California Professional Corporation

For most professionals in the Golden State, the California professional corporation is the business entity of choice. In many cases, this is because you have no other choice!

The single most common reason for forming a business entity is to create a shield between the debts and liabilities of the business and the personal assets of the shareholders. Both limited liability companies and corporations provide such protection when structured correctly. Alas, this protection does not extend to professionals licensed in the state due to an artificial manipulation by the government.

If you are a licensed professional in California, the state limits your ability to protect yourself from malpractice claims. As a matter of public policy, the state does not allow professionals to hide behind the asset protection aspects of a business entity when it comes to malpractice. Yes, you can form a business entity for your practice. If you are sued for malpractice, however, it will not protect your personal assets. Given this, maintaining malpractice insurance coverage is critical and most licensing boards require you do so as a matter of policy.

Why Form?

If you can't protect yourself from malpractice claims with a professional corporation, you might be wondering what the point of forming one is? The answer is two fold. First, the entity will provide you with asset protection from claims that are not based in malpractice. If a patient slips and falls in your practice and sues, the entity will provide a shield because malpractice is not the core issue in the case. Second, the corporation provides certain tax benefits that are not available in a private practice such as writing off benefits and costs related to health insurance and other fringe benefits.

California Professional Corporation

There is one other key restriction when it comes to business entities for professionals in California. A professional may not form an LLC for their practice nor a traditional corporation. Instead, a particular type of corporation called the professional services corporation must be used. This entity can be designated as either a "C" or "S" for tax purposes, but the "C" version comes with a 35 percent flat tax rate for taxable income. Most physicians file for the S designation of the corporation, but that is now changing as there are few benefits to doing so. With tax law expected to change soon again after the next presidential election, consultations on this issue need to be undertaken.

Licensing Boards

Many licensing boards also require that the professional services corporation be created pursuant to specific requirements dictated by the board in question. These requirements differ from board to board, but usually cover shareholder, naming and share transfer restrictions to mention only a few subjects. Regardless, the professional often must include specific language in the incorporation documents, bylaws, and share certificates as well as file for annual certification with the board.

Contact me today at 619-637-6043 if you are a professional seeking to form a California professional corporation. I'll be happy to get you up and running with a minimum of fuss on your end. Following are a few articles on subjects that often come up when individuals consider forming a professional corporation.