The question of whether rendering professional services is permitted through a Foreign Professional Corporation, meaning a corporation or S-Corp formed in a state other than California, is a matter of legal interpretation. This article aims to dissect the legal framework governing the use of Foreign Professional Corporations, such as Delaware Corporations, Nevada S-Corps, or Wyoming S-Corps for professionals rendering professional services in California.

In California, the structure and organization of businesses that professionals may use to provide professional services are subject to specific legal and regulatory considerations. Professionals 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 professional practice without losing sight of the legally permissible forms of business structures, professionals should seek the advice and counsel of both experienced corporate attorneys and their tax advisors when choosing a business structure for their professional practice.

Given the stringent regulations on the provision of the same professional services in California, understanding the nuances and requirements is crucial for professionals seeking to incorporate their California-based professional practices in Foreign Professional Corporations. This article endeavors to provide a clear, informative, and practical answer for professionals considering the use of a Foreign Professional Corporation for their professional practice and to inform professionals who might currently be practicing professionally in California in a Foreign Professional Corporation of their options to get into compliance with the California Corporations Code, the California Business and Professions Code, and the rules and regulations of the governing board for the profession and other governmental agency regulating the profession.

Executive Summary: Putting the Conclusion First for Busy Professionals

California licensed professionals may not practice professionally in California using a Foreign Professional Corporation, and instead must opt for a California Professional Corporation. This prohibition on Foreign Professional Corporations is similar to the restrictions on the use of a limited liability company for practicing professionally, which precludes the use of both California LLCs as well as foreign LLCs and PLLCs, California General Stock Corporations, and Foreign Corporations, and requires conversion from the California LLC, conversion from the foreign LLC or PLLC, conversion from California Corporation, or conversion from the Foreign Corporation into a California Professional Corporation.

What is a Foreign Professional Corporation?

A Foreign Professional Corporation is a corporation organized and existing under the laws of a state other than California. A Foreign Professional Corporation may be easily identified by reading the Purpose Statement of the Articles of Incorporation or Certificate of Incorporation. The Purpose Statement of a California Corporation will indicate that the corporation is organized under California law. The Purpose Statement or other language of a Foreign Professional Corporation formed in a state other than California will indicate that the corporation was organized under the laws of a state other than California.

What are the Options for Professionals Who Render Professional Services in California with a Foreign Professional Corporation?

Professionals rendering professional services in California within a Foreign Professional Corporation should immediately seek informed legal guidance to either form a new California Professional Corporation or convert the Foreign Professional Corporation into a California Professional 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 governing board for the profession or any other regulating governmental agency before continuing to render professional services in California.

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

What are Foreign Professional Corporations?

In the context of rendering professional services in California, Foreign Professional Corporations are out of state corporations formed under the laws of a state other than California. While similar in many respects to California Corporations and California S-Corps, Foreign Professional Corporations differ with respect to their ability to be used for a professional practice by a California licensed professional in California. Understanding the nuances between these corporate structures is essential for professionals intending to establish or continue their professional practices within the legal frameworks of California or any other state. This section will discuss the attributes of both Foreign Professional Corporations and California Professional Corporations.

While a Foreign Professional Corporation may generally apply for authority to transact business in California (sometimes referred to as California foreign qualification or registration), this only applies to general business activities and does not extend to professional practices, such as professional practices, in California. After completing foreign qualification, a Foreign Professional Corporation may be recognized broadly across various states, allowing for a degree of uniformity in both interstate and intrastate business operations.

What is a California Professional Corporation?

California Professional Corporations are specialized entities formed pursuant to the Moscone-Knox Professional Corporation Act specifically for rendering professional services pursuant to a professional license in California. While not all professions in California that require a state license may be formed as a California Professional Corporation, licensed persons have California Professional Corporations and must use a California Professional Corporation to practice professionally in California in a corporate structure. This differentiation ensures that professionals are able to comply with specific legal stipulations governing their professional practice, including liability and practice requirements, thereby protecting both the professionals and the public they serve.

