Navigating the complexities of business structures can be a significant challenge, especially in a state with regulations as specific as California. For licensed attorneys, understanding the right way to incorporate is crucial. The California Professional Law Corporation offers a unique structure designed to meet the legal and professional requirements for the practice of law. However, the path to establishing and maintaining a California Professional Law Corporation is lined with questions.

This article answers some of the most frequently asked questions about California Professional Law Corporations. From what a California Professional Law Corporation is, who can form one, the benefits it offers, and the specific rules that govern its operation under California law. By understanding these key details, California attorneys can make an informed decision about whether a California Professional Law Corporation is the right choice for a law practice and ensure compliance with the California Corporations Code and California Business and Professions Code.

What is a California Professional Law Corporation?

A California Professional Law Corporation is a special type of business entity created for licensed attorneys who provide state-licensed legal services. Under California law, these licensed attorneys are often prohibited from forming a standard corporation, such as a California Corporation or California S-Corp, or a California Limited Liability Company (California LLC) for their law practice. Instead, they must form a California Professional Law Corporation if they wish to practice law in corporate form.

The primary purpose of a California Professional Law Corporation is to allow attorneys to gain the liability protections and tax advantages of a corporate structure while still being held personally accountable for their professional conduct. The California Professional Law Corporation structure is governed by the Moscone-Knox Professional Corporation Act, which is part of the California Corporations Code as well as the California Business and Professions Code, which set out the specific rules for forming, owning, and operating a California Professional Law Corporation.

Essentially, a California Professional Law Corporation functions much like a traditional corporation but with key differences related to ownership and liability specifically tailored for California attorneys.

Who is Required to Form a California Professional Law Corporation?

In California, certain professions are mandated by law to form a California Professional Corporation if they wish to incorporate their practice. They cannot form a standard S Corporation, C Corporation, or LLC to render their professional services.

The list of professions required to use a California Professional Corporation structure is extensive, and includes Law under California Business and Professions Code §§ 6127.5, 6160–6172.

Attempting to practice law through an incorrect business entity can lead to disciplinary action from the State Bar of California and other legal complications.

What are the Benefits of a California Professional Law Corporation?

Choosing to form a California Professional Law Corporation offers several significant advantages for a law practice. Some of these advantages are as follows.

Liability Protection of California Professional Law Corporations

While a California Professional Law Corporation does not shield a California attorney from malpractice claims related to their own professional negligence, it does protect them from the malpractice of their business partners or fellow shareholders. In a California General Partnership, each partner has joint and several personal liable for the business debts and the professional negligence of all other partners. A California Professional Law Corporation creates a corporate shield, limiting the personal liability of a shareholder to their own actions or inactions. Personal assets are also protected from general business debts, liabilities, obligations, and legal judgments against the California Professional Law Corporation itself.

Tax Efficiency of California Professional Law Corporations

A California Professional Law Corporation can elect to be taxed as an S Corporation. This “pass-through” taxation allows the profits and losses of the California Professional Law Corporation to be passed directly to the personal income tax returns of shareholders, avoiding the double taxation that occurs with a standard C Corporation, for California Professional Law Corporations referred to as personal service corporations or professional services corporations (where income is taxed at the corporate level and again when distributed as dividends). This can result in significant tax savings.

The primary advantage of an S-Corp election is the potential savings on self-employment taxes, which currently total 15.3% (12.4% for Social Security and 2.9% for Medicare).

Here is how it works: Say a California law practice generates $100,000 in net profit annually. As a Sole Proprietor or partner in a California General Partnership, the California attorney would pay self-employment taxes on the entire $100,000, or $15,300 in self-employment taxes. With an S-Corp election for a California Professional Law Corporation, the California attorney might pay themself a reasonable salary of $50,000 (subject to employer and employee payroll taxes of 15.3% combined) and take the remaining $50,000 as a distribution (not subject to self-employment taxes or payroll taxes). This could potentially save the California attorney over $7,500 annually in self-employment taxes on these example numbers.

Credibility and Permanence

Operating as a California Professional Law Corporation can enhance the credibility and professional image of a law practice. The corporate structure of a California Professional Law Corporation suggests stability and permanence to clients, partners, employees, and financial institutions. Unlike a sole proprietorship, which dissolves upon the death of its owner, a California Professional Law Corporation has a perpetual existence and can continue operating through changes in ownership.

What are the Naming Requirements for a California Professional Law Corporation?

California has strict naming rules for California Professional Law Corporations. The name of the California Professional Law Corporation must comply with both the California Corporations Code and the regulations of the specific licensing board governing the profession.

Generally, the name restrictions are as follows:

The Articles of Incorporation must include the name of the California Professional Law Corporation. California Corporations Code 202(a).

The Secretary of State shall not file articles setting forth a name in which “bank,” “trust,” “trustee,” or related words appear, unless the certificate of approval of the Commissioner of Financial Protection and Innovation is attached thereto. California Corporations Code Section 201(a).

The name of a California Professional Law Corporation shall not be a name that the Secretary of State determines is likely to mislead the public and shall be distinguishable in the records of the Secretary of State. California Corporations Code Section 201(b). This requires that names are not likely to mislead the public and be distinguishable from all other corporations in the records of the California Secretary of State that are in good standing, including names of foreign corporations qualified to transact interstate business in California.

The name of a California Professional Law Corporation shall not include the word “cooperative,” any abbreviation of it, or any related word. California Corporations Code 12311(b).

The name of a California Professional Law Corporation shall not include the words “Olympic” or “Olympiad,” or related phrases. 36 USC §220506.

The name of a California Professional Law Corporation shall not include the words “national,” “federal,” “United States,” “reserve,” or “deposit insurance,” and certain words and phrases referring to credit unions. 18 USC §709.

