When you say Covid-19 or recession, most people don’t think about new companies forming. However, with staff reductions in professional firms and organizations due to the ongoing Covid-19 pandemic, there will likely be many new professional organization formations in the coming months. The professionals wanting to form these companies may be looking for a change in employment and new opportunities, or they may have been laid off by their current employer. Regardless of the reason for forming a new entity, professionals need to know what entity options they have, and why they should even form one in the first place.
The reasons most people form a professional corporation, or any entity at all, are for tax planning or for the liability protection that the entity provides. If you operate without an entity, any liability that you have while operating the business extends to you and everything that you own because you are personally taking on that liability, and all such obligations. The idea behind forming a separate entity is for the entity to take on the liability and obligations instead of you so that you can shield yourself, personally, from liability. If prepared correctly, you can protect yourself with an entity far better than you can by just operating in your own personal capacity. Of course, no professional entity can protect you from liability for your own negligence, so errors and omissions insurance (also known as malpractice insurance) is still the first priority.
While many business owners can operate by using any entity, licensed professionals in California are often restricted in what entities they can use. For example, they may not be able to operate businesses that are limited liability companies or general corporations. In fact, licensed professionals may be required to form a special type of corporation called a professional corporation if they want to conduct business.
A professional corporation is a special corporation which has been created under the General Corporation Law of California and is required for certain licensed persons who provide professional services.
Examples of licensed professions that may need to operate under a professional corporation are doctors, dentists, architects, accountants, engineers, lawyers, veterinarians, chiropractors, and psychologists.
If you are thinking of forming your own entity and you are a licensed professional, be careful in how you form your entity and which type of entity you choose. I have seen several clients operate under forms of entities that are not allowed by the particular profession. Fixing the problem for each of them costs significantly more than forming it properly from the beginning. And if they are sued, an improperly formed entity can result in a total loss of the liability shield it was intended to create.
Even if you choose an entity that is allowed and decide to move forward with forming a professional corporation, be aware that professional corporations are a lot more complex to set up than one would expect. Professional corporations have many more rules to them than regular corporations, including rules regarding naming specifics, the number of professions who can be in the practice, and certain shareholder, director, and officer requirements. Professional corporations are also often subject to special rules of the professional boards that govern the specific profession.
In a future series of blogs, I will go into specifics for some of the more common professions and describe the legal requirements for those professional corporations. Stay tuned!
All blogs on this site are for educational purposes only, do not constitute legal advice or opinion, and should not be applied to your situation, or any specific situation, without consultation with counsel. Strategy Law, LLP does not provide any legal advice concerning any matter discussed in a blog except upon formal engagement including, without limitation, execution of Strategy Law, LLP’s formal legal services agreement, and with respect to specific factual situations. No blog constitutes a guaranty, warranty, or prediction regarding the result of any legal matter discussed in the blog or any representation.