Can an architectural professional corporation set up an ESOP that holds shares in trust for non-licensed employees, when state law limits non-licensee ownership and bans voting trusts?
Plain-English summary
North Carolina's Professional Corporation Act, codified in Chapter 55B, generally restricts ownership of a professional corporation to licensed practitioners. For architects, engineers, and landscape architects (Chapters 83, 89A, and 89C), the Act adds a limited carveout: non-licensed employees may own up to one-third of the corporation's outstanding shares. G.S. 55B-6 also bars any shareholder from entering a voting trust agreement or any other agreement vesting the voting power of his stock in another person.
The Board of Architecture's attorney asked whether an architectural professional corporation could lawfully set up an Employee Stock Ownership Plan (ESOP) with these features:
- A licensed shareholder-employee of the firm would serve as ESOP trustee.
- The trustee would hold shares in trust for the benefit of corporation employees (the "participants").
- The participants' beneficial interest plus all shares held legally by non-licensed shareholder employees would together stay below one-third of the firm's outstanding shares.
The AG said yes. The opinion reasons in two main moves.
First, the ESOP is not a prohibited voting trust. A voting trust under G.S. 55B-6 is an arrangement in which a shareholder transfers his voting power to another. ESOP participants never receive legal title to the stock; they are equitable beneficiaries. Because they have no legal interest in the stock, they have no voting power to vest in anyone. The arrangement between the trustee and the corporation does not vest voting power either, because the voting power stays with the trustee (who, recall, is a licensed shareholder-employee) the entire time. Nobody is signing away voting rights.
Second, the ESOP complies with the one-third cap. G.S. 55B-6 allows non-licensed employees of an architecture, engineering, or landscape-architecture firm to own up to one-third of outstanding shares. The opinion treats the participants' equitable interest as counting against the cap (so legal shares held directly by non-licensee employees plus equitable interests through the ESOP add together for the one-third test). The proposed plan was designed to absorb only enough shares to keep the total under one-third, so it satisfied the limit.
The AG also emphasized the policy logic. G.S. 55B-6 exists to keep professional corporations under the majority control of licensed professionals, who are subject to the profession's ethical rules. An ESOP that keeps voting power in a licensed trustee and keeps non-licensee economic interest below one-third does not undermine that policy. It just gives non-licensed employees a stake in the firm's economic success.
Currency note
This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.
Chapter 55B has been amended several times since 1986, including changes to which professions can have non-licensee shareholders and how voting works. The federal ESOP framework (ERISA, the Internal Revenue Code) has also changed. Firms designing an ESOP today should consult a benefits lawyer and check the current Chapter 55B, related licensing-board rules, and federal ERISA/IRC requirements rather than relying on the 1986 analysis.
Common questions
Q: Does this opinion apply to law firms, medical practices, or accounting firms?
A: No. The one-third non-licensee carveout in G.S. 55B-6 was limited to professional corporations rendering services under Chapters 83 (architecture), 89A (landscape architecture), and 89C (engineering). Other professional corporations were and are subject to the full licensee-only ownership rule. Whether other professions have since been added to the carveout is a current-law check.
Q: Why does it matter that the trustee is a licensed employee?
A: The Professional Corporation Act keeps ultimate control of the firm with licensed professionals subject to the profession's ethical rules. If the trustee were a non-licensee, the trustee would be voting the shares of non-licensee employees, which would push voting power outside the licensed-professional circle. Keeping the trustee licensed and a shareholder-employee preserves that structural protection.
Q: What if the participants' equitable interest plus other non-licensee legal ownership creeps above one-third?
A: The opinion was clear that the plan must stay below one-third in combined non-licensee ownership. If the plan as designed would push the firm over that line, it would violate G.S. 55B-6 and the share issuance or transfer would be null and void under the statute's own enforcement language.
Q: Can the ESOP participants ever take legal title to the stock?
A: The opinion does not directly answer that, but its logic suggests that a distribution of legal title to a non-licensee employee would be subject to the one-third cap. If a participant who is not licensed received legal title that pushed total non-licensee ownership over one-third, the transfer would be invalid. If the participant is licensed at the time of distribution, that is just a regular shareholder transfer between licensees, which is allowed.
Background and statutory framework
G.S. 55B-6 says professional corporation shares may be issued only to a "licensee" as defined in the Act, and shareholders may voluntarily transfer shares only to another licensee. The corporation cannot record a share transfer until the appropriate licensing board certifies the transferee as a licensee. A specific proviso allows up to one-third of outstanding shares to be owned by non-licensed employees of professional corporations in three fields (Chapters 83, 89A, 89C). The statute also bars voting trust agreements and "any other type of agreement vesting in another person the authority to exercise the voting power" of a shareholder's stock.
