Transitioning from a California Limited Liability Company (LLC) to a Professional Corporation in California requires careful planning and adherence to specific legal requirements. This conversion can offer numerous benefits, including potential tax advantages and professional credibility, however the most likely reason to convert is because California LLCs may not be used for professional practices in California.

This Article outlines the 10 essential steps to seamlessly convert your California LLC into a California Corporation specifically designed for licensed professionals to practice their profession in California, ensuring compliance with the California Corporations Code, the Moscone-Knox Professional Corporations Act, the California Business and Professions Code as well as the rules and regulations of the governing board for the profession being practiced.

Executive Summary: Putting the Conclusion First for Busy Professionals

California Corporations Code Section 17701.04(e) prohibits the use of a California LLC by licensed professionals in California for professional practice as follows:

“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.”

Whether you found an article such as this one, independently discovered that California Corporations Code Section 17701.04(e) prohibits the use of a California LLC for professional practices, or just have an existing California LLC you no longer need and want to convert it for use in your professional practice, the experienced attorneys at San Diego Corporate Law can assist with conversion of your California LLC into a California Professional Corporation. Contact us today to schedule a consultation to discuss the details of your conversion.

Step 1: Draft a Plan of Conversion for the Conversion from a California LLC to a California Professional Corporation

The initial step in converting a California LLC into a California Professional Corporation is drafting and executing a plan of conversion approved by the member(s) of the California LLC.

A Plan of Conversion is a formal document that outlines the specific strategy and legal steps required to transform a California LLC into a California Professional Corporation. It includes crucial details such as the name of the California LLC, the proposed name of the California Professional Corporation, the terms and conditions of conversion, the manner and basis of converting California LLC membership interests or units into shares of stock of the California Professional Corporation.

This plan serves as a blueprint for the conversion process, ensuring that all legal requirements are met and providing a clear roadmap for the transition. It is fundamental to the conversion process and must be approved by the member(s) of the California LLC, together with the approval of the member(s) to the conversion of the California LLC into a California Professional Corporation generally, before proceeding.

Step 2: Obtain Member Approval of the Plan of Conversion and the Conversion from a California LLC to a California Professional Corporation

Obtaining the consent of the member(s) of the California LLC is a critical step in the conversion process to a California Professional Corporation. This step signifies the agreement and commitment of all involved parties towards the conversion and ensures legal and procedural compliance. Not only must the member(s) of the California LLC approve the conversion from a California LLC to a California Professional Corporation generally, but that approval must also extend to the specific terms set forth in the Plan of Conversion.

Documenting Member Approval to the Conversion of the California LLC into a California Professional Corporation

The consent of the member(s) of the California LLC needs to be documented formally. This can be achieved through a meeting where a vote is held or by written consent where each member signs off on the both the conversion generally and the Plan of Conversion specifically. The documentation should clearly indicate the approval of the conversion generally and the approval of the Plan of Conversion specifically, signifying the understanding and agreement of the member(s) of the California LLC to the terms and conditions of the conversion process.

It is advisable to enlist the services of a legal professional to ensure that the consent documentation is in compliance with California law and accurately reflects the intentions of all parties involved.

Legal Requirements for Member Consent

The California Corporations Code requires specific procedures for the approval of a Plan of Conversion by the member(s) of a California LLC prior to converting to a California Professional Corporation. California law mandates a majority vote in favor of the conversion; however, the Operating Agreement of the California LLC may stipulate a higher threshold, so it is imperative to have an experienced corporate attorney review the operating agreement and adhere to its provisions regarding conversion and member consent.

Step 3: Draft and File Articles of Incorporation Conversion for Conversion of a California LLC to a California Professional Corporation

Drafting and filing Articles of Incorporation Conversion is a pivotal step in the process of converting a California LLC into a California Professional Corporation. This legal document formally establishes the transition from a California LLC to a California Professional Corporation under California law and establishes the foundational of the legal structure as a California Professional Corporation after the conversion has occurred.

