July 24, 2020
California is one of the few states that prohibits licensed professionals from operating Limited Liability Companies (LLCs), or their professional cousins, Professional Limited Liability Companies (PLLCs), to offer their services. For this reason, professionals are limited to operating and owning either Registered Limited Liability Partnerships (RLLPs) or California Professional Corporations (PCs). However, only public accountants and attorneys can open RLLPs in California.
Although you may feel limited as a medical professional in California with only having the PC as an option, you are one of just many professionals who are prohibited from operating as LLCs, PLLCs, or RLLPs, including:
Accountants
Architects
Engineers
Financial Specialists
Starting your own practice, whether you are a dentist, optometrist, physician, podiatrist, or chiropractor, is going to be exciting and stressful at the same time. Running your own medical practice can be liberating and open you up to practicing medicine the way you want to, however, being your own boss does come with a lot more responsibility. There are regulations, licenses, and regular filings that you must stay on top of regularly to ensure your practice of medicine stays operational.
Since you’re a medical professional and not a business attorney, many of the ins and outs of setting up and managing a Professional Medical Corporation based on California Corporations Code may not be familiar to you.
While doing your research on state laws ahead of time is definitely a good move for a new business owner, establishing a corporation can get pretty tricky. For that reason, it’s highly advisable that you receive legal advice throughout the process to ensure you have all your paperwork filed correctly. Mistakes in setting up your corporation can be very costly down the road.
This guide will take you through some of the terminologies and introduce you to how PCs are established and governed. You will be more informed about how things work and lower any anxiety you may have about starting this new journey to becoming a founder of a medical Professional Corporation in California.
What Exactly Is a Professional Corporation?
Corporations are business entities that allow their owners to separate themselves from the company in terms of liability. If your business takes out a loan it can’t pay back, when you’re operating as a sole proprietor or are in a partnership, you would be personally responsible for the debt. Creating a separate S corporation or C corporation limits your personal liability.
A PC goes one step further by offering you liability protection -- shielding you from any malpractice suit from another member. No form of incorporation is going to protect you from your own malpractice or negligence suits, but in a Professional Corporation, you will not be responsible for the actions of others in your company. It’s especially important in the medical field to ensure you are always covered by malpractice insurance.
Corporations are also significant in terms of taxes. If you had been employed by someone else or were working in a sole proprietorship, you only had to pay your own personal income taxes. Corporations, however, have to first pay the corporate tax rate on income and then individuals also pay taxes on their own personal income. This double taxation burden can be circumvented by changing to an S Corp, which we will get into later.
While Professional Corporations are similar in many ways to regular corporations, there are some key distinctions worth mentioning:
A Professional Corporation can only be owned by licensed professionals.
The PC's only purpose is limited to providing professional service. You can’t run a secondary business, like a coffee shop in your lobby, for instance, without risking disqualification.
The shareholders and executives must all be licensed professionals in the corresponding field. So if you’re an accountant, you cannot own stock in a Dentistry PC, for example, as you would be a disqualified shareholder. See Cal. Corp. Code § 13406(a).
A shareholder cannot transfer power or shares to a non-licensed individual. For example, in the case of inheritance should a shareholder pass away, their next of kin would not be able to take over their shares unless they were also licensed in the same profession. In such a case, the California Corporation Code provides a six month period from the date of death during which the next of kin must transfer the shares to the corporation, another shareholder, or another person licensed to practice the same profession. See Cal. Corp. Code § 13407.
PCs can hire non-licensed employees, however, they are prohibited from performing professional services in the company. See Cal Corp. Code § 13405(a).
In addition to abiding by local, state, and federal regulations like any corporation, Professional Corporations also answer to their respective licensing body that regulates it. See Cal Corp. Code § 13410. For doctors, that would be the Medical Board of California as well as the relevant California codes.
How Do You Set Up a Medical Professional Corporation in California?
The steps to forming a PC for medical professionals are very similar to starting a regular corporation in California. We’ll go through the process and highlight the important things to note for each step. Again, this guide is simply to provide you with an overview, but we strongly recommend that you seek legal counsel and advice from a financial professional before starting this process.
