Corporations:
Corporation: $1,499^+Costs
$129* Tel. Consult
Corp. Compliance Service
Corporate Clean Up Service
In House Counsel Plans
Should I Incorporate?
How To Form a Corporation
Professional Corporations
S-Corp or LLC?
S-Corp or C-Corp?
Nevada Corp?
Pre-Incorporation Agt
Shareholder Buy-Sell Agmt.
Buy-Sell Agreement FAQs
Asset Protection
Corporate Meetings & Minutes
Update Your Corporate Book
Suspended Ca Corporation
Revive My Corporation
Forfeited Corporation
Dissolve a Corporation
Change Corporate Name
Good Standing Certificate
Get Tax ID Number (EIN)
Get a DBA
Get Seller's Permit
Set Up Payroll
Statement Of Information

---

Related Practice Areas:
Business Transactions
Employment Law
Internet-Computer Law
Landlord-Tenant
Limited Liability Company
Partnerships
Real Estate Law
Trademark & Copyright
Wills & Trusts

---

Prepared By: Melissa C. Marsh, Los Angeles Business And Corporate Attorney
Written: February 2013

Certain professionals, such as doctors, dentists, MDs, chiropractors, certified public accountants, architects and lawyers cannot conduct their business through a California limited liability company ("LLC") or a traditional C- or S- Corporation. In California, many professionals who wish to operate their business through a corporate structure are required to form a California Professional Corporation ("PC") which can be owned and operated only by shareholders who holds a specific license. In addition to following all of the rules set forth in the California Corporations Code, these professionals must also comply with the regulations governing their industry as set forth in California's Business and Professions Code which often times can be researched by the professional through their board (e.g. Medical Board of California, Dental Board of California, State Board of Chiropractic Examiners, the Board of Registered Nursing, State Board of Optometry, the Veterinary Medical Board, etc.)

The primary distinctions between a "regular" C- and S- corporation and a professional corporation are the following:

1. Each director, shareholder, and officer of a California professional corporation MUST be licensed to provide the same professional services as are or will be rendered by the professional corporation. In a California professional medical corporation, at least 51% of the shares must be owned by a licensed physician or surgeon, and only up to 49% of the outstanding and issued shares may be held by a (1) doctor of podiatric medicine; (2) psychologist; (3) registered nurse; (4) optometrist; (5) marriage, family, and child counselor; (6) clinical social worker; (7) physician assistant; (8) chiropractor; or acupuncturist. That being said, all physicians should note that California Business & Professions Code section 2416 only permits a physician to partner with other physicians, osteopaths or podiatrists. For more on this topic, please see Who can be an owner of a professional medical corporation?
2. Shares of stock in a California professional corporation can only be issued to a person who is licensed to render the same professional services in the jurisdiction(s) in which the person practices (e.g. California). Any transfer in violation of this restriction is void. For more on the practice of medicine through a California corporation, please see Corporate Practice of Medicine .
3. No shareholder of a California professional corporation qualified to render professional services in California may enter into a voting trust, proxy, or any other arrangement which allows another person (other than another person who is a shareholder of the same corporation) to vote his/her shares of stock. Any such purported voting trust, proxy or other arrangement in violation of this restriction is void.
4. Shares in a California professional corporation can only be transferred to another person licensed to practice in the same profession in the jurisdiction (e.g. California), or to a shareholder of the same corporation. Any transfer in violation of this restriction is void.
5. A California professional corporation may purchase its own shares so long as at least one share remains issued and outstanding.
6. A California professional corporation must acquire all of the shares of a shareholder who is disqualified from rendering professional services in California, or becomes deceased. If a disqualified shareholder, or the representative of a deceased shareholder, fails to transfer his/her shares in a professional corporation within 90 days following the date of disqualification, or six months following the date of death, to another shareholder of the corporation or to another person licensed to practice the same profession in the jurisdiction, the professional corporation may be suspended, or have its license revoked by the governmental agency regulating the profession. For this reason it is strongly recommended that a shareholder who holds an interest in a professional corporation execute a buy-sell agreement that provides either for the corporation itself, or the remaining shareholders, to value and purchase the disqualified shareholder's interest in a structured manner so as not to financially devastate the corporation.
7. A California professional corporation is prohibited from engaging in any form of illegal fee splitting, kickback, or other similar practice which would violate a provision of the Business and Professions Code.
8. All shareholders, officers, and directors of a California professional corporation are subject to the applicable rules and regulations adopted by, and all the disciplinary provisions set forth in the Business and Professions Code expressly governing the profession as well as the powers of any governmental agency regulating the profession in which the corporation is engaged.
9. A California professional corporation is taxed at a flat 35% federal tax rate, but this may be avoided by either paying out all of the taxable gain in salary, or by electing to have the professional corporation taxed as an "S" corporation ("S-corp").
10. A California professional corporation often must acquire pre-approval from the Board that regulates its activity before adopting a fictitious business name. For example, with a medical corporation no pre-approval is needed if the Corporation's name contains only the name or surname (last name) as it appears on the license of the physician or podiatrist, followed by Medical Doctor, M.D., Podiatrist, Doctor of Podiatric Medicine, D.P.M., Medical Corporation, Medical Corp., Podiatry Corporation, Podiatry Corp., Professional Corporation, Prof. Corp., Corporation, Corp., Incorporated or Inc. For more on using a fictitious business name in the practice of medicine, please see When do I need a fictitious name permit from the Medical Board of California?