Preparation of Articles of Incorporation Conversion for a California Professional Corporation

The Articles of Incorporation Conversion from a California LLC into a California Professional Corporation must include specific information as required by the California Corporations Code. This information includes the name of the California LLC that is converting and its California Secretary of State Entity Number, the name of the California Professional Corporation once the conversion is compete, its principal place of business and mailing address, the purpose of the California Professional Corporation, the name and address of the Registered Agent for Service of Process, the number of shares of common stock the California Professional Corporation will be authorized to issue, and a statement that the California Professional Corporation is being formed pursuant to a Plan of Conversion from a California LLC to a California Professional Corporation.

It is important to ensure accuracy and adherence to legal requirements when drafting the Articles of Incorporation Conversion, as they form the legal backbone of the California Professional Corporation. Attention to detail in this step can prevent potential legal and operational issues down the line.

Filing Articles of Incorporation Conversion with the California Secretary of State

Once the Articles of Incorporation Conversion have been prepared, the next step involves filing them with the California Secretary of State. This filing officially converts the California LLC into a California Professional Corporation with the State of California and is accompanied by a filing fee of $150 at the time of this writing, plus a $5 Certification Fee if a certified copy of the Articles of Incorporation Conversion are requested. A document examiner in the office of the California Secretary of State will review the submitted Articles of Incorporation Conversion for compliance with California laws before approving the conversion.

Legal Considerations and Compliance for Articles of Incorporation Conversion for a California Professional Corporation

Throughout the drafting and filing process, adherence to California laws and regulations is non-negotiable. Ensuring legal compliance not only legitimizes the conversion process and safeguards the status as a California Professional Corporation, but also ensures that the drafted and filed Articles of Incorporation Conversion are accepted and not rejected by the California Secretary of State.

It is therefore advisable to seek the expertise of an experienced corporate attorney to guide the drafting, review, and filing of the Articles of Incorporation Conversion, as competent counsel may provide invaluable insights into the nuances of California corporate law, ensuring the conversion process is executed correctly and efficiently.

Step 4: Draft Bylaws for a California Professional Corporation Compliant with the Moscone-Knox Professional Corporations Act

After drafting and filing Articles of Incorporation Conversion, and while waiting for approval from the California Secretary of State, it is time to draft the Bylaws for the soon to be converted California Professional Corporation. The Bylaws of a California Professional Corporation provide the governance structure and every California Professional Corporation is required to have Bylaws.

Bylaws serve as the internal manual governing the operations of a California Professional Corporation, detailing the rights, responsibilities, and obligations of the directors, officers, and shareholders. In accordance with the Moscone-Knox Professional Corporation Act, which governs the formation and operation of professional corporations in California, bylaws must adhere to specific California requirements specific to the profession as set forth in both the California Corporations Code and the California Business and Professions Code.

Key Elements of California Professional Corporation Bylaws

Bylaws should encompass distinct provisions that align with the Moscone-Knox Professional Corporation Act where applicable, the California Corporations Code where the Moscone-Knox Professional Corporation Act is silent, and the California Business and Professions Code applicable the specific profession that will be practiced by the California Professional Corporation. These provisions include:

• Organizational Structure: Detailed description of the governance structure of the California Professional Corporation, including the size of the board of directors, the tenure of directors, and the scope of authority of the officers.
• Shareholder Agreements: Conditions under which shares may be issued, transferred, or repurchased, especially considering the restrictions on share ownership specific to the profession that will be practiced by the California Professional Corporation.
• Meetings and Voting: Procedures for conducting annual meetings, special meetings, and the mechanism for voting, including the use of proxies.
• Professional Compliance: Specific clauses ensuring that all practicing professionals within the corporation hold valid and current licenses and comply with the ethical standards mandated by their respective professional governing boards.

