According to the law in California (the Moscone-Knox Professional Corporation Act), a professional corporation is a corporation that is engaged in rendering professional services.
In this context, “professional services” are any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the California Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act.
Examples of professional services include services rendered in the practice of law, medicine, accounting, and architecture.
Before a profession may be practiced through a professional corporation, the Business and Professions Code or the Chiropractic Act must expressly authorize such professional services to be rendered by a professional corporation. Moreover, most professional corporations must obtain a certificate of registration issued by the governmental agency regulating the profession, though some do not.
A professional corporation rendering professional services by persons duly licensed by the following agencies is not required to obtain a certificate of registration in order to render professional services:
- Medical Board of California
- California Board of Podiatric Medicine
- Osteopathic Medical Board of California
- Dental Board of California, Dental Hygiene Board of California,
- California State Board of Pharmacy
- Veterinary Medical Board
- California Architects Board, Court Reporters Board of California
- Board of Behavioral Sciences
- Speech-Language Pathology and Audiology Board
- Board of Registered Nursing
- State Board of Optometry
One may wonder why doctors don’t have to get a certificate of registration for a professional corporation, but lawyers and accountants do. It’s simple. The doctors have better lobbyists!
Typically, all the outstanding shares of a professional corporation must be owned by persons licensed to render the professional services rendered by the professional corporation, but for many of the professional corporations involved in the healing arts, up to 49% of the shares may be owned by persons licensed in specified related fields. For example, registered nurses and licensed psychologists are permitted to own shares in a medical corporation.
A professional corporation does not limit the liability of a professional for his or her own malpractice, but it will often shield a professional from liability for the malpractice of an employee or fellow shareholder. A professional corporation will also typically shield the shareholder from liability for business obligations other than malpractice. For example, if a landlord rents an office to a professional corporation and does not get a personal guaranty from one or more shareholders, then typically none of the shareholders have any liability to the landlord if the rent is not paid.
From a tax perspective, a professional corporation is for the most part no different from a regular business corporation. If it meets the requirements, a professional corporation may elect to be an S corporation. Being an S corporation entitles the corporation not to pay corporate income tax at the federal level; the corporation’s income or loss passes through to the shareholders, who each report their pro rata share of the corporate income or loss on their personal tax returns. Although an S corporation may pay no federal income tax, California does impose a 1.5% income tax on the net income of an S corporation.
There are intricacies to properly organizing a professional corporation that make it particularly unsuitable for self-help or for online legal filing services such as LegalZoom. As always, it is best to hire an experienced practitioner to help you with your legal needs.
