Forming a Professional Corporation in California: What to Know

Forming a professional Corporation
Daniel Rodriguez

So you’re a licensed professional in California—maybe an accountant, architect, therapist, or attorney—considering forming your own professional corporation. Smart move!

Professional corporations come with appealing perks like liability protection and tax savings that regular corporations don’t offer. But you also take on additional regulations and paperwork.
Before jumping in, let’s walk through what’s involved so you can make an informed decision. Consider us your guide through the process— At Legal Norcal, We’ve helped dozens of professionals successfully establish their corporations over the years. By the end, you’ll understand the unique benefits and requirements around California Professional Corporations so you can decide if it’s the right choice for your company.

Who Can Form a Professional Corporation?

The Moscone-Knox Professional Corporation Act lays down the rules for these special entities in California. Professional Corporations are intended for licensed practitioners to provide services requiring their professional certification or registration. This includes accountants, architects, financial planners, engineers, consultants, attorneys, and more.
However, exceptions exist under Section 13401 for certain medical professionals who instead form medical corporations (i.e. dentists, doctors, pharmacists, etc.)
The key is checking if your particular licensed field requires or allows the professional corporation structure. Reach out anytime if you need help making that determination.

What are the Rules Around Ownership & Management?

If you decide a professional corporation makes sense, a few unique rules apply under California law:

Strict Licensing Requirements

Only professionals licensed in the same field can be shareholders, ensuring sole focus on one practice area. For example, an accountant shareholder couldn’t partner with a financial advisor or consultant. Some secondary cross-disciplinary ownership is allowed under Section 13401.5 as long as the minority share stays under 49%.
Corporate directors also generally must hold a relevant professional license. Exceptions provide flexibility for corps with minimal shareholders to appoint non-licensee administrators.
Bottom line—confirm your ownership structure and leadership meet all requirements for your specific field before filing.

Limitations on Name Choice

You must choose an original professional corporation name that is distinguishable from other registered businesses. And under Section 13409, your licensing board may issue further name standards or require indicating your corporate status in the name.

We can review the rules around selecting the perfect compliant name for your practice area before finalizing your choice and paperwork.

Steps to Forming Your California Professional Corporation

Once you have a name and confirm you meet all ownership and licensing conditions, turning your solo practice into a legit professional corp involves:

1. Filing Articles of Incorporation

The articles should include your corporation’s chosen name and purpose, details around stock shares, your address, and the registered agent’s info. Pay the standard filing fee and submit it online or by mail.

2. Submit an Initial Statement of Information

Within 90 days after incorporation, you must provide additional details like names and addresses of your corporate directors and officers. This helps California maintain public transparency around who controls professional corporations. Expect to pay $25 and file annually.

3. Draft Required Corporate Governance Documents

You’ll need bylaws establishing organizational rules like shareholder meetings and director elections, stock purchase agreements allowing new investors, and shareholder agreements governing things like profit distributions or sale processes.

As corporate counsel, I can provide templates tailored to your professional corporation’s needs so you don’t have to start from scratch.

4. Obtain Tax IDs & Licenses, Update Regulatory Filings

Finally, make sure to notify your profession’s licensing board about your new corporate status, apply for necessary tax IDs, and update related regulatory paperwork.
And with that, you’ll be set up as a fully compliant professional corporation in California!

Why Bother Forming a Professional Corporation?

With the additional steps required, you may wonder why operate as a professional versus a standard corporation. Two key advantages make them worthwhile for licensed fields:

  1. Personal Liability Protection – By functioning as a corporate entity separating your professional and personal assets, you shield your house, car, investments, etc., if your practice ever faces a lawsuit. This benefit makes us believe that forming a professional corporation is crucial.
  2. Preferential Tax Treatment – Professional corporations allow passing income directly to shareholders without corporate double taxation. You report profits via your personal tax return. California also taxes professional corps at reduced rates compared to standard corporations.

The smart liability protections and preferential tax rates offered by professional corporations typically make forming one worthwhile for licensed professionals.

Keeping Your Professional Corporation Compliant

Forming a professional corporation has advantages for licensed fields, but with those benefits comes responsibility around upkeep. To preserve your corporation’s protections and privileges, stay on top of these key requirements:

Hold Annual Shareholder Meetings

As stakeholders owning part of the company, shareholders must gather yearly to vote on major decisions put forth by leadership around finances, operations, and governance. Electing directors, approving mergers/acquisitions, and voting on bylaw changes are typical agenda items.

Convene Regular Board Meetings

The board of directors chart the corporation’s course through actions like hiring executives, setting budgets and policies, and ensuring adequate resources. They conduct regular meetings to fulfill these oversight duties. Maintaining detailed meeting minutes creates a compliance paper trail.

File Annual Statements

To preserve incorporation status, corporations must submit annual statements to the Secretary of State listing directors, officers, business activities, and other details. This public transparency allows California to monitor professional corporations.

Update Licenses, Taxes, and Regulations

Stay current on license renewals, tax filings, and other regulatory paperwork specific to your profession. Falling behind on requirements could put your corporation at risk.

Professional corporations reward diligent directors and shareholders while they are involved. Schedule a consultation today to ensure your corporation stays compliant and protected.

The Cost of Improper Business Formation

While forming a corporation for your professional practice comes with advantages around taxes and liability, not going about it correctly carries significant risks.

Here is what can go wrong with inadequate incorporation:

  • Insufficient Legal Shielding – Forming an entity without properly meeting filing or licensing requirements results in loss of liability protection for personal and corporate assets in lawsuits. The consequences can be catastrophic.
  • Missed Tax Deadlines – Delaying paperwork for special tax status like S-corporations past IRS deadlines leads to higher standard corporate tax rates.
  • Loss of Incorporation – Failing to maintain annual statements risks voiding incorporation status and losing associated benefits.
  • Penalties and Back Taxes – Attempting to claim corporate tax deductions without properly forming leads to IRS fines, back taxes, and interest.

Rushing incorporation without fully understanding professional corporation needs wastes money and actually undermines the asset protection you sought. Partnering with experienced legal counsel prevents regrettable missteps.

Ready to Form Your California Professional Corporation?

As you can see, operating a licensed practice as a professional corporation does require meeting extra regulations under California law. But the liability and tax incentives make it an appealing choice for many experts, from accountants to architects.

Now that you understand the basics of what’s needed to form and run a professional corporation, you can make an informed decision about whether it suits your practice. Reach out to Legal Norcal anytime to explore the option further. We’re happy to discuss your circumstances and goals in detail.

With years of experience advising California professionals navigating incorporation, we can offer guidance on smoothly setting up your professional corporation or any other corporate structure that fits your needs. Schedule an intro consultation now, and we’ll make sure you check all the boxes.

Author Bio

Daniel Rodríguez is an accomplished attorney from Hamilton City, California, and founder of Legal Norcal. As the first attorney in his family, Daniel’s journey embodies the American dream, driven by his parents’ hard work and determination to secure a better future. Daniel’s passion for estate planning was ignited when his grandparents passed away, leaving behind hard-earned assets without proper planning. This personal experience inspired him to navigate the complex legal maze that followed, cementing his commitment to helping others secure their legacies.

As an active member of prestigious organizations such as WealthCounsel, NAELA (National Academy of Elder Law Attorneys), and CANHR (California Advocates for Nursing Home Reform), Daniel stays at the forefront of estate planning and elder law practices, ensuring his clients receive the best guidance. With a J.D. from the University Of San Francisco School Of Law and a B.A. from the University Of California, Santa Cruz, Daniel combines his legal experience with a genuine dedication to serving his clients’ needs.

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