March 18, 2020
Forming a professional entity in California is akin to forming a traditional incorporated entity with a few subtle, but important, exceptions. Fortunately, the process of business formation can largely be handled by an experienced professional, so long as they’re well-versed in local California statute. In fact, having an experienced attorney on your side is important anytime you’re making large structural decisions regarding your business operation.
California business owners looking to incorporate typically have the option to form the traditional incorporated structures such as corporations and LLCs. However, owners whose businesses provide “professional” services aren’t allowed to form these structures and are instead subject to a separate but similar set of rules when it comes to incorporating their practice.
Whether owners are forming a professional entity or a traditional structure, they are required to execute a particular set of documents and file them with the appropriate state departments. The exact protocol not only depends on the state, but also on the type of structure, which in California can take one of two forms—professional corporations (PCs) or registered limited liability partnerships (RLLPs).
Importantly, only certain occupations are considered “professional”, and the designation is established according to state legislation. California code lists dozens of occupations that fall within the “professional” category, including:
- Pharmacists
- Nurses
- Psychologists
- Financial Professionals
- Public Accountants
- Architects
- Legal Professionals
- Dentists
However, not every professional occupation can “choose” between a PC and an RLLP. PCs are the more common of the two, largely because they apply to most professional occupations whereas RLLPs are only meant for attorneys and public accountants. The steps to forming your professional entity will depend on whether your structure will be a PC or an RLLP.
Forming your California Professional Corporation (PC)
The process of forming a California PC isn’t necessarily daunting but can certainly be strenuous, especially for unfamiliar or inexperienced owners. Half the battle is understanding which forms must be filed and at what times. In California, this generally includes two key filings:
1. The Articles of Incorporation
2. The Statement of Information
The Articles of Incorporation (form ARTS-PC) are a foundational filing for both traditional and professional corporations alike. They include key pieces of information, such as the business name, its purpose, its street and mailing address, the registered agent, and the number of stock shares. The articles should also contain a statement or section regarding the professional nature of the business. In other words, there should be information notifying application reviewers that the business is indeed a professional corporation under California law (and not a traditional corporate structure).
Once the Articles of Incorporation are submitted, owners have 90 days to file their Statement of Information. The Statement of Information is essentially an annual report of the business. It includes information concerning the company personnel (ie. principle officers and directors) as well the name of the business’s registered agent. In many ways, the Statement of Information is a way for state legislators to ensure they have up-to-date information for all of the state’s incorporated businesses.
Importantly, the Statement must be filed on an annual basis and failure to do so can result in a penalty of up to $250. Additionally, any time a business changes its name, an updated Statement of Information must be promptly filed.
Forming an RLLP in California
Similar to PC formation, forming a California RLLP is accomplished largely through the Secretary of State’s office. Reviewers will require a completed LLP-1 form (Application to Register a Limited Liability Partnership), which includes information such as the name of the RLLP, its street and mailing address, a statement regarding the RLLP’s motivation, and the name of the registered agent.
Likewise, the LLP-1 should contain language regarding the professional nature of the business, again notifying reviewers that the business is indeed a professional entity. RLLPs must then apply for an employer identification number and obtain the appropriate businesses licenses.
Whether you’re looking to form a PC or an RLLP in California, a particular set of filings must be submitted—on time, of course—with the California Secretary of State. For PCs, this includes the Articles of Incorporation followed by the annual submission of the Statement of Information. On the other hand, RLLPs are only required to register their business through proper execution of form LLP-1.
It’s important to mention that these various types of state filings all have one thing in-common: filing fees. Filing fees in California aren’t necessarily exorbitant (usually amounting to around $25 per submission), however, when multiple filings must be made, they’re certainly an inconvenience. This generally happens when the wrong documentation is sent to the Secretary of State, the right documentation is sent to the wrong state agency, or perhaps when there are errors or missing information in the submitted forms.
To avoid paying unnecessary filing fees (and to avoid wasting your time on redundant paperwork) it may be worthwhile to consult a legal professional for guidance before you file anything with the Secretary of State. Additionally, once the professional entity is successfully formed, there are certain tax and regulatory requirements to be aware of, and a qualified attorney can help you understand these new formalities.
