Choosing the right business structure is a crucial decision for group practices in California. The choice of business entity determines how the group practice is taxed, the extent of personal liability protection and personal asset protection available to the licensed professionals, and the administrative requirements the licensed professionals will need to manage in operating the group practice.

A recent article titled “What are the Business Structure Options for Solo Professionals in California?” discussed the business structure options available to solo professionals starting a alone, however, for two or more professionals practicing in California, there are different options available.

This article provides an overview of the various business structure options available to professional group practices in California, helping professionals to make an informed choice that aligns with their professional goals and liability concerns in the most tax efficient format possible.

Executive Summary: Putting the Conclusion First for Busy Professionals

Summary of Practicing as a General Partnership

The primary benefit of a California General Partnership is its simplicity. There are few legal formalities to establish a California General Partnership and tax reporting is equally straightforward. However, a California General Partnership is not a separate legal entity, which means that partners are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability) and the lack of a separate legal entity also means there is no distinction between personal and professional business assets for partners, meaning the debts, liabilities, and legal judgments for which a partner is liable are satisfied from the personal assets of the partner.

Summary of Practicing with a California Limited Liability Partnership (LLP) (Only Available to Accountants and Attorneys)

For accountants and attorneys, a California Limited Liability Partnership (LLP) is an option worth examining under certain circumstances. The complexity of California LLPs are equivalent to those of a California Corporation, the complexity of a California LLP may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. Like a California General Partnership, a California LLP is not a separate legal entity, so partners of California Limited Liability Partnerships are jointly and severally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability). However, unlike California General Partnerships, partners of a California LLP are not personally liable for the malpractice of other partners.

Summary of Practicing with a California Professional Corporation

While slightly more complex than California General Partnerships and are equivalent in complexity to California LLPs, the complexity of a California Professional Corporation may be reduced by working with the experienced corporate attorneys at San Diego Corporate Law. As a separate legal entity, California Professional Corporations significantly reduce liability risks and are more tax efficient for most professionals. For professionals in high-liability practices, this reduction in risk can be substantial. The separate legal entity status of California Professional Corporations also means there is a distinction between personal and professional business assets for professional owners, meaning the debts, liabilities, and legal judgments against a professional practice are not generally satisfied from the personal assets of the professional owners, and as with California LLPs owners are not personally liable for acts of malpractice by their co-owners, but do remain personally liable for their own acts of malpractice.

Choosing Between a California General Partnership, a California LLP, and a California Professional Corporation

For most professionals, the California Professional Corporation is the right chose because the tax benefits coupled with limited liability protection and ability to separate personal assets from professional business assets far outweighs the increased administrative complexity compared to practicing as a California General Partnership or a California LLP.

Contact San Diego Corporate Law for Assistance Selecting and Forming the Best Business Structure for Your Professional Practice

Take the next step toward securing the ideal business structure for your professional practice, whether that is a California Professional Corporation or another business structure. Contact the experienced corporate attorneys at San Diego Corporate Law today to schedule a consultation and receive personalized, expert guidance tailored to your needs. Our team is here to help you make informed decisions with confidence.

Practicing as a California General Partnership

Practicing as a California General Partnership is the simplest and most straightforward business structure for two or more professionals practicing together in California. A California General Partnership requires minimal paperwork to set up compared to other business entity options and offers flexibility in managing the practice. However, along with these advantages come distinct disadvantages that professionals must consider carefully before considering a California General Partnership as the business structure for their practice.

Administrative Requirements of Practicing as a California General Partnership

One of the primary benefits of a California General Partnership for practicing is the simplicity of establishing a California General Partnership and the continued simplicity of operating as a California General Partnership.

California General Partnerships require minimal effort to establish, but there are legal formalities involved. Typically, the initial steps of setting up a California General Partnership include optionally filing a Certificate of Partnership with the California Secretary of State, entering into a Partnership Agreement between all partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate and, if applicable, registering a fictitious business name (often referred to as a d/b/a).

Taxation of California General Partnerships

Tax considerations are a critical aspect to be examined when planning to practice as a California General Partnership. California General Partnerships file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to professional practices is essential for professionals when choosing a business structure in which to operate their professional practice.

