Small business owners who become profitable often find it advantageous to incorporate. There are a variety of reasons to form a corporation such as certain tax benefits, the ability to establish substantial retirement plans for business owners and their employees, liability protection, and the establishment of a mechanism to add partners or to transfer the business to third parties upon retirement or death.
Business owners form corporations by filing Articles of Incorporation with the Secretary of State, adopting bylaws, holding organizational meetings, issuing stock certificates, and restructuring payroll procedures to be consistent with corporate law.
Professionals, such as dentists, certified public accountants, doctors, veterinarians, lawyers, optometrists, marriage and family therapists, psychiatrists, and psychologists among others must form a special type of corporation known as a “professional corporation.”
Professional corporations require additional rules, restrictions, and procedures.
First, in general, only licensed practitioners are allowed to be shareholders of a professional corporation. For example, only lawyers who are licensed to practice law in the State of California may be shareholders of a California law corporation.
Second, most professions require that certain language be included in the bylaws and on the stock certificates that restrict the ownership of the professional corporation to individuals licensed in the particular profession.
Third, many professions require that the respective licensing board issue a certificate to allow a professional to operate as a professional corporation. For example, the California Board of Accountancy requires that all certified public accountants apply for and receive a certificate that approves the operation as a professional corporation. Before issuing a certificate, the licensing board might insist upon reviewing the corporation’s bylaws and stock certificates to ensure that the appropriate language limiting ownership to licensed professionals is included.
Fourth, many professions have specific rules regarding the name of the corporation, including approved suffixes such as “Inc.,” “Incorporated,” and “Ltd.” It is critical for professional corporations to ensure that their names are in compliance with the rules before issuing membership certificate, publishing letterhead and business cards, and advertising.
The function of professional corporations upon incapacity or death can be challenging for a professional’s family, particularly if other members of the family are not licensed in the same profession. There is a limited period of time after a professional’s death for the professional’s family to transfer or sell the professional corporation to another licensed professional. To address this problem, professionals should designate “practice administrators,” other licensed professionals, to run the business and arrange its disposition after the death of a professional.
Professional corporations can be very attractive entities for a many reasons. However, because of the specific restrictions placed on such organizations, it is critical to seek the counsel of an experienced attorney who can help navigate the nuances related to each profession.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.