The AG's interpretive moves were straightforward. An ESOP is structurally a trust: the trustee holds legal title, beneficiaries hold equitable interests. Participants who are equitable beneficiaries do not have voting power because they never owned the stock for voting purposes. A trust arrangement does not convert into a voting trust just because beneficiaries gain through trust property. The voting-trust prohibition in G.S. 55B-6 targets a different practice: shareholders pooling their stock under a trustee for voting purposes while retaining their economic interest as the shareholders of record.
The Official Comment to the Model Professional Corporation Act § 22 (referenced in the AG opinion) confirms that the policy goal is keeping ethical oversight inside the licensed profession. An ESOP that keeps voting in a licensed trustee fits that goal.
Citations
- N.C.G.S. § 55B-6 (capital stock; licensee ownership; one-third carveout for architecture/engineering/landscape architecture professional corporations; ban on voting trusts)
- Official Comment to Model Professional Corporation Act § 22 (policy of keeping control with licensed professionals)
Source
- Landing page: https://ncdoj.gov/opinions/application-of-professional-corporation-act-g-s-55b-to-employee-stock-ownership-plans-esop/
Original opinion text
Requested By:
Julian Mann, III
Attorney for the North Carolina Board of Architecture
Question:
Under G.S. 55B-6, may an architectural professional corporation establish an employee stock ownership plan (ESOP) wherein up to one third of the outstanding shares of the professional corporation are held in trust, by a trustee who is a licensed employee of the corporation, for the benefit of non-licensed employees of the corporation?
Conclusion:
Yes.
The Employee Stock Ownership Plan (ESOP) proposed here would have the following characteristics: The ESOP will be an agreement between the trustee (who will be a licensed shareholder of the corporation) and the corporation, under which the trustee will hold stock in the corporation for the benefit of corporation employees (hereinafter "participants"). The shares attributable to the accounts of the participants plus all shares owned by non-licensed shareholder employees will comprise less than one third of the total outstanding shares of the corporation.
The specific question posed here is whether the proposed ESOP would be in violation of G.S. 55B-6 which is set out in full as follows:
§ 55B-6. Capital stock.
"A professional corporation may issue shares of its capital stock only to a licensee as hereinabove defined, and such shareholders may voluntarily transfer such shares of stock issued to him only to another such licensee. No share or shares of any stock of such corporation shall be transferred upon the books of the corporation unless and until the corporation has received a certification of the appropriate licensing board that the transferee of such shares is a licensee as here defined. Provided, it shall be lawful in the case of professional corporations rendering services as defined in Chapters 83, 89A and 89C, for non-licensed employees of such corporation to own not more than one third of the total issued and outstanding shares of such corporation. Upon the transfer of any shares of such corporation to a non-licensed employee of such corporation, the corporation shall inform the appropriate licensing board of the name and address of the transferee and the number of shares issued to such nonprofessional transferee. Any share of stock of such corporation issued or transferred in violation of this section shall be null and void. No shareholder of a professional corporation shall enter into a voting trust agreement or any other type of agreement vesting in another person the authority to exercise the voting power of any or all of his stock. (1969, c. 718, s. 6; 1977, c. 855, s. 1.)"
It is the opinion of this office that the proposed ESOP does not constitute an illegal voting trust and that it fully complies with the requirements of G.S. 55B-6. The participants under the ESOP proposed here would be the beneficiaries of a trust, the corpus of the trust consisting of stock of the professional corporation. Thus the participants under the plan would be equitable but not legal owners of the stock which constitutes the corpus of the trust. Since the participants are never given or promised any legal interest in the stock, they have no voting power and they are incapable of entering into an agreement to vest the voting power of the stock in another. Obviously, one cannot agree to give away what he does not have.
The only "agreement" involved in this type of plan would be an agreement between the trustee and the corporation in which the trustee agrees to hold the shares for the participating employees. This does not constitute an agreement to vest the voting power of the stock in another person since the voting power of the stock at all times remains with the trustee. The proposed ESOP therefore does not constitute a prohibited voting trust.
The policy behind G.S. 55B-6 presumably is that of keeping majority control of a professional corporation in the hands of licensed professionals who will manage the corporation consistent with the ethical standards of the profession. (See Official Comment to Model Professional Corporation Act § 22). The proposed ESOP would in no way contravene this policy, nor would it violate the statute. All ESOP shares would be voted by the trustee, a licensed professional employee of the corporation. Moreover, the ESOP would absorb only so many shares as would allow the total number of shares owned by non-licensed employees (either equitably or legally) to be less than one third of the total amount of outstanding shares. This is consistent with G.S. 55B-6.
In conclusion, the ESOP proposed here does not violate G.S. 55B-6 because (1) all interests in the stock (both equitable and legal) will be held by authorized shareholders; and (2) there has been no "voting trust" whereby shareholders have agreed to convey away their voting rights.
Lacy H. Thornburg
Attorney General
Richard G. Sowerby, Jr.
Associate Attorney General