Comparison of Foreign Professional Corporations versus California Professional Corporations

The key differences between a Foreign Professional Corporation and a California Professional Corporation are as follows:

• A Foreign Professional Corporation is formed in a state other than California, while a California Professional Corporation is formed under the laws of the State of California, specifically the Moscone-Knox Professional Corporation Act and the California Corporations Code.
• Foreign Professional Corporations may only transact general business activities in California after applying for authority to transact business in California (California foreign qualification or registration), whereas California Professional Corporations are specifically designated for rendering professional services in California.
• Foreign Professional Corporations, even after being a foreign corporation qualified to to business in California by applying for authority to transact business (California foreign qualification or registration) in California to transact general business activities in California still may not be used for practicing professionally.

How to Identify Foreign Professional Corporations and California Professional Corporations?

Since Foreign Professional Corporations cannot be used to lawfully render professional services in California and California Professional Corporations must be used to practice professionally in corporate form, it is important for every licensed professional to identify whether they are practicing professionally as a Foreign Professional Corporation or a California Professional Corporation.

The corporate documents of a Foreign Professional Corporation such as the Articles of Incorporation, Bylaws, and Stock Certificates, should contain language specific to the jurisdiction in which the Foreign Professional Corporation was registered. Similarly, the Articles of Incorporation, Bylaws, and Stock Certificates of a California Professional Corporation should contain language specific to the formation of the California Professional Corporation under California law and also include language specifying the practice under the California Professional Corporation.

Purpose Statement of a Foreign Professional Corporation

A Foreign Professional Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation or Certificate of Incorporation. The Purpose Statement of a Foreign Professional Corporation will include language indicating the state laws under which the corporation was formed, and this will be a state other than California, although the specific wording will vary from state to state. In addition, the purpose statement of a Foreign Professional Corporation will also indicate that it is established to practice professionally or specify a certain profession to be practiced. The exact details will vary on a state-by-state basis.

If the Purpose Statement indicates formation of the corporation under the laws of a state other than California law, but does not specify a profession, those Articles of Incorporation are likely for a Foreign Corporation which may not be used to render professional services in California and should either be converted to or replaced with a California Professional Corporation for rendering professional services in California. If the Purpose Statement indicates formation of the corporation under the laws of a state other than California law and specifies professional status or a specific profession, those Articles of Incorporation are likely for a Foreign Professional Corporation which may not be used to lawfully render professional services in California and should either be converted to or replaced with a California Professional Corporation.

Purpose Statement of a California Professional Corporation

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

“The purpose of the corporation is to engage in the profession of [specify profession] 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.”

If the Purpose Statement indicates formation of the corporation under California law, but does not specify the profession, those Articles of Incorporation are likely for a California General Stock Corporation, such as a California Corporation or California S-Corp, which may not be used to render professional services in California and should either be converted to or replaced with a California Professional Corporation for rendering professional services in California.

What to Do if Practicing Professionally in a Foreign Professional Corporation?

Professionals practicing professionally in California using a Foreign Professional Corporation should contact the experienced attorneys at San Diego Corporate Law today for personalized legal solutions tailored to the unique needs of their professional practice. Our team of corporate attorneys is dedicated to helping professionals seamlessly transition into compliant corporate structures, safeguarding the future of their professional practice and protecting the professional license they studied and worked hard to obtain.

What are the Options for Professionals Rendering Professional Services in a Foreign Professional Corporation?

In California, professionals who discover they are not incompliance with the California Corporation Code, the California Business and Professions Code, and the rules and regulations of the governing board for the profession or other regulating governmental agency because they are practicing professionally as a Foreign Professional Corporation should cease operating as a Foreign Professional Corporation as soon as possible.

These professionals are presented with two viable pathways to align their business structure with California laws and regulations: (1) forming a new California Professional Corporation and thereafter dissolving and winding up their Foreign Professional Corporation (unless they will continue to render professional services with the Foreign Professional Corporation outside of California); or (2) converting the existing Foreign Professional Corporation into a California Professional Corporation. This section of the article will explore the considerations involved in each option, providing a clear roadmap for professionals facing the need to navigate this transition.

Forming a New California Professional Corporation and Dissolving and Winding Up the Foreign Professional Corporation (or Keeping the Foreign Professional Corporation for Rendering Professional Services Outside of California)

Forming a new California Professional Corporation as a means to come into compliance with the California laws and regulations for corporate structures permitted to be used for professional practices is a viable option for professionals operating their professional practice under a Foreign Professional Corporation. This option entails the establishment of a California Professional 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 licensed professional to legally render professional services within the State of California.

