by LawInc Staff
January 11, 2023
A California professional corporation is a great idea if you are a California licensed professional, with your own business, or working as an independent contractor, since it can provide extra liability protection and tax savings.
Specifically, by having your professional corporation taxed pursuant to subchapter S of the Internal Revenue Code (taxed as an S corporation), you could be eligible for significant payroll tax savings.
Other benefits of forming a CA professional corporation include business credibility and continuity.
While a professional corporation will not limit your exposure for malpractice, it can be helpful for other types of lawsuits. Examples include contractual disputes and claims by employees.
Be sure to consider the following factors when starting your California professional corporation. Failure to do so could lead to invalidation of the corporation in case of a lawsuit or audit.
Consult with a California Business Formation Attorney When Forming Your California Professional Corporation
Professionals often take the do-it-yourself to incorporating their businesses.
This often leads to hiccups during the registration process since most professionals are not familiar with the specific paperwork required to make the corporation valid under the rules of the California Secretary of State and their licensing board.
Others take the dangerous approach of using a run-of-the-mill online document preparation service to form their professional corporation. This is dangerous since such services do not allow you to work with an attorney and are do not have experience with forming professional corporations. Using a service like this can come back to haunt you.
Use your time, and money, wisely and delegate responsibility to a California business law formation attorney in order to ensure everything is done correctly.
Be sure that the attorney you work with has specific experience with forming professional corporations in California.
Be sure to discuss things like formalities, liability issues, tax questions, timing, and more.
If you would like a licensed California attorney to handle your California professional corporation formation, simply get the process started via our secure online order form or call us at (310) 765-2525.
Types of Professional Corporations
The following California professionals are required to form professional corporations (as opposed to regular corporations):
Accountant | California Professional Accountancy Corporation
California accountants are licensed by the California Board of Accountancy (CBA) and are required to form California professional accountancy corporations.
Acupuncturist | California Professional Acupuncture Corporation
California acupuncturists are licensed by the Department of Consumer Affairs Acupuncture Board and are required to form California professional acupuncture corporations.
Audiologist | California Professional Audiology Corporation
California audiologists are licensed by the Department of Consumer Affairs Speech-Language Pathology & Audiology & Hearing Aid Dispensers Board and are required to form California professional audiology corporations.
Chiropractor | California Professional Chiropractic Corporation
California chiropractors are licensed by the California Department of Consumer Affairs Board of Chiropractic Examiners and are required to form California professional chiropractic corporations.
Dentist | California Professional Dental Corporation
California dentists are licensed by the Department of Consumer Affairs Dental Board of California and are required to form California professional dental corporations.
Doctor | California Professional Medical Corporation
California doctors are licensed by the Medical Board of California and are required to form California professional medical corporations.
Lawyer | California Professional Law corporation
California lawyers are licensed by The State Bar of California and are required to form California professional law corporations.
Licensed Clinical Social Worker | California Professional Licensed Clinical Social Worker Corporation
California Licensed Clinical Social Workers are licensed by the California Board of Behavioral Sciences and are required to form California professional licensed clinical social worker corporations.
Marriage and Family Therapist | California Professional Marriage and Family Therapy Corporation
California licensed marriage and family therapists are licensed by the California Board of Behavioral Sciences and are required to form California professional marriage and therapy corporations.
Nurse | California Professional Nursing Corporation
California Nurses are licensed by the California Board of Registered Nursing and are required to form California nursing corporations.
Optometrist | California Professional Optometry Corporation
California optometrists are licensed by the Department of Consumer Affairs California State Board of Optometry and are required to form California optometry corporations.
Pharmacist | California Professional Pharmacy Corporation
California pharmacists are licensed by the California State Board of Pharmacy and are required to form California professional pharmacy corporations.
Physician Assistant | California Professional Physician Assistance Corporation
California physician assistants are licensed by the Department of Consumer Affairs Physician Assistant Board and are required to form California professional physician assistance corporations.
Podiatrist | California Professional Podiatry Corporation
California podiatrists are licensed by the Podiatric Medical Board of California and are required to form California professional podiatry corporations.
Psychologist | California Professional Psychology Corporation
California psychology corporations are licensed by the California Board of Department of Consumer Affairs Board of Psychology and are required to form California psychology corporations.
Speech Language Pathologist | California Professional Speech Language Pathology Corporation
California speech language pathologists are licensed by the Department of Consumer Affairs Speech-Language Pathology & Audiology & Hearing Aid Dispensers Board and are required to form California professional speech language pathology corporations.