Potential Advantages to a forming a California Professional Corporation (Medical, Dental, Law)

One major benefit of the California professional corporation is the ability to shield and limit the personal liability of the professional corporation's shareholders from ordinary business debts and obligations (such as commercial lease obligations, equipment leases, vendor contracts, etc.). Another major benefit of the California professional corporation is the potential shield the corporation offers when one shareholder-employee commits a negligent act from becoming the personal responsibility and obligation of all the shareholder-employees. This is not to say that a professional corporation will protect you from personal malpractice claims in California, but unlike partnerships, professional corporations do enable shareholder/employees to avoid personal liability for another employee's negligence where the non-participatory shareholder(s) did not personally provide the alleged negligent services, or supervise those that did. For example, assume there are three medical doctors who own and operate a medical practice through a professional corporation and one of the doctors commits an act of negligence resulting in a claim of professional malpractice. In such a case, the professional corporation can provide protection from personal liability to two of the three professional owners who were not involved in the alleged negligent act. Had the three professionals operated as a partnership all three could be personally jointly and severally liable for the one partner's negligent act and/or omission.

Forming and organizing as a California professional corporation can also offer many potential tax advantages to qualified small business owners. Some of the primary advantages that are not available to sole proprietors and unincorporated businesses, include:

1. the ability to create retirement and 401(k) plans with higher contribution limits than are available to individuals or unincorporated businesses.
2. the ability to provide and take deductions for the provision of various employee benefits such as health and life insurance benefits, disability insurance, dependent care, and other fringe benefits.

Despite the aforementioned, please consult with your tax advisor about all tax related matters. I am an attorney. I am not an accountant and I do not give specific tax advice.

Potential Disadvantages to a forming a California Professional Corporation (Medical, Dental, Law)

There are three main disadvantages to forming a professional corporation. The first is the flat 35% corporate tax rate that applies to professional corporations, which makes retaining earnings within the business ill advised, and reduces the corporation's ability to retain and distribute income to shareholder/employees. That said, careful year end planning with your tax professional can eliminate this negative tax treatment. The second disadvantage to forming a professional corporation (as explained above) is the lack of personal limited liability protection from malpractice claims. The third disadvantage is cost. In year one, a California professional corporation should expect to pay between $550 and $1000 in state fees to properly register the corporation with the Secretary of State, Department of Corporations, and the Board that regulates its practice. In year two all California professional corporations are required to begin paying California's annual franchise tax which is a minimum of $800, plus the $25+ required filing fee that must be submitted to the Secretary of State with the Corporation's annual officers and directors statement. A California professional corporation should also presume to have annual legal and accounting expenses.

How a California Professional Corporation is Formed and Organized (Medicine, Dentistry, Law, Accountancy, Etc..).

The formation of a California professional corporation typically begins with the preparation and filing of professional articles of incorporation that comply not only with state law, but also the regulations of the board that licenses the particular profession. Occasionally, depending on the profession, this may be step two as some professional boards require their professionals to get pre-approval. The Secretary of State is currently taking about 4 to 6 weeks to process Articles of Incorporation, but this can be shortened to just 3 days with the payment of the State's hefty $350 expedite fee. After preparing and filing the Articles of Incorporation designed specifically for the professional services to be rendered, the attorney must then determine what, if any, additional requirements must be met with respect to the particular profession. Once that has been accomplished, the attorney will then create special bylaws and organizational minutes that conform not only to state law, but also the rules governing the specific profession. Once these steps are complete, the attorney will then typically arrange for the corporation to acquire a taxpayer identification number so the intended owner(s) can open a bank account and simultaneously the attorney will prepare the necessary paperwork to ensure that the corporate shares are properly issued and that the corporation has made the requisite additional filings with the Secretary of State and the Department of Corporations.

Fictitious Name Permit for California Professional Corporations.