Forming a California Professional Corporation

The initial step in forming a California Professional Corporation is drafting and filing Articles of Incorporation specific to the profession with the California Secretary of State, including the required filing fee. These Articles of Incorporation should include the required Purpose Statement for a California Professional Corporation and should also comply with all pertinent codes and regulations specific to the profession. Subsequently, it is essential to adopt corporate Bylaws that govern the internal operations of the California Professional Corporation. All of the required language that must be included in the corporate documents of a California Professional 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 Corporation, and all other corporate documents should be drafted and adopted.

Dissolving and Winding Up a Foreign Professional Corporation

Upon the successful formation of the California Professional Corporation, attention must then turn to the dissolution and winding up of the Foreign Professional Corporation. This process involves settling debts and obligations, distributing any remaining assets, and filing the necessary documentation with the state in which the Foreign Professional Corporation is registered to officially terminate the corporate existence of the Foreign Professional Corporation. An attorney licensed to practice in the state where the Foreign Professional Corporation is registered should assist with the dissolution and winding up of the Foreign Professional Corporation.

Of course, the Foreign Professional Corporation may continue its existence and operations if it will continue to be useful to its owner(s) after the professional practice in California is transferred to the newly formed California Professional Corporation.

Converting the Existing Foreign Professional Corporation into a California Professional 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 Foreign Professional Corporation registered in a state other than California into a California Professional Corporation would allow a professional rendering professional services in California with a Foreign Professional Corporation to come into compliance with California law.

If permitted by the laws of the state in which the Foreign Professional Corporation was formed and exists, the conversion of an existing Foreign Professional Corporation into a California Professional Corporation is an alternative to forming a new California Professional Corporation. The conversion process, when permitted by the foreign jurisdiction, 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 Foreign Professional Corporation converting is the same as the resulting California Professional Corporation it is converted into.

Converting a Foreign Professional Corporation into a California Professional Corporation

The initial step in converting a Foreign Professional Corporation into a California Professional Corporation is filing Articles of Incorporation Conversion specific to the profession with the California Secretary of State together with the required filing fee. These Articles of Incorporation Conversion should include the required Purpose Statement for a California Professional Corporation and should also comply with all pertinent codes and regulations specific to practicing as a professional in California.

Subsequent to the filing of Articles of Incorporation Conversion, it is essential to adopt new corporate Bylaws that govern the internal operations of the California Professional Corporation, as these corporate Bylaws will differ significantly from the corporate Bylaws used by a Foreign Professional Corporation. All of the required language that must be included in the corporate documents of a California Professional 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 Foreign Professional Corporation into a California Professional Corporation, and all other corporate documents required should be drafted and adopted.

Deciding between Forming a New California Professional Corporation and Converting a Foreign Professional Corporation

Deciding between forming a new California Professional Corporation and converting an existing Foreign Professional Corporation into a California Professional Corporation ultimately depends on the specific circumstances and needs of the professional. Both options have their advantages and disadvantages, and consulting with a legal professional is recommended to determine the best course of action. Factors such as the complexity of the current business structure, potential tax implications, and timeline for transition should be carefully considered before making a decision. However, the following presents some of the considerations that should be examined when choosing a path toward rendering professional services in California with a California Professional Corporation.

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

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

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

When is Converting a Foreign Professional Corporation into a California Professional Corporation the Best Option?

Conversion of a Foreign Professional Corporation into a California Professional Corporation presents a practical option for professionals seeking to align their corporate structure with the legal regulatory requirements of California laws and regulations without disrupting the continuity of their business operations. While legal fees for conversion are generally higher than forming a new California Professional Corporation, conversion allows for a seamless transition without the need to dissolve and wind up the Foreign Professional Corporation. Additionally, it also preserves existing contracts, relationships, and operational history of the business entity.

Converting a Foreign Professional Corporation into a California Professional Corporation is ideal for professionals who have already established a successful business presence in California but want to bring their corporate structure into compliance with California law.

Conclusion

Professionals navigating the transition from practicing under a Foreign Professional Corporation to practicing under a California Professional Corporation should consult with legal and financial advisors to ensure a seamless and compliant shift from the Foreign Professional Corporation to the California Professional Corporation. Legal and financial advisories play a key role in navigating the new California Professional Corporation formation process or Foreign Professional Corporation conversion process, ensuring that the transition not only complies with California laws and regulations, but also positions the professional practice for sustained success and growth within the legal framework of a designated professional corporation.