1. Decide on a Name
The first step is to choose a business name for your new corporation. In California, you’re restricted to choosing the first or last name of one or more stockholders, for example, “Smith and Garcia, MD.” You do have the option of applying for a fictitious name permit, but you’ll need to go through some extra steps and file a permit with the state. Either way you go, you’ll need to make sure your name is not already taken. You can conduct a preliminary name search on the California Secretary of State website.
2. Appoint a Registered Agent
This can be a person or a company who will be the contact between your corporation and the government. See Cal. Corp. Code § 16309. They will file the necessary paperwork and receive official correspondence. This cannot be the corporation itself, but it can be a person affiliated with the company (i.e. you or one of the other founders). This person or company must have a California address and complete a certificate of registration. For the requirements of a corporate agent, see Cal. Corp. Code § 1505.
3. File the Articles of Incorporation
The Articles of Incorporation are what essentially found your corporation. They need to be filed with the California Secretary of State and include the $100 filing fee. This document will contain the corporation’s basic information (name, address, and purpose), along with the Registered Agent’s information, and the number of shares the corporation can issue. While you can create your own document, the California Secretary of State provides a form for ease in filing. While the mentioned form clearly indicates it is for a professional corporation, if you create your own, they must specify, amongst other information, that this is a Professional Corporation operating under California Law.
4. Send in the Statement of Information
You have 90 days from when you filed your Articles of Incorporation to submit your Statement of Information to the state. This simply provides them with your most up-to-date contact information and has to be submitted every year, even if nothing has changed.
5. Register With Your Profession’s Governing Board
All of your shareholders must hold valid licenses in order to be part of the medical corporation. You must also register the company with the Governing Board. Should any shareholder no longer possess a valid license to practice, they must transfer their shares. If the shareholder fails to transfer their shares within ninety days of disqualification, your corporation may have its certificate of registration suspended or revoked, in which case, the corporation must cease to render professional services. See Cal. Corp. Code § 13407.
6. Draft Your Bylaws
All corporations need to have bylaws, which are the rules and procedures by which your corporation operates. While these don’t need to be filed with the state, you do need to have them available. It’s important to specify who can be issued shares and who can serve as the executive officers of the board as president, vice president, etc.
The shareholders in a medical corporation need to be licensed medical professionals, although only 51% need to be licensed by the Medical Board. Other owners can be licensed pharmacists, acupuncturists, physical therapists, or registered nurses, however, they cannot be the majority. See Cal. Corp. Code § 13401.5. As previously mentioned, this does not mean that the corporation cannot have employees who are not licensed practitioners, such as administrative staff, for example.
Now that your corporation is legally formed, you’ll need to hold a Board of Directors meeting and put your bylaws into effect. If you haven’t consulted with a lawyer up until this point, the bylaws are a critical point in setting up your corporation, so you’ll definitely want a trained professional drafting and overseeing this document.
7. Registrations and Taxes
You need to apply for an EIN (Employer ID Number) from the IRS, pay corporate taxes to the California Franchise Tax Board, register with the California Employment Development Department (assuming you will be hiring employers), and apply for various other local licenses, depending on your city and county regulations. Again, a business attorney will be able to guide you through this process and ensure nothing is missed.
Further, you will want to decide on your tax designation. By default, your corporation starts off as a C Corp and is required to pay corporate taxes. If your shareholders unanimously elect to switch to S Corp status, you may end up saving a lot on taxes. S Corp status will allow the corporate income to flow through to the shareholders and be taxed on the individual income tax level. This is called “pass-through” taxation and helps small businesses not get taxed excessively. As noted on the IRS website, S Corps do have come with some limitations, however, including:
A maximum of 100 shareholders
All shareholders must be US citizens or residents
One class of stock can be issued
Summary
As you can see, there are quite a lot of steps we’ve mentioned and far more forms and licenses we have not. A single mistake in filing could lead to rejection from the California Secretary of State. An error or oversight in your corporate bylaws could be a costly mistake down the road.
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