Business Income Taxation When Practicing as a California General Partnership

California General Partnerships report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California General Partnership does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California General Partnership, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California General Partnership on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing as a California General Partnership

Taxation of the partners of a California General Partnership is not tax efficient. One significant consideration for partners of a California General Partnership is self-employment tax. Since partners of a California General Partnership do not receive a salary from the practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California General Partnership can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing as a California General Partnership

High-earning partners of California General Partnerships may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For partners of a California General Partnership filing as single, the threshold is $200,000, while it is $250,000 for partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Partners of California General Partnerships must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earners to account for this additional tax in their financial planning to avoid unexpected liabilities.

Conclusions About Taxation of Partners of California General Partnerships

Understanding the tax implications of a California General Partnership is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing as a California General Partnership

Practicing as a California General Partnership also comes with challenges regarding personal liability protection and asset protection for partners because a California General Partnership is not a separate legal entity, and thus does not offer a legal distinction between the professionals and the professional practice.

Personal Liability for Professionals When Practicing as California General Partnerships

One of the primary risks faced by partners of a California General Partnership is unlimited personal liability. The lack of distinction between the professional partners and the California General Partnership professional practice means that each of the professional partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the professional practice personally, including claims for professional negligence, better known as malpractice, for errors and omissions.

Personal Asset Protection for Professionals When Practicing as California General Partnerships

The lack of distinction between the professionals and the professional practice that makes unlimited personal liability a primary risk to partners of a California General Partnership also means that all assets of the professional partners, be they strictly personal assets or assets used in the practice, are subject to claims by creditors and legal claimants against the personal assets (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Professional Partners of California General Partnerships

The exposure to unlimited personal liability for debts, liabilities, obligations, and legal judgments (including those for professional negligence) coupled with the inability to separate personal assets from professional business assets underscores the importance for professionals choosing a business structure for their professional practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing as a California General Partnership

When deciding whether to establish a professional practice as a California General Partnership, it is essential to weigh the benefits and drawbacks of this business structure. While California General Partnerships offer some simplicity to professional partners, California General Partnerships come with significant risks and limitations. The advantages and disadvantages of operating a California General Partnership are compared below together with a recommendation for when a California General Partnership is the best legal structure for a professional practice.

Advantages of California General Partnerships

The primary benefit of a California General Partnership is its simplicity. There are relatively few legal formalities to establish a California General Partnership for a professional practice.

Disadvantages of California General Partnerships

While California General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most professionals.

A California General Partnership is not a separate legal entity, which means that professional partners are personally liable for all debts, liabilities, obligations, and legal judgments (including malpractice liability). For professionals in high-liability practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for professional partners, meaning the debts, liabilities, and legal judgments for which a professional partner of a California General Partnership is liable are satisfied from the personal assets of the professional partners.

When is a California General Partnership the Right Business Structure for a Professional Practice?

A California General Partnership can be an ideal option for two or more professionals joining together to organize a small-scale practice with the expectation of low net profit and low liability risks. However, before choosing to practice as a California General Partnership, it is essential for the professional partners to weigh the benefits of simplicity against the risks of unlimited personal liability and the future growth of the professional practice. Professional partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing as a California General Partnership in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

For a more detailed understanding of the differences between California General Partnerships and California Professional Corporations and when a California General Partnership is the best choice of business structure for a professional practice, see “When Not to Use a California Professional Corporation” and “What are the Disadvantages of General Partnerships in California?” for more information.

Practicing as a California LLP

Like a California Professional Corporation, practicing as a California LLP is a relatively complex business structure available to two or more accountants or two or more attorneys practicing together in California. A California LLP offers flexibility in managing the practice and flexibility in distributing net profits to professional partners. In addition, a professional partner of a California LLP is not liable for acts of malpractice committed by other partners, but the professional partner remains liable for their own acts of malpractice. Along with these advantages come distinct disadvantages that professionals must consider carefully before considering a California LLP as the business structure for their practice.

Administrative Requirements of Practicing as a California LLP

California LLPs are about equivalent to California Professional Corporation with respect to initial formation, however California LLPs are usually more simple to operate in subsequent years as compared to California Professional Corporation. Typically, the initial steps of setting up a California General Partnership include the mandatory filing a Certificate of Limited Liability Partnership with the California Secretary of State, entering into a Limited Liability Partnership Agreement between all partners, obtaining a local business license to operate legally in the municipal jurisdiction in which the practice will operate.

