Professional Corp

Forming a professional corporation (“PC”) consists of two steps. First, the Articles of Incorporation of a Professional corporation must be filed with the California Secretary of State (CA Form ARTS-PC: $100). And second, applying for registration with the appropriate state agency that regulates the profession. A third step may be necessary if a particular tax election is desired.

Once upon a time, professionals were not permitted to form their practice as a corporation because as a matter of public policy, the state did not want professionals to escape personal liability for their malpractice. Nowadays, professionals still cannot escape malpractice liability; however, forming a PC is now permitted and governed under the Professional Corporation Act under California Corporations Code Section 13400 et seq. This Act permits certain licensed, professional activities, including the practice of law, medicine, dentistry and accountancy to be conducted in the corporate form. In a moment, I will discuss the specifics of limited liability as they apply to a professional corporation.

To continue, a professional corporation may render its professional services only through individuals who are duly licensed in the particular profession involved. See Cal. Corp. Code. § 13405(a). The corporation itself is subject to regulation by the state agency charged with licensing such professional activity. See Cal. Corp. Code. § 13410(a). For example, law corporations may render legal services only through persons who are licensed to practice law in California; and such corporations are subject to regulation by the State Bar of California. See Cal. Bus. & Prof. Code. § 6160.

With respect to a Law Corporation, after the Articles of Incorporation are filed with the Secretary of State, a law corporation must then apply for an issuance of a Certificate of Registration as a Law Corporation with the State Bar of California. This process is somewhat tedious; it requires a declaration of compliance with the California Rules of Professional Conduct; a Standard Law Corporation Guarantee, Secretary of State Certified Copy of Incorporation; Bylaw Excerpts specifically providing for restricted ownership and transfer of shares in the corporation; the Corporate Secretary’s Certification; a specimen of the Share Certificate and Legend with a similar share restriction as provided in the Bylaws; and a payment of a $200 non-refundable fee.

The state regulatory agencies also generally require that the name of a professional corporation denote its corporate status; i.e., that it contain the words “a professional corporation” or “law corporation” or “medical corporation,” etc. See Cal. Corp. Code. § 13409(a). Provided below is State Bar of California Rule 3.152(B):

• Corporate Designations Allowed: A Law Corporation name must include an ending designation such as: A Professional Corporation, A Professional Law Corporation, Professional Corporation, Professional Law Corporation, Law Corporation, APC, A.P.C., PC, P.C., Prof. Corp., A Professional Legal Corporation, Professional Legal Corporation, A Legal Corporation, Inc., Incorporated, Corporation, A California Professional Corporation, L.C., Ltd., Limited, P.A., and Professional Association.

• Corporate Designations Not Allowed: “APLC” & “PLC” are not permitted because in other states/foreign countries, APLC may suggest that the entity is “a Public Liability Company” or “Professional Legal Consultant” and therefore is misleading to the public.

Furthermore, the State Bar is very particular about terms used in conjunction with the name of a legal entity. Provided below is one such example of a State Bar of California Rule:

• Law Offices: Including the term “Law Offices” implies that the law corporation has more than one address, or more than one attorney including the shareholder at the address of record for the corporation. Thus, the term should not be used unless this arrangement is true. The Law Corporation Program will accept a home address as the second office. The law corporation must provide The State Bar with both addresses.

Additionally, in California most licensed “professionals,” including lawyers, are not permitted to render professional services as an LLC. However, accountants, attorneys, architects, engineers and land surveyors can operate as a limited liability partnership (see the LLP article for more info). 

As briefly noted above, shares in a professional corporation may be transferred only to another licensed person or back to the corporation. Any other transfer is void. Such restrictions on transfer must be noted on the share certificates’ legend. See Cal. Corp. Code. § 13407(a).

In the case of law corporations (and certain other professional corporations) with more than one shareholder, a buy-out agreement among the shareholders and the corporation is mandatory. The buy-out provisions must be set forth in the corporation’s articles, bylaws or a separate written agreement. See CA ST RULES OF STATE BAR Rule 3.157(E).

An important factor in deciding whether to incorporate a professional practice is the extent to which incorporation may limit the professional’s liability for the acts of others. Understandably, a professional person cannot avoid personal liability for his or her own malpractice or tortious conduct through incorporation–since a tortfeasor is always liable for his or her own acts, even if performed on behalf of another. T & R Foods, Inc. v. Rose (1996) 47 CA4th Supp. 1, 8-10. But, incorporation may enable professional persons to limit the vicarious liability they otherwise would incur for acts of their professional partners. For example, in the case of a medical partnership, Dr. Q would normally have unlimited vicarious liability for his partner’s negligence; but this liability may be substantially limited by incorporation, and the maintenance of specified insurance coverages. See T & R Foods, Inc. v. Rose.

A flat 35% tax rate is applied to all the income of corporations whose activities primarily involve performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts or consulting; and substantially all of whose stock is held by employees. IRC § 11(b)(2). This means that professional corporations are denied the benefit of the graduated tax rates. But this should not be a problem in most cases, because such corporations can avoid having any taxable income through payment of salaries, or may elect S corporation status by filing IRS form 2553 and obtaining an EIN number. Lastly, for law corporations, clients and/or third parties are required to file form 1099-MISC when they make payments for legal services or settlements of $600 or more.

Giving back to the legal profession. As an extension of my admiration toward aspiring legal professionals considering hanging out a shingle, I will form your professional law corporation at no charge.