California Professional Law Corporation
California Professional Law Corporation Summary
Practicing as a California professional law corporation may have several distinct advantages over practicing as a sole proprietor or partnership. In California, professional law practices may only operate in the form of a corporation by forming a California professional law corporation under the Moscone-Knox Professional Corporation Act. Among the many benefits of incorporating a professional practice as a California professional law corporation are the ability to:
• Limit personal liability against creditors and lawsuits (excluding some malpractice claims);
• Obtain business credit without making a personal guarantee;
• Reduce self-employment taxes for shareholders earning wages;
• Pass profits and losses through to shareholders, thus avoiding double taxation; and
• The availability of fringe benefits, such as medical care, and retirement.
All California professional law corporations formed by San Diego Corporate Law include attorney-drafted articles of incorporation and bylaws, federal EIN application, corporate records book with stock certificates, and minutes for the organizational meeting of the board of directors.
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California Professional Law Corporation Details
A California professional law corporation is a corporation formed under the Moscone-Knox Professional Corporation Act whose articles of incorporation, bylaws, and other corporate documents contain language in compliance with both the Moscone-Knox Professional Corporation Act and the general provisions of the California Corporations Code.
Only a professional licensed to practice law may be a shareholder of a California professional law corporation.
Other restrictions on who may be a shareholder are contained in the California Business and Professions Code, the California Corporations Code, and other applicable law.
A California professional law corporation with only one shareholder need have only one director, who also must be the sole shareholder, and the sole shareholder must also serve as president and treasurer of the California professional law corporation; in general, other officers need not be licensed professionals. California Corporations Code § 13403. A California professional law corporation with only two shareholders need have only two directors, who also must be the two shareholders, and those two sole shareholders must also serve as president, vice-president, secretary, and treasurer of the California professional law corporation. California Corporations Code § 13403.
A California professional law corporation is formed by filing articles of incorporation with the Secretary of State. California Corporations Code § 200(c). In addition to the formation procedure of a regular corporation, additional language is added to the articles of incorporation to create a California professional law corporation. The filing fee for articles of incorporation is currently $100.00. California Government Code § 12186(c). Bylaws, which dictate how the corporation operates, must be adopted.
Shareholders may enter into an optional, separate agreement restricting the sale or transfer of shares of the stock of the California professional law corporation, a formula for determining the value of shares upon transfer, voting provisions, and other clauses.
A shareholder of a California professional law corporation is not liable for the debts and obligations of the California professional law corporation unless: (1) the shareholder personally guarantees a debt or obligation; (2) the shareholder engages in tortious conduct; (3) the shareholder receives improper distributions of the professional corporation’s assets; (4) the shareholder intermingles personal and corporate matters (alter ego; piercing the corporate veil); or (5) the shareholder breaches a duty owed to other shareholders.
Shareholders in a California professional law corporation have the right to inspect the books and records of the professional corporation, thereby learning the names of fellow shareholders. The names of shareholders of California professional law corporations also may be subject to public record and disclosure by the state governing body. The names of officers and directors of a California professional law corporation are a matter of public record.
Unless otherwise named in the articles of incorporation, the incorporators appoint the initial directors of a California professional law corporation. California Corporations Code § 210. After shares of stock in a California professional law corporation have been issued, the shareholders vote annually to elect a board of directors, and the elected directors then elect officers to handle the day-to-day operational management of the California professional law corporation. A California professional law corporation must have a president, a corporate secretary, and a treasurer/chief financial officer. Other officers may also be elected in addition to the three required.
Shareholders in a California professional law corporation exercise no management in a California professional law corporation based upon shareholder status alone. When shareholders do exercise control of management, the California professional law corporation risks losing its limited liability protection.
Shareholders contribute assets to the California professional law corporation in exchange for shares of stock. If the assets contributed are non-cash, the fair market value of the assets establishes the price of the stock.
Shares of stock in a California professional law corporation are securities.
Federal Securities Issues
Federal securities laws should be considered when issuing stock in a California professional law corporation. Regulatory filings may be required either to qualify an offering and sale or to receive an exemption.
California Securities Issues
All offers and sales of securities in California require qualification with the Department of Business Oversight unless either the transaction or the security itself is exempted from qualification. The securities laws of other states may also apply to offers or sales of stock made outside California. California Corporation Code §§ 25000-25707; 10 California Code of Regulations §§ 250.9-260.617.
The net income of a California professional law “C” corporation is taxable by both the federal and state governments at personal service corporation tax rates. The federal personal service corporation tax at the time of this writing is a 35% flat federal tax and an 8.84% California franchise tax.
If a California professional law corporation distributes dividends to shareholders, the shareholders must report the dividends received as income. This income will be subject to both federal and state income taxes. Taxation of dividends is commonly referred to as “double taxation” because the net income of the California professional law corporation is taxed twice: first at the corporate level and again if distributed as dividends to the shareholders. Dividend payments made to shareholders are not treated as an expense of the California professional law corporation.
Double taxation may be minimized by the payment of wages to shareholder-employees, by payment of fair market rent or royalties of assets owned by shareholders, or by payment of fair market interest on a debt owed to shareholders.
California professional law corporations must pay a minimum annual franchise tax of $800 to the State of California’s Franchise Tax Board for the privilege of doing business as a limited liability entity. Employment taxes and workers’ compensation insurance must be paid on employees’ wages.
Net income, loss, and tax credits of a California professional law “S” corporation are not taxed at the corporate level and are instead “passed through” to the shareholders.
If not restricted by shareholder agreements or securities law requirements, a shareholder in a California professional law corporation may readily transfer stock to a new owner, provided the transfer is made only to another licensed professional permitted to own such shares of stock.
Change of ownership does not dissolve or terminate a California professional law corporation.
A California professional law corporation can be dissolved by a vote of 50% or more of the voting power of the professional corporation’s shareholders and the subsequent filing of a certificate of election with the Secretary of State. California Corporations Code §§ 204(a)(4), 1900(a), 1901.
The organization of a California professional law corporation for the pricing listed on this page assumes a single class of stock and the issuance to founders domiciled in California valued at US$25,000.00 or less. More complex organizations and share issuance available by quotation. Filings required by applicable federal and blue sky securities laws available for additional fees and with additional costs.