Compliance and Customization of California Professional Corporation Bylaws

While drafting Bylaws, it is essential to ensure that they not only comply with legal requirements but also reflect the specific operational dynamics of the California Professional Corporation. Customization of Bylaws allows for creating a corporate governance framework that is tailored to the mission, values, and professional practices of the California Professional Corporation is possible within the restraints of the California Corporations Code, which proscribes many of the details which must be included in the Bylaws of a California Professional Corporation.

Adoption of California Professional Corporation Bylaws

Once finalized , the Bylaws must be formally adopted by the board of directors of the California Professional Corporation in their first meeting. This adoption is a significant step, as it legally enforces the bylaws as the governing document of the operations of the California Professional Corporation.

In conclusion, drafting Bylaws in compliance with the Moscone-Knox Professional Corporation Act is a foundational step in forming a California Professional Corporation. Bylaws found online or from sources other than California corporate attorneys should be reviewed by experienced corporate counsel to ensure they are compliant with the Moscone-Knox Professional Corporations Act, the California Corporations Code, and the California Business and Professions Code.

Ensuring the legal compliance of the Bylaws of a California Professional Corporation requires meticulous attention to detail, a deep understanding of legal requirements, and a nuanced approach to incorporating the requirements of all the applicable California laws into the Bylaws of the California Professional Corporation.

Step 5: Hold Meetings or Draft and Sign Consents by the Shareholders and Board of Directors of the Newly-Converted California Professional Corporation

Following the successful conversion from a California LLC to a California Professional Corporation, an imperative next step involves organizing the initial meetings of both the board of directors and shareholders or, alternatively, drafting and signing written consents in lieu of physical meetings. These initial sessions or consents are pivotal for laying the groundwork for the governance and operational frameworks of the newly-converted California Professional Corporation.

Initial Shareholders Meeting

Prior to the initial board of directors meeting, the first meeting of the shareholders should be convened. The primary purpose of this assembly is to elect the board of directors of the California Professional Corporation. Shareholders may also be involved in ratifying the actions taken during the conversion from a California LLC to a California Professional Corporation and also approve certain decisions to be confirmed by the board of directors during their meeting to follow, thus providing an additional layer of validation for the initial decisions to be made by the board of directors. Maintaining an accurate record of this meeting of the shareholder(s) is of utmost importance for compliance and historical reference.

Initial Board of Directors Meeting

The first meeting of the board of directors is critical for a newly-converted California Professional Corporation. The primary objectives of this meeting include the adoption of the Bylaws of the California Professional Corporation, the election of corporate officers (such as the President or CEO, Secretary, and Treasurer or Chief Financial Officer), and the resolution of any initial matters necessary to commence operation of the California Professional Corporation.

During this meeting, the board of directors may also discuss setting the fiscal year of the California Professional Corporation, the designation of one or more business bank accounts, establishing a principal place of business, and the authorization of the issuance of shares to the shareholders, to name a few. Given the importance of these decisions, ensuring a meticulously documented minutes of the meeting are prepared and subsequently filed with the records of the California Professional Corporation is crucial.

Written Consents in Lieu of Meetings

California corporate law allows for the drafting and signing of written consents by the board of directors and shareholders as an alternative to holding formal meetings if permitted in the Bylaws of a California Professional Corporation. This can be particularly advantageous for streamlining decisions when scheduling conflicts or logistical challenges arise. These written consents must encompass all decisions ratified as if the meeting had been held, adhering to the same standards of detail and formality. For legal validity, consent documents must be signed by all members of the board of directors or shareholders, respectively, and filed within the records of the California Professional Corporation in the same manner meeting minutes should be filed in the records of the California Professional Corporation.

Legal Compliance and Documentation

Whether opting for physical meetings or written consents, compliance with the California Corporations Code is paramount. This includes adhering to notice requirements for meetings, achieving the necessary quorums, and ensuring proper documentation and filing of minutes or consents. Additionally, these early governance activities should be executed in harmony with the stipulations contained within the Bylaws of the California Professional Corporation and the overarching legal framework governing California Professional Corporations.

