by Zach Javdan
December 30, 2020
Forming a California nursing corporation is a great idea for California nurses looking to save on self-employment taxes and receive additional liability protection.
Here are the steps you should take if you decide to form a California professional nursing corporation:
Work with an Experienced California Attorney
Before you start a California nursing corporation, consult with a California business formation attorney that has specific expertise in California nursing corporations.
Avoid “document preparation” services and find out whether a California nursing corporation is actually right for you.
Failing to perform any one of these steps properly could lead to tax and liability issues.
Ensure you are Eligible to Start a California Nursing Corporation
CA Nursing corporations have specific ownership requirements which are required by the State of California.
For example 51% of the shares must be held by a California nurse.
The other 49% cannot be owned by just anyone.
The shares must be held by certain licensed professionals.
Accordingly, if you were thinking about opening a nursing corporation with friends or family, it might not be permissible.
The other 49% are required to be one of the following: (1) Licensed physicians and surgeons; (2) Licensed doctors of podiatric medicine; (3) Licensed psychologists; (4) Licensed optometrists; (5) Licensed marriage and family therapists; (6) Licensed clinical social workers; (7) Licensed physician assistants; (8) Licensed chiropractors; (9) Licensed acupuncturists; (10) Naturopathic doctors; (11) Licensed professional clinical counselors or (12) Licensed midwives.
Consider a Buy-Sell Agreement if the California Nursing Corporation will have More than One Owner
If you are not forming the nursing corporation for just yourself, and the other owner meets the California requirements, be sure to look into a buy-sell agreement for the owners/shareholders.
Such an agreement would cover what would happen to the nursing corporation if certain events transpire (e.g., one of the owners wants to sell his/her shares).
This step is quite often overlooked and can be catastrophic for nursing corporations, if not addressed.
Decide Whether an S or C corporation Will be Better
Taxes are especially important to consider before forming your nursing corporation.
California nursing corporations can be taxed as C corporations (the default tax status) or S corporations (requiring that, among other things, a special election be filed with the IRS).
Be sure to consider the tax savings that can be accomplished with an S corporation, beforehand.
Choose a Name for the Nursing Corporation
In California, professional nursing corporations are required to have the word “nursing” or “registered nursing” as part of the corporation name.
File Articles of Incorporation with the California Secretary of State
In order to make the corporation official, Articles of Incorporation must be filed with the California Secretary of State.
The Articles should include the corporation name, the business address, the agent of service of process (public contact person or company available from 9-5 daily at a California business address), the number of shares the nursing corporation is authorized to issue and the type of professional corporation being formed (in this case “nursing”).
Prepare Organizational Corporate Minutes
Nursing corporations must, among other things, appoint directors and officers. Such appointments, and other decisions made on behalf of the corporation, should be documented via corporate minutes.
Maintaining such formalities are especially important to protect the corporation’s “veil.” That is, in order to be afforded the protections offered by a corporation, you must comply with the requirements applicable to corporations.
Failure to do so could be used as a factor to invalidate the corporation in case of a lawsuit. Corporate minutes should also be prepared on an annual basis.
Bylaws, which are created by the directors during the corporation formation process, set forth the rules of the corporation.
They dictate where the offices of the corporation will be, how the corporation is operated, the time, place and manner of shareholder meetings, stock issuance, director powers, numbers, elections and indemnification, officer types, duties and meetings, recordkeeping and general matters.
Bylaws are an important and official part of the corporate records and must be available for review in case of a lawsuit or audit. Failure to prepare bylaws can lead to invalidation of the corporation in case of a lawsuit.
Nursing corporations must issue stock to the owners of the corporation. Doing so is necessary to document the owners and how much capital they are contributing to the corporation.
Prepare a Stock Ledger
A log should be kept documenting the shareholder, number of shares received and date of issuance. The ledger should also be used to document any future share transfers.
Obtain an Employer Identification Number (EIN)
An Employer Identification Number (EIN) also known as a Taxpayer Identification Number (TIN) is a number issued by the IRS for newly formed corporations.
Think of it as a Social Security Number for your nursing corporation.
The EIN is used when opening the checking account for the new corporation. It is also used when filing taxes.
File an IRS S Corporation Election
If it is deemed advisable to form an S corporation, you must file IRS Form 2553 with the IRS. Information that the IRS requests on Form 2553 includes the corporation name, address, date of formation, EIN, representative and shareholders.
In community property states, like California, the shareholder’s spouse should also be referenced on IRS Form 2553.
File the California Statement of Information
Within 90 days of formation of the nursing corporation, a Statement of Information must be filed with the CA Secretary of State.
The filing fee is $25. The Statement of Information must also be filed on an annual basis.
Information that must be included on the Statement of Information includes, the nursing corporation’s name, entity number, business address, mailing address (if different), officers, directors, agent of service of process and business type.
File a Limited Offering Exemption Notice (LOEN)
California nursing corporations are allowed to offer or sell stock (securities), without complicated filings and qualifications, pursuant to CA Corporations Code Section 25102(f), as long as the following requirements are met: (1) The sale of securities is not made to more than 35 people, inside or outside of CA; (2) All purchasers have a preexisting personal or business relationship with the company (or its owners, officers or directors), or are sophisticated investors that are able to protect their own interests in connection with the purchase (based on their, or their unaffiliated professional adviser’s business or financial experience).; (3) All purchasers are buying for themselves and not for sale or distribution; and (4) The offer and sale of securities is not being made via advertisement or publication.
Failure to file can result in a penalty being assessed.
The purpose of the exemption notice is to basically let the government know that you are not selling stock to third parties and to exempt you from further securities filings.
The exemption notice should be filed within 15 days of stock issuance. The filing fee is $25 if the value of securities is less than $25,000. Filing fees cap out at $300 for securities valued over $1,000,000.
Open a Corporate Bank Account
After the nursing corporation is formed, a business bank account must be set up. This is an integral part of the incorporation process.
A separate bank account must always be used for the nursing corporation.
Failure to do so can lead to invalidation of the nursing corporation in case of a lawsuit.
Business funds must not be commingled with personal funds. For the initial deposit, the stated capital contribution (reflected in the minutes and stock ledger) must be deposited into the bank account.
Banks typically request the nursing corporation’s Articles of Incorporation and EIN when opening a new business account. Some banks also ask for a copy of the nursing corporation’s filed Statement of Information.
Since requirements vary, it’s often best to contact the bank before showing up to open the account.
Obtain a Local Business License
An often overlooked part of opening a nursing corporation is obtaining a local business license. The purpose of a local business license is to basically to pay local city taxes.
The CAlGold website can assist you in finding license and permit information for your business.
Notify Third Parties About Your Nursing Corporation
It’s essential that everybody you do business with knows you are operating as a nursing corporation.
Be sure to notify all parties you will be working with that you are officially a corporation (e.g., insurance companies, clients, lessors, etc.). All contracts should be executed in the name of the nursing corporation.
Consult with Your CPA About Your California Nursing Corporation
It’s vital that you maintain contact with your CPA in order to ensure that you are on top of all tax filing, payment and withholding requirements.
Make sure you do not miss any important ongoing filing requirements. Failure to comply can result in assessment of penalties and suspension of the nursing corporation.
Mark your calendar right away to ensure your corporation remains in good standing.
California nursing corporations are required to maintain corporate formalities. Specifically, California law dictates that corporations should prepare corporate minutes on an annual basis.
Failure to do so could lead to invalidation of the nursing corporation in case of a lawsuit.
ALSO SEE: Naming a California Nursing Corporation?
ALSO SEE: Who Can Own a California Nursing Corporation?