Taxation of California LLPs

Tax considerations are a critical aspect to be examined when planning to practice as a California LLP. California LLPs file informational tax returns and partners are subject to business income taxation, self-employment taxation, and additional Medicare taxes. Understanding how these taxes apply to professional practices is essential for professionals when choosing a business structure in which to operate their professional practice.

Business Income Taxation When Practicing as a California LLP

California LLPs report their business income and expenses on informational tax returns, namely IRS Form 1065 and California Franchise Tax Board Form 565, however a California LLP does not pay California or federal income tax on its own net profit. Instead, each partner receives a Schedule K-1 from the IRS Form 1065 tax return reporting their distributive share of profits and losses of the California LLP, and each partner in turn reports this on their personal income tax return using Internal Revenue Service Form 1040 and California Franchise Tax Board Form 540 to pay taxes on the net income of the California LLP on their personal income tax return at their household personal income tax rate.

Self-Employment Tax When Practicing as a California LLP

Taxation of the partners of a California LLP is not tax efficient. One significant consideration for partners of a California LLP is self-employment tax. Since partners of a California LLP do not receive a salary from the practice, they are responsible for paying self-employment taxes to cover Social Security and Medicare contributions. This self-employment tax is reported on Schedule SE, with the current rate totaling 15.3% of net profit in addition to federal and state income taxes. However, a partner of a California LLP can deduct half of the self-employment tax paid as an adjustment on their personal tax return, which provides some financial relief.

Additional Medicare Tax When Practicing as a California LLP

High-earning partners of California LLPs may also be subject to the Additional Medicare Tax. This tax applies to individuals whose income exceeds certain thresholds, which are determined based on filing status. For partners of a California LLP filing as single, the threshold is $200,000, while it is $250,000 for partners filing a joint tax return with a spouse. The Additional Medicare Tax rate is 0.9% and applies only to the earnings above the specified threshold. Partners of California LLPs must calculate and report this tax on Form 8959, ensuring compliance with Internal Revenue Service requirements. It is important for high earners to account for this additional tax in their financial planning to avoid unexpected liabilities.

Annual Franchise Tax for California LLPs

California LLPs must pay an annual franchise tax of $800 per year.

Conclusions About Taxation of a California LLP

Understanding the tax implications of a California LLP is integral when deciding which of the available business entities will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

Personal Liability Protection and Personal Asset Protection When Practicing as a California LLP

Practicing as a California LLP also comes with challenges regarding personal liability protection and asset protection for partners because a California LLP is not a separate legal entity, and thus does not offer a legal distinction between the professionals and the professional practice.

Personal Liability for Professionals When Practicing as a California LLP

One of the primary risks faced by partners of a California LLP is unlimited personal liability. The lack of distinction between the professional partners and the California General LLP professional practice means that each of the professional partners are jointly and severally personally liable for all debts, liabilities, obligations, and legal judgments incurred by the professional practice personally, including claims for professional negligence for their own actions or inactions, better known as malpractice, for errors and omissions. However, unlike a California General Partnership, professional partners of a California LLP do not have liability for the malpractice of other partners.

Personal Asset Protection for Professionals When Practicing as a California LLP

The lack of distinction between the professionals and the professional practice that makes unlimited personal liability a primary risk to partners of a California LLP also means that all assets of the professional partners, be they strictly personal assets or assets used in the practice, are subject to claims by creditors and legal claimants against the personal assets (such as homes, bank accounts, investments, and other property).

Conclusions About Personal Liability and Asset Protection for Partners of a California LLP

While the exclusion of liability for the malpractice of other partners of a California LLP is a step up in protection from a California General Partnership, the exposure to unlimited personal liability for debts, liabilities, obligations, and all other legal judgments coupled with the inability to separate personal assets from professional business assets underscores the importance for professionals choosing a business structure for their professional practice to understand liability risks and take proactive measures to safeguard their personal wealth and future earnings from such claims.

Conclusions About Practicing as a California LLP

When deciding whether to establish a professional practice such as a California LLP, it is essential to weigh the benefits and drawbacks of this business structure. While California LLPs offer freedom from liability for the malpractice of other professional partners, California LLPs still come with significant risks and limitations. The advantages and disadvantages of operating a California LLP are compared below together with a recommendation for when a California LLP is the best legal structure for a professional practice.

