California is a unique state in many ways. This is also true of the way it handles corporations. For professionals such as lawyers, doctors, psychiatrists, family therapists, and psychologists, a California professional corporation is the best bet. But what is a California professional corporation exactly, and how can it help you offer professional services to others in your field?
Typically, a partnership is formed when two or more people come together with similar ideas to run a business. In the case of a California professional corporation, you’re providing professional services, so you have to first be a licensed person. Read on to find out how this business structure works and how it may be able to help you.
What Is a California Professional Corporation?
A professional corporation is a legal entity under the Moscone-Knox Professional Corporation Act. It offers professional services for particular professions:
- Medicine (including veterinary medicine)
Like any other traditional corporation, a professional corporation keeps the personal assets of members of professional corporations safe from any professional company debts. It also provides limited liability protection for these assets. Note that there can be exceptions in shielding a professional from liability in some cases, most notably malpractice.
Professional corporations can be used to encompass many other types of corporations. This includes domestic corporations and foreign corporations as well as specialized groups like medical corporations, foreign corporations, speech-language pathology corporations, and the like.
Which Licensed Person Can Form a Professional Corporation in California?
California doesn’t permit members of certain professions to form professional LLCs or registered LLCs. As a professional in those professions, you must create either a registered limited liability partnership or professional services corporation.
According to the Moscone-Knox Professional Corporation Act, here are the licensed professionals that have to register as a professional services corporation in California:
- Licensed doctors
- Podiatric medicine specialists
- Speech-language pathologists
- Naturopathic doctors
Other Medical Professionals
- Licensed physician assistants
- Dental hygienist
- Physical therapists
- Family therapists
- Clinical counselors
- Lawyers, including business lawyers
- Clinical social workers
A California Professional Corporation (foreign corporation) formed outside the state that intends to do business in California must register with California’s Secretary of State. According to statutory requirements, a foreign professional corporation is expected to file a certificate of good standing from where it was formed.
The Pros and Cons of a California Professional Corporation
First of all, you should note that no one can offer the professional services that qualify for a professional corporation in California without an effective certificate of registration issued. You have to be a “licensed person” first. These limitations can be found in the Limited Liability Company Act.
Additionally, once you’re in a professional corporation, shares of capital stock in that professional law corporation can only be issued to a licensed person. Any shares given that are against that restriction are considered a violation of law and void. However, for those who meet the applicable rules, a California professional corporation is a professional business structure that grants you the platform and an effective certificate to do business.
That aside, here are some of the pros and cons of a California professional corporation.
Benefits of a California Professional Corporation
Here are some of the most notable benefits of forming a California professional corporation.
LLC Liability Protection
This business structure protects licensed professionals from personal liability due to negligence. With a professional law corporation, on the other hand, the professional services you offer and you as a person are considered two separate entities. Hence, your assets aren’t affected if your corporation falls into debt.
Unlike limited partnerships and sole proprietorships, a professional corporation shares most of the benefits of a typical corporation. It has tax benefits, issuance of stock, shares of capital stock, and personal assets protection.
- A professional law corporation can issue shares of stock that help to attract new partners.
- The corporation exists even when the owner leaves or in the case of a deceased shareholder.
- Professional corporations pay a reduced 21 percent corporate tax rate.
- Any licensed person under this public benefit corporation has personal asset protection.
- As an advantage of liability protection, shareholders are safeguarded from the personal malpractice and unprofessional relationship/unprofessional conduct of other owners.
Drawbacks of a California Professional Corporation
While there are many benefits to this type of business structure, you should also keep these drawbacks in mind.
Joint Business Decisions
Before you form this type of corporation to render professional services, consider your potential partners carefully. You and your group may share opposing views on business decisions, medical services, or other pertinent matters. To succeed as a business, you’ll need to ensure you work well with your colleagues.
Joint Liability in Professional Corporations
This professional relationship often comes with a lot of member susceptibility. No one is a sole shareholder, and each partner is liable for the partnership’s debt. This means each partner is held responsible for the misconduct or (in medical centers) malpractice of the other partner.
Types of California Professional Corporation
A professional corporation can either be taxed as an S or C corporation. S and C corporations are formed under the IRS, while professional corporations are formed under California’s Secretary of State. A popular dilemma when creating a professional corporation status is whether it should be an S or C corporation. Read on to see what both options are.
Know that, in either scenario, your first step should be to create a professional corporation with the Secretary of State. After that, you can start either as an S or C corporation with the IRS governmental agency.
This section starts getting a little deeper into the tax structures of different types of corporations. If you need more background information on this, check out some of our other articles on business formation.
Professional C Corporation
Professional corporations are taxed as C-corporations by default. A C corporation is considered a separate entity for business entity filings. This means the corporation files and pays their corporate income taxes and federal taxes. The professional corporation owner has to pay and file their individual taxes as well.
This is called double taxation. However, a C corporation does have fewer lesser restrictions than its alternatives. We’ll discuss that more below.
Professional S Corporation
A professional corporation is taxed as an S Corporation or a small business corporation that experiences pass-through taxation. Pass-through taxation means your corporation isn’t subjected to paying income taxes.
So, what happens to those income taxes? Any profits and losses are “passed” to the corporation’s owner (likely you).
S-Corporations help prevent double taxation as is found in regular corporations. Some California professional corporations refer to their corporation as an S corporation to avoid double taxation. However, an S corporation is limited and is open only to businesses that meet these minimum requirements:
- Less than 100 shareholders
- Owned by another business entity
- Issues only one class of stock
- Doesn’t have foreign shareholders
How to Form a California Professional Corporation
Ready to take action? Here is a brief guide including applicable rules on how to form a professional corporation in California.
Pick a Name
Every corporation requires a name. Of course, you have to pick a name that any other corporation hasn’t used. Check here for name requirements.
Choose an Agent
This entity (an organization or an individual) receives legal notices on your corporation’s behalf. The name and address of this corporate agent for service are required as part of the application process.
File Your Article of Incorporation (Form ART-SC)
This document officially registers your corporation with the state of California. If you fill and submit an article of incorporation containing all required details including your business address, you act as an incorporator.
Appoint a Board of Directors
As an incorporator, you are responsible for assigning an initial set of directors for your corporation.
Draft a Corporate Bylaw
A corporate bylaw contains all pertinent information about your business. This can include terms of office for a regulatory board, annual report requirements, professional conduct in which the corporation seeks to operate, and the like.
Either the incorporator or initial directors can draft a corporate bylaw. However, you don’t have to actually file a corporate bylaw. You just need to keep it on file for the proper functioning of the corporation.
Manage Your Corporation Tax Obligations
Find out all the required taxes and pay them. This can include corporate taxes and federal taxes as well as state and local taxes.
Get Business Licenses and Permits
Get the required permits and licenses if there are any. This step really depends on the type of corporation you’re opening and the field in which you work.
There are many documents for your legal requirements and additional requirements if you want to render professional services by a person. These documents must be complete and submitted appropriately during the applicable filing period to have your effective certificate of registration issued to you by a governmental agency.
How A People’s Choice Can Help You with Your California Professional Corporation
Forming a professional corporation requires you, as a licensed professional, to deal with a lot of paperwork. Luckily, to file your paperwork to become a professional corporation, you don’t have to hire an overpriced business attorney. All you need is A People’s Choice.
A People’s Choice is a certified platform in California that offers affordable business incorporation paperwork services. We will guide you through the hassle of forming a professional law corporation at an affordable cost, preventing the delays or additional application fees that mistakes can cause. Start your professional corporation now!
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