm is organized as a nonprofit corporation, at least one individual possessing governance authority must be a professional licensed to furnish at least one category of the firm’s pertinent professional services.
Although parties possessing governance authority may delegate administrative and operational responsibilities, they may not delegate or assign any decision involving the exercise of professional judgment to a party who is not a professional licensed to practice the professional services involved in the decision.
A professional whose license to furnish any pertinent professional services has been revoked or suspended may not, during the period of suspension or revocation, possess or exercise governance authority, hold a position with governance authority, or participate in any decision constituting an exercise of governance authority.
Section 319B.09, subd. 2, further provides that the ownership restrictions applicable to a professional firm also apply to the holding and exercise of any right to vote or participate in the management of a professional firm where the right derives from or is on account of an ownership interest in the professional firm. In addition, when a professional firm is considering whether to rescind its election, the representative of a deceased or incompetent owner may vote that owner’s ownership interest to the same extent the owner could have voted but for the death or incompetency.
How We Can Help
If you have questions about the MPFA or any other matter affecting your professional firm, please contact the author, James VandenBergh, at (952) 460-9248 or [email protected]. James advises clients on mergers and acquisitions, entity formation and dissolution, corporate governance, ownership agreements, succession planning, commercial contracts, restrictive covenant agreements, liability waivers, and offers general counsel services.