A licensed physician, surgeon, podiatrist, dentist, or dental hygienist, who is practicing or will practice medicine or dentistry or dental hygiene, under a false, assumed or fictitious name, either as an individual, firm, corporation or otherwise you may be required to acquire a fictitious name permit ("FNP") from the Board that regulates your professional practice. Examples: "XYZ Medical Group" or "Sherman Oaks Dental Group." However, a FNP is generally not required by a professional corporation if practicing under the corporate name (which often must include the name of the licensed professional followed by particular designations). Examples: John Smith General Dentistry, John Smith, M.D. Inc., Dr. John Smith. D.P.M., or John Smith Medical Corp.

Shareholder Buy Sell Agreement

A buy-sell agreement, also known as a shareholder agreement, is an agreement between the corporation and its shareholders and between and among each of the shareholders. Its purpose is to set forth a procedure to resolve disputes before they occur by detailing what will happen in the event of death, disability, retirement, suspension, a disagreement, and simply the desire of one of the shareholders to get out (withdraw). If a professional corporation is going to have more than one shareholder, a shareholder agreement (often called a buy-sell agreement) is strongly recommended for various reasons. The first reason we strongly recommend a shareholder buy sell agreement is to mitigate the potential for expensive and protracted time consuming litigation. The second reason we strongly encourage a shareholder buy-sell agreement is to provide the orderly continuation and transfer of a professional practice, especially since the shares in a professional corporations cannot be held or owned by a non-licensed individual. To this end a properly drafted shareholder buy-sell agreement will set forth one or more procedures for how the corporate shares are to be valued and thereafter transferred in the event one of the shareholder's dies, retires, or withdraws. Such an agreement will also normally make provisions in the event of a divorce. In California, a spouse typically has a 50% economic right in and to the other spouses property. With a professional practice, a spouse who is not licensed in the profession by law cannot own the shares, but the spouse can sue not only the other spouse but the practice for his/her 50% share. Consequently. such an agreement will often provide that in the event of a divorce, that the divorcing shareholder must purchase the ex-spouse’s interest in the practice at a predetermined price and that if the divorcing shareholder fails to do so, that the corporation itself may purchase the shares. Of course this provision would have to be signed off on (consented to) by each of the shareholder's spouses which is typically accomplished with a spousal consent form.

Example #1:

Let's assume three individuals form a California professional corporation to run a dental practice, but they do not have a shareholder buy-sell agreement. Typically things will all go well for a few years and let's assume they do. Now let's assume that in the fifth year of the practice one of the dentists unexpectedly has a heart attack and dies and his family trust and will provide that everything goes to the spouse, if s/he survives and then to the children (very common scenario). Alternatively you can assume that one of the shareholders gets a divorce and the spouse is awarded 50% of the spouse's share of the practice. At that moment, the shareholder's shares in the dental practice have passed to a spouse who by law is not permitted to hold or own the shares as the spouse is not a licensed dentist. The spouse can sell those shares to anyone who is a licensed dentist, even a dentist none of the remaining shareholders know, or worse has a bad reputation or is impossible to deal with. The practice now has a very expensive problem. With a properly prepared shareholder buy-sell agreement, this can be avoided. Obviously there are many options as to what could be placed in the agreement, but at the very least such an agreement should provide restrictions on the transfer of the shares, a method of valuation, a method for the transfer, and a time period for either the professional corporation (the practice itself) or one or more of the remaining shareholders to pay.

Example #2:

Let's assume two dentists form a California professional corporation to run a dental practice. No one dies, becomes disabled or divorces. Let's just assume that there is a dispute between the two that is making the practice untenable. Well, yes you can litigate the issue and make attorneys like myself go Cha Ching, or you could have had a shareholder buy-sell agreement in place that provides for a resolution (you can call it a form of pre-paid insurance). In such an event, the shareholder agreement would provide a mechanism for either a voluntary or involuntary withdrawal with corresponding buy-out terms. One procedure that can be used is to enable one of the dentists to offer a buy-out pursuant to the terms of the buy-sell agreement, and under the terms either the dentist would have to accept the buy-out or alternatively pay the offered buy-out amount. Either way, there is a set purchase price and one of the dentists is leaving.

If you would like to have Melissa Marsh, a Los Angeles, California business law attorney with over 20 years experience, help you form California professional corporation, the fee for a single member California professional corporation is just $1749 plus the costs. If you would simply like Ms. Marsh to help you decide which entity (a simple sole proprietorship, regular C- or S- Corporation, or a Professional Corporation) will best suit your needs or go over the requirements to properly form, fund and maintain a California corporation you have already formed, please schedule a low cost 30 or 60 minute Telephone Consultation.

© 2013 Melissa C. Marsh. All Rights Reserved.