Business Formation for California Professionals: A Brief Introduction to Professional Corporations in California
California professionals who desire to form a business entity rather than practice as a sole proprietorship must form their business as either a professional corporation or a registered limited liability partnership (“LLP”) in California.
A California professional corporation is a common business entity structure that many California professionals commonly use to set up their private practices. A lengthy list of all the types of professionals that may form a professional corporation in California is provided under California Corporations Code section 13401.5. This list includes, but is not limited to, doctors, psychologists, psychiatrists, licensed marriage and family therapists, dentists, chiropractors, accountants, etc.
California professional corporations may only offer professional services within a single profession. California Corporations Code defines a “professional corporation” as "a corporation ... that is engaged in rendering professional services in a single profession … pursuant to a certificate of registration issued by the governmental agency regulating the profession as herein provided and that in its practice or business designates itself as a professional or other corporation as may be required by statute.” Corp. Code § 13401.
The governmental agency responsible for overseeing the particular profession of the professional corporation may impose requirements as to the professional corporation’s choice of name, and require the professional corporation’s bylaws to specify who can be officers and own shares of the professional corporation.
An interesting issue arises when two or more people in California want to form a California business entity geared towards providing a professional service, but not all of them are licensed professionals. For example, let’s assume that two Californians desire to form a business entity to provide mental health and counseling services for families and individuals. They desire to equally own and manage the business. One of them is a licensed marriage and family therapist, but the other is not. In this case, a professional corporation is not an appropriate entity choice because only licensed persons can be shareholders of a professional corporation. The second most commonly selected business structure for professionals -- the California limited liability partnership (“LLP”) -- is also inappropriate as it is limited to California professionals licensed to practice in the fields of public accountancy, law, and architecture.
In the foregoing example where neither a professional corporation nor an LLP are appropriate options, the two business owners may consult the appropriate government agency that governs the particular profession in which they seek to engage (in this example, the Board of Behavioral Sciences), a business lawyer, and an accountant. The government agency may provide some practical guidance as to what other types of business entities are commonly selected by other licensed professionals in the field who similarly share ownership and management responsibilities with an unlicensed co-owner. The lawyer and accountant may then weigh in on the various options provided by the agency, and help the two business owners decide which option for entity formation works best from a legal and tax perspective.
In summary, a California professional corporation may be a great choice for professionals who desire to form a business entity, rather than practice as a sole proprietor. First, it offers protection from personal liability for claims other than malpractice. Second, it may allow you to take advantage of an income tax deduction for the payment of health insurance premiums for employees. However, in circumstances where a professional corporation is not available, it is best to seek guidance from the appropriate government agency and other professionals as to appropriate entity choices.
Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding choosing a business entity for your practice. Please contact us for a consultation.
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.