The initial meetings of the board of directors and shareholders, or the drafting and signing of written consents in lieu thereof, are foundational elements in the establishment of the governance structure of a California Professional Corporation. These steps not only comply with legal mandates, but also solidify the operational and managerial foundations necessary for the newly-converted California Professional Corporation to thrive.

Step 6: Draft and File a Statement of Information for the Newly-Converted California Professional Corporation

After successfully converting a California LLC into a California Professional Corporation and following the appointment of the board of directors and officers of the California Professional Corporation, the next step that must not be overlooked is the drafting and filing of a Statement of Information with the California Secretary of State. The Statement of Information is a required legal document essential for the public disclosure of the fundamental details of the California Professional Corporation, including the identities of the members of the board of directors and officers, the principal business address and mailing address of the California Professional Corporation, and the identity of its Registered Agent for Service of Process. The disclosures made on the Statement of Information ensure corporate transparency and compliance with California laws and regulations requiring such disclosures.

Filing Requirements for a Statement of Information After Conversion from a California LLC to a California Professional Corporation

The initial Statement of Information for a newly-converted California Professional Corporation must be filed within 90 days following the filing of the Articles of Incorporation Conversion with the California Secretary of State. Thereafter, a Statement of Information it is required to be filed annually, and failure to timely file the initial or subsequent annual Statement of Information can result in financial penalties and could ultimately lead to the suspension of the California Professional Corporation. Therefore, it is paramount for the corporation to adhere to these filing deadlines to maintain good standing and ensure uninterrupted operations.

Procedure for Filing a Statement of Information Following Conversion from a California LLC to a California Professional Corporation

The process for filing the Statement of Information can be completed online, by mail, or in person. For efficiency and accessibility, the California Secretary of State offers an online filing system for California Professional Corporations to submit their initial and annual Statement of Information filings electronically. If preferred, the document can also be downloaded, completed, and mailed or delivered to the Secretary of State. Regardless of the method chosen for filing, it is important to ensure that the information provided is accurate and current to avoid potential legal complications.

Step 7: Inform Governmental Agencies and Taxing Authorities of the Conversion from California LLC to California Professional Corporation

After the conversion of a California LLC into a California Professional Corporation, it is imperative to notify all relevant governmental agencies and taxing authorities about the change. This step is crucial for ensuring that the newly converted entity adheres to the appropriate federal and state regulatory and tax obligations applicable to California Professional Corporations.

Notification of Business Entity Change Following Conversion of a California LLC into a California Professional Corporation

While the California Franchise Tax Board will automatically receive a notice of the Conversion of a California LLC into a California Professional Corporation, the IRS does not receive any such notice from the State of California. Therefore, it is imperative to notify the IRS of the conversion so correct information about the California Professional Corporation may be maintained for federal tax purposes.

Federal Taxation Changes Following Conversion of a California LLC into a California Professional Corporation

Upon conversion, the federal tax status of the business entities may change. For example, if the California LLC was previously taxed as a partnership or disregarded for tax purposes, taxation types not available to California Professional Corporation, the taxation type must change following conversion to either taxation as a personal service corporation (sometimes referred to as a professional service corporation or C Corporation) or elect to be taxed as an S Corporation under Subchapter S of the Internal Revenue Code. To elect S Corporation tax treatment (commonly referred to as S-Corp taxation), the California Professional Corporation must elect this status by drafting and filing IRS Form 2553, the Election by a Small Business Corporation.

If the California LLC was previously taxed as a corporation by filing IRS Form 8832, the Entity Classification Election, or as an S Corporation by filing IRS Form 2553, the Election by a Small Business Corporation, the taxation type of the converting California LLC may be maintained by filing a new election after conversion.

It is worth noting that if the taxation type changes as a result of a conversion from California LLC to California Professional Corporation, the California Professional Corporation must adopt a new Employer Identification Number (EIN) issued by the IRS and will not be able to continue its use of the EIN from the California LLC. If the taxation type does not change, the newly-converted California Professional Corporation may be able to continue using the EIN it was issued as a California LLC prior to conversion.

