If you are a California professional, here are four important things you should know before you open your own practice.

1.         You may incorporate as a California Professional Corporation.

Under California law, you cannot operate your professional practice as any type of corporation other than a California Professional Corporation (the only exception being for architects). That is, you cannot use a standard c-corporation, s-corp, or a limited liability company. California professional corporations were created in 1968 via the enactment of the Moscone-Knox Professional Corporation Act (the “Moscone-Knox Act” or the “Act”). See Cal. Corp. Code, §13400 et seq. The Act gives professionals the ability to protect their personal and family assets from being seized by creditors to pay business-related lawsuit judgments, debts, or other business liabilities. Prior to the Act, most professionals were organized as general partnerships or sole proprietorships. Neither of those business forms protected personal and family assets from being seized. The Moscone-Knox Act solved that problem for licensed professionals. San Diego Corporate Law highly recommends incorporating as a California Professional Corporation before you open your practice. The corporate shield will protect against many types of judgments if you get sued. It is essential to have an experienced San Diego corporate attorney provide advice and assistance with setting up your practice.

2.         Only certain licensed professionals may be owners of your California Professional Corporation.

Under the provisions of the Moscone-Knox Act, there are certain rules and restrictions with respect to who may be shareholders of your California Professional Corporation. Essentially, all of the owners must be licensed persons in general at least 51% must be licensed in the profession being practiced (and the number of professionals in the profession being practiced must be greater than or equal to the number of other licensed persons). California Corporations Code Section 13401.5 limits the other 49% to the following list of licensed persons, although other provisions of the California Corporations Code and California Business and Professions Code may also be applicable to the permissible shareholders of a California Professional Corporation.

Licensure is required, meaning that if any of your owners lose their license, they must be removed as an owner. For this reason and others, it is important to have a Buy-Sell Agreement that sets out the mechanisms for removing an owner and dealing with the process, timing, payment, and other matters. Here again, an experienced San Diego corporate attorney can help by drafting a Buy-Sell Agreement.

3.         There are similar restrictions for directors and senior management.

In a similar manner, the Moscone-Knox Act limits who may serve on the board of directors and who may be hired as the CEO, President, CFO, Treasurer, and other officers of a California Professional Corporation. Only the listed professionals can serve on the board of directors and only persons licensed in the profession being practiced can be hired in certain officer positions. The policy reasons are straightforward; only trained and licensed professionals should be in charge of a California Professional Corporation practicing the same profession. Of course, other types of non-licensed employees can be hired as long as they are not engaged in providing or rendering professional services.

4.         Your California Professional Corporation must be properly named.

All corporations, including California professional corporations, must file articles of incorporation with the California Secretary of State’s office. When doing so, all corporations must comply with various rules with respect to corporation names. First, the name must be unique and not already taken by someone else. Second, for a California Professional Corporation, the name must include a proper designation that the entity is a corporation. Finally, many California Professional Corporations must have a name that includes certain words or phrases to comply with the California Business and Professions Code.