Advantages of California LLP

The primary benefit of a California LLP over a California General Partnership is liability protection from malpractice claims alleged against other partners. The primary benefit of a California LLP over a California Professional Corporation is flexibility of management and flexibility on how profits may be distributed to professional partners of a California LLP.

Disadvantages of California LLP

California LLPs carry significant risks and are not tax efficient for most professionals.

A California General Partnership is not a separate legal entity, which means that professional partners are personally liable for all debts, liabilities, obligations, and legal judgments (including their own malpractice liability, but not liability for acts of malpractice by other partners). For professionals in high-liability practices, this risk can be substantial.

The lack of a separate legal entity also means there is no distinction between personal and professional business assets for professional partners, meaning the debts, liabilities, and legal judgments for which a professional partner of a California LLP is liable are satisfied from the personal assets of the professional partners.

When is a California LLP the Right Business Structure for a Professional Practice?

A California LLP can be an ideal option for two or more professionals joining together to organize a small-scale practice with the expectation of low net profit and low liability risks without liability for the malpractice of other partners. However, before choosing to practice as a California LLP, it is essential for the professional partners to weigh the benefits of simplicity against the risks of unlimited personal liability and the future growth of the professional practice. Professional partners in high-risk practice areas or those who anticipate rapid growth may want to avoid practicing as a California LLP in favor of a business entity that is more tax efficient and provides limited liability protection together with the separation of personal assets from professional business assets.

Practicing as a California Professional Corporation

Practicing with a California Professional Corporation is not as simple or straightforward as practicing as a California General Partnership, and is about equivalent in complexity to a California LLP, however, a California Professional Corporation provides the tax efficiency, limited liability protection, and separation of personal assets of the professional from the professional business assets of the practice that California General Partnerships and California LLPs lack.

Administrative Requirements of Practicing as a California Professional Corporation

In order to enjoy the tax efficiency, limited liability protection, and separation of personal assets a California Professional Corporation provides, professionals are faced with a step up in complexity of establishing a California Professional Corporation. While this formation process is complex, professionals may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for the California Professional Corporation, leaving professionals with essentially the same tasks they would undertake to establish a California General Partnership or California LLP. It is also worth noting that legal fees and costs are usually qualified business expenses that are tax deductible.

In addition to the initial formation of a California Professional Corporation, every year after the initial formation of a California Professional Corporation, a Statement of Information must be filed with the California Secretary of State and a shareholder and board of directors meeting must be held. Just as with the formation of a California Professional Corporation, a corporate attorney can assist in the annual requirements of practicing with a California Professional Corporation.

Despite the additional administrative requirements of practicing with a California Professional Corporation compared to a California General Partnership or California LLP, the right corporate attorney can make the difference in requirements comparable.

For a more detailed understanding of the administrative requirements for forming and maintaining a California Corporation, see “The 7 Steps for Forming a California Professional Corporation” for more information.

Taxation of California Professional Corporations

As with California General Partnerships and California LLPs, tax considerations are a critical aspect to be examined when planning to practice with a California Professional Corporation. While business owners of a California Professional Corporation are subject to business income taxation, payroll taxes for wages, and franchise taxes paid to the California Franchise Tax Board, these professional business owners are not subject to self-employment taxation or additional Medicare taxes. Understanding how these taxes apply to a professional practice is essential for a professional when choosing a business structure in which to operate their professional practice.

Business Income Taxation When Practicing with a California Professional Corporation

A California Professional Corporation is by default taxed as a personal service corporation (sometimes referred to as a professional service corporation), which is essentially a C Corporation (commonly referred to as a C-Corp) wherein corporate taxes applied to corporate profits are taxed directly at the federal and state levels at the corporate income tax rate, and any distributed dividends are subject to taxation again at the individual shareholder’s level (referred to as “double taxation”). However, a California Professional Corporation may (and almost always should) elect to be treated as an S Corporation (commonly referred to as an S-Corp), which fundamentally changes how income is taxed, so this article will focus on S Corporation taxation of California Professional Corporations.

Electing S Corporation status alters the tax treatment by enabling pass-through taxation. This means the profits and losses of the California Professional Corporation after payment of a reasonable salary to the professionals are passed directly to the professionals as the shareholders reports them on their personal income tax returns to pay federal income tax and state income tax on the net profit of the California Professional Corporation to pay personal income tax of the net profits of the professional practice.