It is vital to consult with a tax professional to determine the best tax strategy for your newly-converted California Professional Corporation.

Business Licenses and Permits

The conversion of a California LLC to a California Professional Corporation may necessitate the updating or reissuance of existing business licenses and permits. Contact local and state licensing agencies to update the business entity information on all operational licenses and permits. This ensures the continued legal operation of the professional services under the newly converted corporate entity.

State and Local Taxation Following Conversion of a California LLC into a California Professional Corporation

The conversion from a California LLC to a California Professional Corporation may also affect the state and local tax responsibilities of the business entity. This includes, but is not limited to, income, franchise, and employment taxes. The tax advisor of a converted entity should be notified of the conversion so the accounting records of the business entity may be modified to reflect the new business structure and other agencies such as the Employment Development Department (EDD) should be informed of the conversion by the California Professional Corporation or its tax advisor.

Step 8: Draft and File the California Department of Financial Protection and Innovation Notice of Conversion

After a California LLC is successfully converted into a California Professional Corporation, and in conjunction with the conversion of California LLC membership interests or units converting to shares of stock in the California Professional Corporation, another the critical step to ensure compliance with California law is drafting and filing a Notice of Conversion with the California Department of Financial Protection and Innovation.

What is the Notice of Conversion that Must Be Filed Following Conversion from a California LLC into a California Professional Corporation?

Pursuant to California Corporations Code Section 25103(h), entities converting from a California LLC to a California Professional Corporation are required to notify the California Department of Financial Protection and Innovation about the conversion. This is to ensure that the California Department of Financial Protection and Innovation has a record of the conversion and can provide oversight on the issuance of securities by the newly-converted California Professional Corporation, ensuring it adheres to all applicable regulatory requirements.

What Information is Disclosed in the Notice of Conversion that Must Be Filed Following Conversion from a California LLC into a California Professional Corporation?

The Notice of Conversion must include detailed information about both the original California LLC and the newly-converted California Professional Corporation and the changes to the securities as a result of the conversion.

How is a Notice of Conversion Filed Following Conversion from a California LLC into a California Professional Corporation?

Filing the Notice of Conversion is a complex process that requires careful attention to detail. It involves drafting the notice to meet all legal requirements, ensuring accuracy in reporting the information about the converting California LLC, the converted California Professional Corporation, and the changes to the securities involved as a result of the conversion.

Once the Notice of Conversion is prepared, it should be filed with the California Department of Financial Protection and Innovation together with the required filing fee, which at the time of this writing is a $600 fee.

Businesses are advised to consult with legal professionals having expertise in California securities law to ensure that the Notice of Conversion is drafted correctly and that all regulatory requirements are met. Failure to properly file this notice could lead to legal challenges and complications in the future, especially concerning the issuance and management of securities by the newly-converted California Professional Corporation.

Step 9: Draft and File FinCEN Beneficial Ownership Information Report Following Conversion of a California LLC into a California Professional Corporation

Following the conversion of a California LLC into a California Professional Corporation, a pivotal compliance step involves drafting and filing the FinCEN Beneficial Ownership Information Report, whether as an initial report or an update to a previously-filed report.

The Financial Crimes Enforcement Network (FinCEN), a bureau of the U.S. Department of Treasury, mandates this reporting to combat financial crimes like money laundering and terrorism financing. The Beneficial Ownership Information Report plays a crucial role in providing transparency about the individuals who own or control significant aspects of corporate entities. As the FinCEN Beneficial Ownership Information Reporting requirements are new at the time of this writing, you may wish to read more about the requirements in one of these articles:

What is Beneficial Ownership Information Reporting?

Exemptions from Beneficial Ownership Information Reporting

What Specific Information Does a Company Need to Report for FinCEN Beneficial Ownership Information Reporting?

How to File Beneficial Ownership Information Report

How to Fix Inaccuracies or Make Changes to a Beneficial Ownership Information Report

The failure to comply with the FinCEN Beneficial Ownership Information Reporting requirements can lead to civil penalties of $500 per day of non-compliance and criminal penalties of up to $10,000 and two-years imprisonment.