California Professional Law Corporations also have profession-specific requirements in addition to the general name restrictions as follows:

“That the name of the law corporation and any name or names under which it renders legal services shall be in compliance with the rules and regulations.” California Business and Professions Code Section 6171(c).

“That the law corporation shall obtain from the State Bar, and maintain current, a fictitious name permit when required by the rules and regulations; that the permit may be obtained, maintained, suspended, and revoked pursuant to procedures set forth in the rules and regulations; and that the law corporation shall pay an application and renewal fee for the permit in such amounts as may be determined by the State Bar.” California Business and Professions Code Section 6171(d).

“The name under which the law corporation intends to practice law must include a designation of corporate existence such as “A Professional Corporation”, “A Professional Law Corporation”, “Professional Corporation”, “Professional Law Corporation”, “Law Corporation”, “APC”, A.P.C.”, “PC”, “P.C.” “Prof. Corp.”, “A Professional Legal Corporation”, “Professional Legal Corporation”, “A Legal Corporation”,  “Corporation,” “A California Professional Corporation” “Incorporated”, or “Inc.”” California Rules of Professional Conduct 3.152(B).

It is crucial to check the State Bar of California for any additional naming restrictions or requirements. The proposed name must also be available and not be misleadingly similar to an existing corporation name on file with the California Secretary of State.

Who Can Be a Shareholder in a California Professional Law Corporation?

Ownership in a California Professional Law Corporation is tightly restricted. According to the California Corporations Code, shares can only be issued to individuals who are licensed to practice the specific profession for which the corporation was formed.

Can a California Professional Law Corporation be an S Corp?

Yes, a California Professional Law Corporation can elect to be taxed as an S Corporation. This is one of the most common and beneficial tax strategies for California Professional Law Corporations.

By filing Internal Revenue Service Form 2553, “Election by a Small Business Corporation,” the California Professional Law Corporation can opt for S-Corp tax status. This means the California Professional Law Corporation itself does not pay federal income tax. Instead, the income, losses, deductions, and credits are “passed through” to the shareholders, who report them on their personal tax returns. This structure avoids the double taxation associated with C Corporations.

To qualify for S-Corp status, the California Professional Law Corporation must meet certain IRS requirements, including:

Be a domestic corporation.

Have only allowable shareholders (individuals, certain trusts, and estates).

Have no more than 100 shareholders.

Have only one class of stock.

Choosing S-Corp status can provide significant tax advantages, but it also comes with complexities, such as the requirement to pay reasonable salaries to shareholder-employees. Consulting with a tax professional is essential to determine if this is the right choice for your practice.

Can a California LLC Register as a Professional Law Corporation in California?

No, a California LLC cannot register to do business as a Professional Law Corporation in California, nor may a California LLC provide the services of a California Professional Law Corporation. The California Corporations Code has specific rules that prevent licensed attorneys from using a California LLC structure for their law practice, most notably California Corporations Code Section 17701.04(e) which reads in full 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.”

Licensed attorneys cannot operate as a California LLC or a similar entity from another state to provide legal services. Instead, they would typically need to form a California Professional Law Corporation to conduct their professional practice in California in corporate form.

Can a Foreign LLC Register as a Professional Law Corporation in California?

No, a foreign limited liability company (foreign LLC) cannot register to do business as a Professional Law Corporation in California, nor may a foreign LLC provide the services of a California Professional Law Corporation. The California Corporations Code has specific rules that prevent licensed attorneys from using a foreign LLC structure for their law practice, most notably California Corporations Code Section 17701.04(e) which reads in full 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.”

If a group of licensed attorneys operate as an LLC or a similar entity in another state, they cannot simply register that entity in California to provide legal services in California. Instead, they would typically need to form a new, separate California Professional Law Corporation to conduct their professional practice in California in corporate form.

This area of California law can be complex, especially when dealing with multi-state practices. The rules are in place to ensure that all professionals practicing in California adhere to California’s strict liability and oversight standards, which are tied to the California Professional Law Corporation structure. If a practice operates across state lines, seeking legal advice is critical to ensure compliance.

What Happens if a Shareholder Dies or Becomes Disqualified?

The California Corporations Code has specific provisions for what happens when a shareholder in a California Professional Law Corporation passes away or loses their license (becomes “disqualified”).

Because ownership is restricted to licensed attorneys, the shares of a deceased or disqualified shareholder of a California Professional Law Corporation cannot be transferred to an unlicensed person, such as a family member or an heir. The California Professional Law Corporation or its remaining shareholders are legally obligated to repurchase the shares from the deceased shareholder’s estate or from the disqualified individual, and California law sets a timeframe for this repurchase.

The price and terms are often negotiated after death or disqualification, but may be set forth in advance in a separate shareholder agreement such as a Buy-Sell Agreement. Having a clear, pre-negotiated Buy-Sell Agreement in place is vital to prevent disputes and ensure a smooth transition. Without one, the parties may have to rely on the default provisions of the law, which could lead to complications and significant legal expenses.

Make an Informed Decision for Your Practice

Forming and maintaining a California Professional Law Corporation involves navigating a unique set of legal and regulatory requirements. While the structure offers significant benefits in terms of liability protection and tax flexibility, compliance with the California Corporations Code and the State Bar of California is paramount.

From understanding who can be a shareholder to adhering to strict naming conventions, the details matter. Taking the time to get it right from the beginning can save you from potential legal issues, financial penalties, and even disciplinary action down the road.

If you have more questions or need guidance on setting up a California Professional Law Corporation for your practice, the experienced corporate attorneys at San Diego Corporate Law are here to help. We can provide the clarity and support you need to build a solid legal foundation for your business.

Schedule a consultation today to discuss your specific needs and learn how we can assist you in navigating the complexities of California corporate law for California Professional Law Corporations.