Veterinarian | California Professional Veterinary Corporation
California veterinarians are licensed by the Department of Consumer Affairs Veterinary Medical Board and are required to form California professional veterinary corporations.
When is the best time to form a California professional corporation? Is it better to wait until the new year if you are forming a professional corporation towards the end of the year?
Should I form my law corporation during the last 15 days of the year, pursuant to California’s 15-day rule, for tax benefits?
Questions like these are important to consider and discuss with an attorney.
California Professionals Cannot Use LLCs
It is important to note that California law prohibits professionals from using Limited Liability Companies (LLCs), in connection with a professional license, pursuant to California Corporations Code §17375.
Accordingly, you will not be able to use an LLC, in California, associated with your professional practice.
California Professional Corporation Shareholder, Directors & Officers
Ensure that all of the officers, directors and shareholders (owners) of the professional corporation are licensed to practice the applicable profession, in the State of California.
According to California Corporations Code section 13403, when a professional corporation has one shareholder, that shareholder shall be the director, president and treasurer of the corporation.
When a professional corporation has two shareholders, the shareholders shall be the directors and, among them, hold the positions of president, vice president, secretary and treasurer of the corporation.
Determine Whether a C or S Corporation is Better
California professional corporations can be taxed two ways: (1) as a C corporation or (2) as an S corporation.
The C corporation and S corporation designations are made with the IRS, while the professional corporation, itself, is formed with the California Secretary of State.
The first step is to file with the CA Sec. of State.
The second step is to file with the IRS.
Professional C Corporation
The first option, which is the default tax classification, is to be taxed as a “C” corporation.
This means that the corporation is treated as a separate entity, for tax purposes, and pays and files its own taxes.
The professional corporation owner (shareholder) also has to file and pay its own taxes.
This results in what is known as “double taxation.”
While C corporation taxation can be beneficial under certain circumstance, most professionals opt to have their corporations taxed as S corporations.
Professional S Corporation
Option two is to be taxed as an “S” corporation (also known as a “small business” corporation).
This is achieved by filing Form 2553 with the IRS.
The S corporation is subject to what is known as “pass through” taxation which means that the corporation, itself, is not required to pay income taxes. The profits and losses are passed to the owner(s) of the corporation.
California professional corporation owners typically prefer to have their corporations taxed as “S” corporations in order to avoid the double taxation associated with C corporations.
Naming a California Professional Corporation
Ensure that the professional corporation name that you would like to use is available with the California Secretary of State and meets the requirements specific to your profession.
Failure to to use a name that meets the name applicable to your profession will result in rejection of the Articles of Incorporation.
The corporation name must also include a corporate designation such as: Incorporated, Inc., Corporation, Corp., A Professional Corporation, A Professional Law Corporation or Professional Corporation.
Designate an Agent of Service of Process (Registered Agent)
Professional corporations must have a contact that is publicly available from 9-5 daily at a California physical address.
This contact is known as an agent of service of process (also referred to as a registered agent).
An individual (e.g., any officer, director or shareholder of the corporation) can serve as agent.
Alternatively, you can delegate responsibility to a professional service company.
Benefits of hiring a registered agent include privacy and freedom (not having to be available during business hours).
Failure to be present during regular business hours can result in a default judgement (which means the plaintiff automatically wins) in case of a lawsuit.
If you decide to appoint yourself as agent, make sure you are at the designated physical address, during regular business hours.
File Articles of Incorporation
The first step, in terms of filing paperwork, when forming a professional corporation, is filing Articles of Incorporation with the California Secretary of State.
The Articles of Incorporation should include the name of the law corporation, the business address, the registered agent’s name and address, number of shares of stock authorized and corporation purpose.
The Articles should also be customized to include indemnification provisions.
Prepare Organizational Corporate Minutes
Once the Articles of Incorporation are successfully filed and the corporation is approved, The law corporation should prepare organizational corporate minutes which confirms the information in the Articles of Incorporation and also, among other things, appoints the corporation’s officers and directors.
Minutes are considered part of the corporate formalities of the professional corporation and are important to have in case of an audit or lawsuit
Corporate minutes should also be prepared annually pursuant to California law.
Bylaws set forth the operating procedures and rules of the corporation.
Bylaws dictate the how the corporation is operated, where the corporation is located, time, place and manner of stockholder meetings, director powers, numbers, indemnification and elections, officer types, meetings and duties, share issuance, record keeping and other general matters.
Bylaws are an important and official part of the records of the corporation and must be provided in case of a lawsuit or audit.
Also, professional corporations are required to include additional language specific to their profession.
