The professional corporation or the professional limited liability company are similar to their traditional counterparts, but are organized for the purpose of providing professional services, such as medical, legal, or accounting services. Unlike other states however, California does not provide for the formation of a “professional limited liability company”. California only provides for the formation of a “professional corporation”. A “professional corporation” is a service corporation that is licensed by the State of California. With an ever increasing prevalence of professionals in California, the professional corporation is becoming more and more prevalent. This article is specifically directed at the California Professional Corporation.
A professional corporation is formed, just as a traditional corporation, by the filing of articles of incorporation with the California Secretary of State. However, unlike traditional corporations, a professional corporation generally has to comply with the rules and regulations of the appropriate licensing body. For instance, a professional corporation for medical doctors must register with the Medical Board of California. Moreover, there are specific requirements regarding who may own shares and who may hold title as an officer and/or director of a professional corporation. Typically, only licensed professionals of like professions may share in the ownership and serve as officers and/or directors.
Shareholder Limitations On Professional Corporations
In California, shares of stock in a professional corporation can only be issued to individuals that hold a license in the professional service which the business provides. Further, a shareholder of a professional corporation is prohibited from entering into a voting trust, proxy, or any other arrangement that would permit a non-shareholder to vote his or her shares of stock. In the event a shareholder is disqualified from rendering professional services or dies, the professional corporation must acquire all of his shares.
Choosing A Name For The Professional Corporation
In California, the name of a professional corporation must end with specific designations such as “a Professional Corporation” or the abbreviation “PC.” The name requirements vary from profession to profession. In addition, the name cannot be the same as, or “deceptively similar” to, that of any other professional corporation licensed in California. The California Secretary of State maintains a database of current business names that may be checked to see if the name chosen is available. If a name is available, it can be reserved for up to sixty days by filing a reservation request with the office of the California Secretary of State. It’s important to review the particular state licensing board for the requirements of any given profession to ensure compliance.
Taxation Of Professional Corporations
Under the Internal Revenue Service’s default provisions, professional corporations are taxed as C Corporations. In most cases however,
professional corporations do not benefit from graduated income tax rates available to the average C Corporation. That is because most
professional corporations are “qualified personal service corporations”
(those that provide services in the fields of health, law, engineering,
architecture, accounting, actuarial science, or consulting). Qualified
personal service corporations pay a flat federal income tax rate of
thirty-five percent instead of the graduated tax rates applicable to
other C Corporations. Depending on the corporation’s revenue, the flat
thirty-five percent can result in an increased tax burden.
Professionals can avoid this flat thirty-five percent tax rate as well
as the double taxation applicable to C Corporations by electing S Corporation status.
Other Important Considerations
In addition to registration and licensing requirements, professional
corporations need to consider other important matters such as business
licensing and certification, fictitious names (the name under which the
corporation intends to do business if different from the corporate name –
sometimes referred to as “doing business as” or “dba”) and any other
requirements of the applicable licensing board. A business license or
certificate will always be required regardless of the type of business.
Information on licensing is typically available on-line via city or
county websites in which the professional corporation intends to do
business. Moreover, the name chosen as a “dba” is most often subject to licensing board limitations similar to the limitations applicable to
the corporate name. It’s important that professionals carefully review
applicable rules and regulations governing their specific profession.
Due to the expanded requirements of organizing and operating a professional corporation in California, it is advisable to consult with a San Diego corporate lawyer before and during the formation process.