For more information about the election of S Corporation status for a California Professional Corporation, see “Can a California Professional Corporation Be an S-Corp?” for more information.

Self-Employment Tax When Practicing with a California Professional Corporation

Unlike California General Partnerships and California LLPs, which require the professional partners to pay self-employment tax on their distributive share of the net profit of the professional practice, shareholders of a California Professional Corporation are not subject to self-employment taxes.

Instead of self-employment taxes on the entire net profit of the professional practice, with a California Professional Corporation employee and employer contributions to payroll tax are only paid on the reasonable salary of the professionals. While the sum of the employee and employer contributions total 15.3%, the calculation of the tax is based upon the reasonable salary only and not the net profit of the California Professional Corporation, which may result in significant annual tax savings.

Additional Medicare Tax When Practicing with a California Professional Corporation

As discussed above for California General Partnerships and California LLPs, the Additional Medicare Tax is an extra 0.9% tax applied to earned income exceeding certain thresholds. However, because the Additional Medicare Tax is only applied to earned income and the net profit of a California Professional Corporation is not deemed to be “earned” income, the Additional Medicare Tax would only be applicable to professionals practicing with a California Professional Corporation if the reasonable salary of the professionals exceed those thresholds, meaning for all intents and purposes, practicing with a California Professional Corporation does not subject professionals to the Additional Medicare Tax.

Annual Franchise Tax for California Professional Corporations

California Professional Corporations must pay an annual franchise tax similar to that paid by a California LLP but that California General Partnerships do not pay. The franchise tax paid by a California Professional Corporation taxed as an S Corporation is 1.5% of net profit with a minimum of $800 annually. While this is a tax not paid by partners of a California General Partnership, a similar annual franchise tax is paid by California LLPs, but pales in comparison to the self-employment taxes and the Additional Medicare Taxes paid by partners in California General Partnerships and California LLPs.

Conclusions About Taxation of California Professional Corporations

Understanding the tax benefits of a California Professional Corporation is integral when deciding which of the available business entities for two or more professional to practice together will be the most tax efficient, and understanding self-employment and the Additional Medicare Tax liabilities is the first step in planning and efficiently managing future tax liabilities.

For a more detailed understanding of the taxation of California Professional Corporations, see “What Tax Benefits Does a California Professional Corporation Provide?” for more information.

Personal Liability Protection and Personal Asset Protection When Practicing as a California Professional Corporation

Practicing as a California Professional Corporation overcomes many of the personal liability protection and asset protection shortcomings of a California General Partnership or California LLP. A California Professional Corporation is a separate legal entity distinct from its professional owners, thus offering a legal distinction between the professionals and the professional practice as well as personal and business assets of the professionals.

Personal Liability for Professionals When Practicing with a California Professional Corporation

Practicing with a California Professional Corporation resolves most of the risks faced by partners of California General Partnerships and California LLPs for personal liability. The California Professional Corporation provides a separate legal entity distinct from the professional owners, meaning the professional owners are generally not personally liable for the debts, liabilities, obligations, and legal judgments incurred by the professional practice.

Under California law, claims for professional negligence, better known as malpractice, for errors and omissions of a professional are personal to the licensed professional committing the act of malpractice and not shielded by the existence of the California Professional Corporation. Similar to California LLPs, California Professional Corporations do shield professional shareholders from the malpractice liabilities created by the other professional shareholders of a California Professional Corporation; professional shareholders are only personally liable for their own acts of malpractice. Malpractice is an insurable risk and appropriately apportioned professional liability insurance may be used to indemnify the professionals from the risks of their own acts of malpractice.

Personal Asset Protection for Professionals When Practicing with a California Professional Corporation

The separate legal entity and distinction between professionals and the professional practice provided by a California Professional Corporation means that, unlike California General Partnerships and California LLPs, a California Professional Corporation separates the personal assets of professional owners from professional business assets of the practice. Therefore, claims by creditors and legal claimants against the California Professional Corporation are generally limited to the professional business assets of the California Professional Corporation and are not satisfied against the personal assets (such as homes, bank accounts, investments, and other property) of the professional owners.