Understanding Beneficial Ownership Reporting Requirements

The FinCEN reporting requirements focus on identifying and verifying the beneficial owners of legal entities. A beneficial owner is defined as any individual who, directly or indirectly, holds equity interests in the business entity or who exercises significant control over the entity. This includes individuals who have the authority to make significant decisions for the entity, such as officers and members of the board of directors.

Requirement to Report Changes within Thirty (30) Days

A critical aspect of maintaining compliance with the FinCEN Beneficial Ownership Information Reporting regulations is the requirement to report any changes to beneficial ownership information within thirty (30) days of such changes occurring. This includes changes resulting from the conversion of a California LLC into a California Professional Corporation. The conversion process entails not only a shift in the structure subject to reporting, but potentially the ownership and/or management of the business entity, thus necessitating an update to the reported beneficial ownership information to reflect the current ownership and control structure accurately.

Legal and Professional Assistance

Given the complex nature of the FinCEN Beneficial Ownership Information Reporting requirements, and the potential consequences of non-compliance, it is advisable for business entities undergoing conversion to seek the assistance of legal professionals knowledgeable about the reporting requirements for guidance on accurately identifying beneficial owners, completing the reporting, and navigating the filing process efficiently. By accurately reporting beneficial ownership information and promptly updating this information within thirty (30) days of any changes, the newly-converted California Professional Corporation secures its legal and operational standing.

Step 10: Notify Vendors and Clients/Patients of the Conversion from California LLC to a California Professional Corporation

The final step after a California LLC has been successfully converted to a California Professional Corporation is to communicate the change to all vendors, clients or patients, banks and other financial institutions, insurance companies, payroll companies, property management companies for leased premises, and any others who interact with the business on a professional basis. This notification not only serves as a formal announcement but also ensures the continuity of business operations without legal or financial disruptions and secures the personal liability protection of the shareholders.

Communication Strategy

Develop a comprehensive communication strategy that specifies the timeline, modes of communication (e.g., email, letter, personal phone calls), and the key messages to be conveyed. The strategy should include a clear explanation of why the conversion took place, what changes (if any) can be expected, and reassurance of the commitment to maintaining the quality of services or products provided.

Formal Notification Letters

Prepare formal notification letters that detail the conversion, including the effective date and any new tax identification or business entity numbers (and a new IRS Form W9, if applicable) that result from the conversion. These letters should be tailored to each group (e.g., letters to clients or patients might emphasize continuity of service, while letters to banks and financial institutions may focus on the technical aspects of the conversion and any necessary updates to accounts or agreements).

Updating Legal and Financial Documents

It is also crucial to inform all relevant parties about changes to legal and financial documents that may affect contractual relationships. This includes updating real property and equipment leases, contracts, loan agreements, and any other legal documents to reflect the new corporate structure. Ensure that all references to the business in these documents are updated from the previous California LLC designation to the new California Professional Corporation status.

Insurance and Payroll

Notify insurance companies and payroll providers about the conversion to adjust policies and payroll accounts as necessary. This step is vital to ensure that coverage and payroll processing are not interrupted. It may also be necessary to review and adjust these services to better fit the needs of a California Professional Corporation as opposed to a California LLC.

Regulatory Notifications

Finally, ensure that all necessary regulatory bodies are informed of the conversion. This includes any professional boards or agencies that regulate the professional practice of the California Professional Corporation. Staying compliant with all regulatory requirements is imperative for the newly-converted California Professional Corporation.

Conclusion

Notifying all relevant parties of the conversion from a California LLC to a California Professional Corporation is the critical, final step in the conversion process. It requires a detailed, methodical approach to ensure that all financial, legal, and professional relationships are maintained and that the California Professional Corporation remains in good standing with regulatory bodies. Professionalism and clarity in communication can help facilitate a smooth transition and ensure that the business continues to operate efficiently and effectively post-conversion.