Issue Stock to the Shareholder(s)
Share issuance is an often overlooked and integral part of the incorporation process.
Shareholders are the owners of the corporation and their ownership must be documented by shares of stock.
Share certificates should include the name of the professional corporation, shareholder name, number of shares issued, number of shares authorized, issuance and should be signed by the corporation’s secretary and president
Professional corporations should also have additional language, restricting the ownership of shares, on the stock certificates.
Prepare a Stock Ledger
The corporate stock ledger logs all stock issued by the corporation and should document the name of the shareholder, the date of issuance, the amount paid for the shares
The stock ledger should also be used to document any future stock transfers and issuance.
California Law Corporations with More than One Owner Should Have a Buy-Sell Agreement
Buy-Sell agreements (also known as shareholder agreements) are crucial for professional corporations with more than one shareholder.
Buy-Sell agreements account for what happens to when a stockholder passes away, is incapacitated, divorces or decides to sell their shares to another qualified stockholder.
Failing to prepare a buy-sell agreement can be devastating when unforeseen circumstances arise.
A California attorney can help draft a buy-sell agreement for your California professional corporation.
Obtain a Taxpayer Identification Number (TIN)
A TIN, which is also known as an Employer Identification Number (EIN) is an identifying number the Internal Revenue Service issues to newly formed corporations. A TIN can be analogized to a business Social Security Number.
The EIN is used when paying taxes and opening the corporate bank account.
File IRS Form 2553 (S Corporation Election)
If it is determined that it is advantageous to have the professional corporation taxed as an S corporation, IRS Form 2553 (S corporation election) should be filed with the IRS, within 75 days of formation.
The S corporation election should include the name of the corporation, date of formation, address, EIN, representative and stockholders (and any spouses holding a community property interest).
File a Statement of Information
Within 90 days of incorporation, a Statement of Information should be filed with the California Secretary of State. Failure to file will result in assessment of a $250 penalty and corporation suspension.
The Statement of Information should include the name of the corporation, California Secretary of State entity number, business address, mailing address (if different), officers, directors, agent of service of process and business type.
The government filing fee is $25.
The Statement of Information is also required to be filed on an annual basis.
File a Limited Offering Exemption Notice
Within 15 day of stock issuance, a Limited Offering Exemption Notice should be filed with the CA Dept. of Financial Protection and Innovation. The filing fee is $25 if the total initial stock value is less than $25,000.
Penalties can result from failing to file.
The purpose of the limited offering exemption is to let the government know that you are not selling stock to third parties and to exempt you from further securities filings.
Register the Professional Corporation With Your Licensing Agency (if Applicable)
Certain professions are required to take the additional step of registering their professional corporations with their applicable licensing agency.
Examples include law corporations, accountancy corporations, dental corporations (if a fictitious name is being used), medical corporations (if a fictitious name is being used).
Open a Bank Account
A very important step in the formation process is opening the corporation bank account.
The bank account should only be used for monetary transactions associated with the corporation.
Commingling of business and personal funds should be prevented at all costs since doing so can lead to issues in case of a lawsuit or audit.
The stock ledger should show the amount being deposited into the bank account in exchange for shares.
Obtain a Local Business License
Most cities in California require corporations operating within their boundaries to obtain a local business license and pay local taxes.
The CAlGold website can help determine which licenses and permits are needed for your business.
Notify Third Parties
All parties with whom the law corporation will have a business relationship should be clearly informed that they are dealing with a corporation.
All contracts should be executed in the name of the corporation.
Also be sure to notify insurance carriers about the new corporation.
Maintain Corporate Formalities
If you want to be afforded the protections and tax benefits of being a corporation then you need to properly maintain the entity after the formation is complete.
This means be sure to prepare corporate minutes annually.
Also be sure to file the law corporation’s California Statement of Information annually.
Remain compliant and vigilant since failure to follow corporate formalities could be considered a factor when trying to invalidate the corporation in case of a lawsuit.
Comply with the Corporate Transparency Act
In January of 2024, a new federal law is going to effect known as the Corporate Transparency Act (CTA) is going into effect.
The CTA requires that existing and new corporations and LLCs disclose “beneficial ownership” to the Dept. of Treasury Financial Crimes Enforcement Unit (FinCEN). The term “beneficial ownership” means that they want to know the name of the owners listed on the ownership paperwork and anyone else that might be directly or indirectly controlling the entity behind the scenes.
Willful violators of this new law will be subject to a $500 per day penalty (up to $10,000) and prison time.
Call (310) 765-2525 to speak with a California licensed attorney or simply click here to get the start your California professional corporation online: