In California, the structure and organization of businesses that accountants may use to provide accounting services are subject to specific legal and regulatory considerations. An Accountant must contemplate the most suitable corporate form for tax liability by minimizing both income and self-employment taxes as well as personal liability and personal asset protection concerns such as separating personal and corporate assets and practicing in a business entity that provides limited liability protection to protect personal assets. To undertake their accounting practice without losing sight of the legally permissible forms of business structures, accountants should seek the advice and counsel of both experienced corporate attorneys and their tax advisors when choosing a business structure for their accounting practice.

The question of whether rending professional services is permitted through a General Stock Corporation, whether that is a California Corporation or a California S-Corp, is a matter of legal interpretation. This article aims to dissect the legal framework governing the use of General Stock Corporations, such as California Corporations and California S-Corps for accounting practices in California, analyzing the implications, limitations, and potential benefits of adopting such a structure.

Given the stringent regulations on accounting services in California, understanding the nuances and requirements is crucial for accountants seeking to incorporate their accounting practices in California as General Stock Corporations. This article endeavors to provide a clear, informative, and practical answer for accountants considering the use of a General Stock Corporation for their accounting practice and to inform accountants who might currently be practicing accountancy in a General Stock Corporation their options to get into compliance with the California Corporations Code, the California Business and Professions Code, and the rules and regulations of the California Board of Accountancy.

Executive Summary: Putting the Conclusion First for Busy Accountants

California accountants may not practice accountancy in California using a General Stock Corporation, and instead must opt for a California Professional Accountancy Corporation.

How to Identify a California General Stock Corporation

A General Stock Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California General Stock Corporation will read as follows:

“The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.”

The Purpose Statement of a General Stock Corporation formed in a state other than California will read similarly, although the accepted Purpose Statement wording will vary by state.

How to Identify a California Professional Accountancy Corporation

A California Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California Professional Accountancy Corporation will read as follows:

“The purpose of the corporation is to engage in the profession of accountancy and any other lawful activities (other than the banking or trust company business) not prohibited to a corporation engaging in such profession by applicable laws and regulations. This corporation is a professional corporation within the meaning of California Corporations Code section 13400 et. seq.”

Options for Professionals Practicing in a General Stock Corporation

If you are an accountant currently practicing accountancy within a General Stock Corporation, whether formed under California law or the laws of another state, it is imperative to seek informed legal guidance to either form a new California Professional Accountancy Corporation or convert your California General Stock Corporation into a California Professional Accountancy Corporation to ensure compliance with the nuanced requirements set by the California Corporations Code, the California Business and Professions Code, and the rules and regulations of the California Board of Accountancy.

Contact the experienced attorneys at San Diego Corporate Law today for personalized legal solutions tailored to the unique needs of your accounting practice. Our team of corporate attorneys is dedicated to helping you seamlessly transition into a compliant corporate structure, safeguarding the future of your accounting practice and protecting the accounting license you studied and worked hard to obtain.

What are General Stock Corporations and California Professional Accountancy Corporations?

While similar in structure generally, General Stock Corporations formed under California law or the laws of another state and California Professional Accountancy Corporations differ with respect to their ability to be used for an accounting practice by a certified public accountant in California. Understanding the nuances between these corporate structures is essential for accountants intending to establish or continue their practices within the legal frameworks of California or any other state. This section will discuss the attributes of both General Stock Corporations and California Accountancy Corporations.

What is a General Stock Corporation?

A General Stock Corporation is a business entity formed under the laws of the State of California or the laws of other states that can engage in virtually any legal activity, other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code. This type of corporation is recognized broadly across states, allowing for a degree of uniformity in business operations beyond California or the jurisdiction of its formation and generally permitted to file for authority to transact business in other states (commonly referred to a registration of a foreign corporation).

What is a Professional Accountancy Corporation in California?

California Professional Accountancy Corporations are specialized entities formed pursuant to the Moscone-Knox Professional Corporation Act specifically for rendering professional services that require a California license to practice as a certified public accountant. This differentiation ensures that accountants are able to comply with specific legal stipulations governing their practice of accountancy, including liability and practice requirements, thereby protecting both the accountants and the public they serve.

General Stock Corporations versus California Professional Accountancy Corporations

Limitations on the Provision of Professional Services Between General Stock Corporations and California Professional Accountancy Corporations

The primary distinction between a California General Stock Corporation and a California Professional Accountancy Corporation lies in the nature of the services provided. While General Stock Corporations can operate in a wide array of industries and offer virtually any service or product, other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporations Code, California Professional Accountancy Corporations are exclusively established by licensed accountants to render professional services personally or with professional employees to practice accountancy under the California Professional Accountancy Corporation.

Limitations on the Identity of Permitted Shareholders Between General Stock Corporations and California Professional Accountancy Corporations

Another key difference between General Stock Corporations and California Professional Accountancy Corporations is the restriction on the ownership structure of a California Professional Accountancy Corporation. Whereas a General Stock Corporation such as a California Corporation has virtually no restrictions on the identity of shareholders, and a General Stock Corporation recognized by the Internal Revenue Service as an S Corporation like a California S-Corp has some limitations on citizenship and number of permitted shareholders, California Professional Accountancy Corporations have significant restrictions on the identity of shareholders and generally must be owned by licensed individuals in the professional field for which the corporation is established or certain other licensed professionals. For more information about permitted shareholders, read this article about who may be a shareholder of a California Professional Accountancy Corporation.

Limited Liability Protection Differences Between General Stock Corporations and California Professional Accountancy Corporations

Liability is another area where California Professional Accountancy Corporations differ from General Stock Corporations. While shareholders in a General Stock Corporation generally enjoy comprehensive protection from personal liability for the debts, liabilities, obligations, and legal judgments against a General Stock Corporation, professional shareholders and professional employees of a California Professional Accountancy Corporation are personally liable for their own professional malpractice (professional negligence). However, these professional shareholders are shielded from the malpractice liabilities of their associates and the general debts, liabilities, obligations, and legal judgments against a California Professional Accountancy Corporation, which still provides a significant benefit compared to sole proprietorships or partnerships where personal assets of professionals are at risk for all debts, liabilities, obligations, and legal judgments against the accounting practice.

Taxation Differences Between General Stock Corporations and California Professional Accountancy Corporations

Taxation presents the potential for variance between General Stock Corporations and California Professional Accountancy Corporations. Both General Stock Corporations and California Accountancy Corporations may elect to be taxed under Subchapter S of the Internal Revenue Code, a specific taxation status potentially offering benefits such as pass-through taxation of income, deductions, and credit through to shareholders to be reported on personal tax returns. However, if not electing to be taxed as an S Corporation, traditionally personal service corporations (sometimes referred to as professional service corporations) such as California Professional Accountancy Corporations not electing S Corporation tax status were taxed at a flat federal rate of 35% in addition to state income taxes. Furthermore, these personal services corporations were subject to the double taxation of traditional C corporations. Under the Tax Cuts and Jobs Act signed by then President Trump in 2018 reduced the federal flat tax from 35% to the standard federal corporate tax rate of 21%, but this tax cut is due to expire at the end of 2025 and return to the 35% federal tax rate unless the Tax Cuts and Jobs Act is extended or new tax laws are adopted.

Summary of General Stock Corporation versus California Professional Accountancy Corporation Differences

In summary, a California Professional Accountancy Corporation serves as a critical vehicle for accountants desiring to practice accountancy within a corporate framework while adhering to the legal requirements and professional standards of the practice of accountancy in California. This structure not only provides a way to manage the business aspects of an accounting practice, but also offers a layer of protection against certain liabilities and the advantages of corporate tax structures. Understanding these differences is essential for accountants in deciding the appropriate entity structure for their accounting practice.

How to Identify if Business Entities are General Stock Corporations or California Professional Accountancy Corporations?

Since General Stock Corporations, whether formed under California law or the laws of another state, cannot render professional services in California, it is important for every accountant to identify whether they are practicing accountancy as a California Professional Accountancy Corporation or a General Stock Corporation such as a California Corporation or a California S-Corp.

While the corporate documents of a California Professional Accountancy Corporation, such as the Articles of Incorporation, Bylaws, and Stock Certificates should contain language specific to the practice of accountancy under the California Professional Accountancy Corporation, the easiest way to determine whether a business entity is a General Stock Corporation or a California Professional Accountancy Corporation is to review the Purpose Statement in the Articles of Incorporation of the business structure.

Purpose Statement of a General Stock Corporation

A General Stock Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California General Stock Corporation will read as follows:

“The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code.”

The Purpose Statement of a General Stock Corporation formed in a state other than California will read similarly, although the accepted Purpose Statement wording will vary by state.

Purpose Statement of a California Professional Accountancy Corporation

A California Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California Professional Accountancy Corporation will read as follows:

” The purpose of the corporation is to engage in the profession of accountancy and any other lawful activities (other than the banking or trust company business) not prohibited to a corporation engaging in such profession by applicable laws and regulations. This corporation is a professional corporation within the meaning of California Corporations Code section 13400 et. seq.”

What to Do if Practicing a Profession in a General Stock Corporation?

An Accountant practicing accountancy in California using a General Stock Corporation should contact the experienced attorneys at San Diego Corporate Law today for personalized legal solutions tailored to the unique needs of their accounting practice. Our team of corporate attorneys is dedicated to helping accountants seamlessly transition into a compliant corporate structure, safeguarding the future of their accounting practice and protecting the accounting license they studied and worked hard to obtain.

What are the Options for an Accountant Practicing Accountancy in a General Stock Corporation?

In California, accountants who discover they are not incompliance with the California Corporation Code, the California Business and Professions Code, and the rules and regulations of the California Board of Accountancy because they are practicing accountancy under a General Stock Corporation should cease operating as a General Stock Corporation as soon as possible. These accountants are presented with two viable pathways to align their business structure with California laws and regulations: (1) forming a new California Professional Accountancy Corporation and thereafter dissolving and winding up the General Stock Corporation; or (2) converting their existing General Stock Corporation into a California Professional Accountancy Corporation. This section of the article will explore the considerations involved in each option, providing a clear roadmap for accountants facing the need to navigate this transition.

Forming a New California Professional Accountancy Corporation and Dissolving and Winding Up the General Stock Corporation

Forming a new California Professional Accountancy Corporation as a means to come into compliance with the California laws and regulations for corporate structures permitted to be used for accounting practices is a viable option for accountants operating their accounting practice under a General Stock Corporation. This option entails the establishment of a California Professional Accountancy Corporation that adheres to the specifics outlined in the Moscone-Knox Professional Corporations Act, the California Corporations Code, and California Business and Professions Code, thereby enabling the accountant to legally render accounting services within the State of California.

Forming a California Professional Accountancy Corporation

The initial step in forming a California Professional Accountancy Corporation is drafting and filing Articles of Incorporation specific to accountancy with the California Secretary of State. These Articles of Incorporation should include the required Purpose Statement for a California Professional Accountancy Corporation and should also comply with all pertinent codes and regulations specific to the profession of accountancy. Subsequently, it is essential to adopt corporate Bylaws that govern the internal operations of the California Professional Accountancy Corporation. All of the required language that must be included in the corporate documents of a California Professional Accountancy Corporation should be included in the Articles of Incorporation and the corporate Bylaws. A California Statement of Information, Internal Revenue Service EIN, S Corporation election, California Limited Offering Exemption Notice, and FinCEN Beneficial Ownership Information Report should be filed for the new California Professional Accountancy Corporation, officers such as a CEO, Vice-President, CFO, and Secretary should be appointed, and all other corporate documents should be drafted and adopted.

Dissolving and Winding Up a General Stock Corporation

Upon the successful formation of the California Professional Accountancy Corporation, attention must then turn to the dissolution and winding up of the General Stock Corporation. This process involves settling debts and obligations, distributing any remaining assets, and filing the necessary documentation with the state in which the General Stock Corporation is registered to officially terminate the corporate existence of the General Stock Corporation.

If the General Stock Corporation is a California General Stock Corporation, the experienced attorneys at San Diego Corporate Law can assist in the dissolution and winding up process by drafting the plan of dissolution, shareholder and board of directors approvals, and drafting and filing the Certificate of Election to Wind Up and Dissolve and the Certificate of Election to Wind Up and Dissolve with the California Secretary of State.

If the General Stock Corporation is registered in a state other than California, an attorney licensed to practice in the state where the General Stock Corporation is registered should assist with the dissolution and winding up of the General Stock Corporation.

When is Forming a New California Professional Accountancy Corporation and Dissolving and Winding Up the General Stock Corporation the Best Option?

Transitioning to a California Professional Accountancy Corporation not only assures compliance with California law but also provided the limited liability status for accountant shareholders, which is crucial for protecting their personal assets from business liabilities. Additionally, it aligns the business structure not only with the norms and expectations of an accounting practice within California, potentially enhancing its legitimacy and reputation among peers and clients, but also complies with the legal requirements for the accounting practice in California.

Forming a new California Professional Accountancy Corporation and dissolving and winding up the previously used General Stock Corporation is generally the less expensive of the two options, however, if the administrative burden of managing contracts with clients, vendors, business bank accounts, loss of operating history, or insurance coverage or panels to name a few would be less cumbersome with a conversion of the General Stock Corporation into a California Professional Accountancy Corporation, the higher legal fees may justify using the conversion option as opposed to the formation of a new California Professional Accountancy Corporation and the dissolution and winding up of the General Stock Corporation.

Accountants navigating this transition should consult with legal and financial advisors to ensure a seamless and compliant shift from a General Stock Corporation to a California Professional Accountancy Corporation, ultimately ensuring that their accounting practice stands on solid legal and operational ground.

Converting the Existing General Stock Corporation into a California Professional Accountancy Corporation

The conversion of an existing General Stock Corporation into a California Professional Accountancy Corporation is a structured process that necessitates meticulous planning and strict adherence to California law. This route allows business entities to transition structure without the need to dissolve the original business entity and form a new business entity, thus retaining its existing operational history, relationships, contracts, and potentially Internal Revenue Service EIN if the taxation type of the General Stock Corporation converting is the same as the resulting California Professional Accountancy Corporation.

Converting a California General Stock Corporation into a California Professional Accountancy Corporation

The initial step in converting a California General Stock Corporation into a California Professional Accountancy Corporation is drafting Articles of Incorporation Conversion specific to accountancy with the California Secretary of State. These Articles of Incorporation Conversion should include the required Purpose Statement for a California Professional Accountancy Corporation and should also comply with all pertinent codes and regulations specific to the profession to be practiced. Subsequently, it is essential to adopt new corporate Bylaws that govern the internal operations of the California Professional Accountancy Corporation, as these corporate Bylaws will differ significantly from the corporate Bylaws used by a California General Stock Corporation. All of the required language that must be included in the corporate documents of a California Professional Accountancy Corporation should be included in the Articles of Incorporation Conversion and the corporate Bylaws. A California Statement of Information and FinCEN Beneficial Ownership Information Report should be filed after conversion of a California General Stock Corporation into a California Professional Accountancy Corporation, and all other corporate documents required should be drafted and adopted.

Converting a General Stock Corporation Registered Outside of California into a California Professional Accountancy Corporation

Not all states allow the conversion of business structures registered in their state to other states. However, if permitted, the process of converting a General Stock Corporation registered in a state other than California into a California Professional Accountancy Corporation is similar to converting a California General Stock Corporation into a California General Stock Corporation with the addition of an additional set of filings made with the state in which the General Stock Corporation was registered prior to the conversion into a California Professional Accountancy Corporation to inform that state that the conversion has occurred.

When is Converting a General Stock Corporation into a California Professional Accountancy Corporation the Best Option?

Conversion presents a practical option for accountants seeking to align their corporate structure with the legal regulatory requirements of California laws and regulations without disrupting the continuity of the business operations. Legal and financial advisories play a key role in navigating the conversion process, ensuring that the transition not only complies with California laws and regulations, but also positions the accounting practice for sustained success and growth within the legal framework of a California Professional Corporation.