Professional Corporations: The “Whens” and “Hows”
Professional Corporations: The “Whens” and “Hows”

Just like in any other sector, highly-educated professionals often find themselves wanting to set up a business entity to better allow them to protect themselves, serve their clients, and to share support services with other similar professionals. When these sorts of professionals want to start a business in the state of California, they are required to use a type of business entity called a “professional corporation.”

When Should I Form a Professional Corporation?

As discussed above, licensed professionals will need to set up a professional corporation, rather than an LLC or a traditional corporation. As a general rule, if you’re in the medical, dentistry, therapy, legal, accountancy, or veterinary professions, you’ll need to set up a professional corporation. However, this list is far from exhaustive, and you should work with your attorney to verify whether you’re in the kind of profession that California law states needs to be organized under a professional corporation.

How Do I Form a Professional Corporation?

Your business attorney can help you put together the paperwork you need to form a professional corporation. It’s important to work with your attorney to make sure your business is properly formed and certified. For instance, legal professional corporations not only need to go through the “normal” process of registering a business with the Secretary of State, but they must also register with the State Bar. The details are incredibly important here—California law even sets forth how these corporations must be named. A little guidance on the front end can save a lot of headache and frustration down the road, so work with your attorney to make sure things are done right.

Once you have an entity set up, you also need to make sure that the management structure of your corporation is in compliance with the relevant laws. Professional corporations generally must be owned and operated by people of one single profession. In other words, lawyers and accountants can’t form a single business together; instead, they must form two separate corporations to represent their different expertise.

Further, only similarly-licensed professionals can be shareholders, officers, or directors of the corporation. In other words, if you want to own stock in a dental corporation, you have to be part of the dental profession. This certainly isn’t the time to find shareholders amongst your family and friends! However, there are obviously some nuances to this rule (as with most rules), so it’s a good idea to consult with your attorney to make sure you’re complying with these laws and that you won’t get in trouble with your licensing board.

Don’t Forget Insurance!

One important detail that professionals need to pay particular attention to is the insurance they purchase for their new professional corporation. Most professionals will want to purchase both business insurance and professional liability insurance. Further, if your business employs a number of people, you may also want to look into employment practices liability insurance (or “EPL” insurance). These different types of insurance cover different situations and together provide your business with the protection it needs.

Professional liability insurance covers your professional judgement when working for your clients. You’ve probably heard of at least one type of professional liability insurance—malpractice insurance for doctors and lawyers.

Business insurance, meanwhile, covers the more general risks involved with running any business. For instance, claims of property damage and personal injury against your business would generally be covered by this general business liability insurance.

Finally, EPL insurance protects employers against claims made by employees alleging things like discrimination, wrongful termination, harassment, and retaliation. You should work with your business attorney and your insurance agent to determine the risks faced by your particular business, which will dictate the particular types of insurance you should carry.

Take the time to meet with an experienced business attorney to learn what rules will apply to your business. Call (310) 545-7700 to reach the team at Chase Law Group, P.C. to set up a consultation today.