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.

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

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

Executive Summary: Putting the Conclusion First for Busy Professionals

With the exception of California licensed architects, California professionals may not practice their profession in California using a General Stock Corporation, and instead must opt for a California Professional Corporation.

How to Identify a California General Stock Corporation

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

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

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

How to Identify a California Professional Corporation

A California Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California Professional 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.”

Options for Professionals Practicing in a General Stock Corporation

If you are a professional currently practicing your profession within a General Stock Corporation, whether formed under California law or the laws of another state, it is imperative to seek informed legal guidance to either form a new California Professional Corporation or convert your California General Stock 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 your governing board.

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 General Stock Corporations and Professional Corporations?

While similar in structure generally, General Stock Corporations formed under California law or the laws of another state and California 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 practices within the legal frameworks of California or any other state. This section will discuss the attributes of both General Stock Corporation and California Professional Corporations.

What is a General Stock Corporation?

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

What is a Professional Corporation in California?

California Professional Corporations are specialized entities formed pursuant to the Moscone-Knox Professional Corporation Act specifically for rendering professional services that require a state license. While not all professions in California that require a state license may be formed as a California Professional Corporation, those professions that do have a California Professional Corporation available for use must use that California Professional Corporation (with the exception of architecture, which may be practiced as either a California General Stock Corporation or a California Professional Corporation). This differentiation ensures that professionals are able to comply with specific legal stipulations governing their practice, including liability and practice requirements, thereby protecting both the professionals and the public they serve.

General Stock Corporations versus California Professional Corporations

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

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

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

Another key difference between General Stock Corporations and California Professional Corporations is the restriction on the ownership structure of a California Professional Corporation. Whereas a General Stock Corporation such as a California Corporation has virtually no restrictions on the identity of shareholders, and a General Stock Corporation recognized by the Internal Revenue Service as an S Corporation like a California S-Corp has some limitations on citizenship and number of permitted shareholders, California Professional Corporations have significant restrictions on the identity of shareholders and generally must be owned by licensed individuals in the professional field for which the corporation is established or certain other licensed professionals (with the exception of accountancy, however there are restrictions on the role and duties that non-accountant shareholders.

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

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

Taxation Differences Between General Stock Corporations and California Professional Corporations

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

Summary of General Stock Corporation versus California Professional Corporation Differences

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

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

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

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

Purpose Statement of a General Stock Corporation

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

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

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

Purpose Statement of a California Professional Corporation

A California Corporation may be easily identified by reading the Purpose Statement in the Articles of Incorporation. The Purpose Statement of a California Professional 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.”

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

With the exception of California licensed architects (who are permitted to practice architecture using a California General Stock Corporation), a professional practicing their profession in California using a General Stock Corporation should contact the experienced attorneys at San Diego Corporate Law today for personalized legal solutions tailored to the unique needs of 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.

For What Professional Services are California Professional Corporations Available?

The following is a list of some of the professions for which California Professional Corporations exist and must be used (with the exception of architecture, which may also use a California General Stock Corporation) to render professional services in California:

California Professional Accountancy Corporation (See California Business & Professions Code Sections 5150-5158)

California Professional Acupuncture Corporation (See California Business & Professions Code Sections 4975-4979)

California Professional Architecture Corporation (See California Business & Professions Code Sections 5610-5610.7)

California Professional Audiology Corporation (See California Business & Professions Code Sections 2536-2537.5)

California Professional Chiropractic Corporation (See California Business & Professions Code Sections 1050-1058)

California Professional Licensed Clinical Social Worker Corporation (See California Business & Professions Code Sections 4998-4998.5)

California Professional Dental Corporation (See California Business & Professions Code Sections 1800-1808)

California Professional Dental Hygienist in Alternative Practice Corporation (See California Business & Professions Code Sections 1967-1967.4)

California Professional Law Corporation (See California Business & Professions Code Sections 6127.5, 6160-6172)

California Professional Marriage and Family Therapy Corporation (See California Business & Professions Code Sections 4987.5-4988.2)

California Professional Medical Corporation (See California Business & Professions Code Sections 2400-2417)

California Professional Midwifery Corporation (See California Business & Professions Code Sections 2505-2523)

California Professional Naturopathic Doctor Corporation (See California Business & Professions Code Sections 3670-3675)

California Professional Nursing Corporation (See California Business & Professions Code Sections 2775-2781)

California Professional Occupational Therapy Corporation (See California Business & Professions Code Section 2572)

California Professional Optometric Corporation (See California Business & Professions Code Sections 3160-3167)

California Professional Osteopathy Corporation (See California Business & Professions Code Sections 2402-2417, 3600)

California Professional Physical Therapy Corporation (See California Business & Professions Code Sections 2690-2696)

California Professional Physician Assistant Corporation (See California Business & Professions Code Sections 3540-3545)

California Professional Podiatry Corporation (See California Business & Professions Code Sections 2402-2417)

California Licensed Professional Clinical Counselor Corporation (See California Business & Professions Code Sections 4999.123-4999.129)

California Professional Psychological Corporation (See California Business & Professions Code Sections 2907-2907.5, 2995-2999)

California Professional Speech-Language Pathology Corporation (See California Business & Professions Code Section 2537.5)

California Professional Veterinary Corporation (See California Business & Professions Code Sections 4910-4917)

As noted above, this is not a complete list of all professions for which California Professional Corporations may be formed and are required. For example, land surveyors, pharmacists, and shorthand court reporters should also form California Professional Corporations instead of General Stock Corporations.

What are the Options for a Professional Practicing Their Profession in a General Stock 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 their governing board because they are practicing their profession as a General Stock Corporation should cease operating as a General Stock 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 the General Stock Corporation; or (2) converting the existing General Stock 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 General Stock Corporation

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 General Stock 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 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 a profession to be practiced with the California Secretary of State. 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 to be practiced. 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 General Stock Corporation

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

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

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

When is Forming a New California Professional Corporation and Dissolving and Winding Up the General Stock 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, 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 General Stock Corporation is generally the less expensive of the two options, however, if the administrative burden of managing contracts with clients/patients, vendors, business bank accounts, loss of operating history, or insurance coverage or panels would be less cumbersome with a conversion of the General Stock 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 General Stock Corporation.

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

Converting the Existing General Stock Corporation into a California Professional Corporation

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

Converting a California General Stock Corporation into a California Professional Corporation

The initial step in converting a California General Stock Corporation into a California Professional Corporation is drafting Articles of Incorporation Conversion specific to a profession to be practiced with the California Secretary of State. 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 the profession to be practiced. Subsequently, 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 California General Stock 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 California General Stock Corporation into a California Professional Corporation, and all other corporate documents required should be drafted and adopted.

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

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

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

Conversion 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 the business operations. Legal and financial advisories play a key role in navigating the conversion process, ensuring that the transition not only complies with California laws and regulations, but also positions the professional practice for sustained success and growth within the legal framework of a California Professional Corporation.