Conclusions About Personal Liability and Asset Protection for Professional Practicing with a California Professional Corporation

The limitation of personal liability for debts, liabilities, obligations, and legal judgments against a California Professional Corporation coupled with the ability to separate personal assets from professional business assets makes the use of a California Professional Corporation the choice for professionals who wish to limit their personal liability and protect their personal wealth and future earnings from most claims arising out of their professional practice.

For a more detailed understanding of the liability protection and asset protection of California Professional Corporations, see “What Liability Protection Does a California Professional Corporation Provide?” for more information.

Conclusions About Practicing with a California Professional Corporation

When deciding if establishing a professional practice as a California Professional Corporation is worth the additional cost and administrative requirements, it is essential to weigh the benefits and drawbacks of this business structure. While California Professional Corporations are more complex, California Professional Corporations resolve many of the significant risks and limitations inherent to practicing as a California General Partnership or California LLP. The advantages and disadvantages of operating with a California Professional Corporation are compared below together with a recommendation for when a California Professional Corporation is the best legal structure for a group professional practice.

Advantages of California Professional Corporations

While General Partnerships are simple to establish, they carry significant risks and are not tax efficient for most professionals. California LLPs reduce liability for partners from the malpractice of other partners, they otherwise still carry significant risks and are not tax efficient for most professionals. California Professional Corporations significantly reduce liability risks and are more tax efficient for most professionals.

A California Professional Corporation is a separate business entity, which means the professional owners are generally shielded from personally liable for business debts, liabilities, obligations, and legal judgments (other than the insurable risk of malpractice liability for the errors and omission of each professional shareholder for their own malpractice). For professionals in high-liability practices, this reduction in risk can be substantial.

The separate entity status also means there is a distinction between personal and professional business assets for professional owners, meaning the business debts, liabilities, and legal judgments against a professional practice are not generally satisfied from the personal assets of the professional owners.

Disadvantages of California Professional Corporations

The primary disadvantage of a California Professional Corporation is the relative complexity of formation and operation. However, professionals may rely upon the experienced corporate attorneys at San Diego Corporate Law to draft and file all the required legal documents for establishing and maintaining the California Professional Corporation, leaving professionals with essentially the same tasks they would undertake to establish and maintain a California General Partnership or California LLP.

When is a California Professional Corporation the Right Business Structure for a Professional Practice?

A California Professional Corporation can be an ideal option for professionals starting a professional practice based upon factors such as tax efficiency, limits personal liability, and separation personal assets from professional business assets. Small-scale practices with the expectation of revenue growth can benefit from starting as a California Professional Corporation to avoid the future need to reestablish the practice as revenue grows. Similarly, even small-scale practices in high-risk practice areas may benefit from the limited liability protection, separation of personal assets from professional business assets of a California Professional Corporation, and for professional shareholders to avoid malpractice liability for the errors and omissions of other professional shareholders regardless of revenue or profitability.

For a more detailed understanding of the differences between California General Partnerships, California LLPs, and California Professional Corporations and when a California Professional Corporation is the best choice of business structure for a professional practice, see “When to Use a California Professional Corporation” for more information.

Professionals in California May Not Practice as a Limited Liability Company (LLC) or Professional Limited Liability Company (PLLC)

A The experienced corporate attorneys at San Diego Corporate Law are frequently asked about limited liability companies and professional limited liability companies, so this will be briefly discussed here.

California law explicitly prohibits professionals from operating their practices as Limited Liability Companies (LLCs) or Professional Limited Liability Companies (PLLCs). This prohibition may be found in California Corporations Code Section 17701.04(e), which reads:

“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”

This restriction applies to all licensed professionals for which a California Professional Corporation may be formed. Instead, California requires these professionals to form other types of business entities, such as California Professional Corporations.

For a more detailed understanding of the prohibition on the use of LLCs for professional practice in California, see “May a Licensed Professional Practice Using a California LLC?” and “Can I Use a PLLC in California?” and for more information.

If an LLC or PLLC is currently being used for a professional practice in California, see “10 Steps to Convert LLC to Professional Corporation in California” and “Four Reasons Not to Convert LLC to Professional Corporation in California” or “12 Steps to Convert a PLLC to a California Professional Corporation” and “Four Reasons Not to Convert Foreign LLC or PLLC to a California Professional Corporation” for more information about bringing the professional practice into compliance with California law.