A common question the attorneys at San Diego Corporate Law are asked is whether or not a licensed professional may practice as a California Limited Liability Company (LLC).

Whether you are a professional, or someone advising professionals, you may have the same questions and concerns regarding the legality of using California LLCs for the practice of a profession, and hopefully, this writing will answer many of your questions about California LLCs with respect to professionals and professional practices in California.

What California Laws Regulate the Entities a Professional May Use for the Practice in California?

The board of each profession regulates and enforces the applicable laws to uphold the standards of the practice of that profession within the State of California. While many areas of California law touch the highly regulated practices of California professionals, we need only review two such bodies of California law for this discussion.

California Business and Professions Code for Professional Practices

The California Business and Professions Code primarily governs the practice of professions in California. Specifically, California Business and Professions Code addresses the entities in which duly licensed professionals may practice their profession in California.

California Corporations Code for Professional Practices

The California Corporations Code also governs the entities in which duly licensed professionals may practice their profession in California. Specifically, California Corporations Code Sections 13400-13410 comprises the Moscone-Knox Professional Corporation Act.

The Moscone-Knox Professional Corporation Act provides guidance for California Professional Corporations, but the rest of the California Corporations Code applies to California Professional Corporations, when Sections 13400-13410 of the California Corporations Code is silent on a subject.

A Professional MAY NOT Practice Using a California LLC

In reading the pertinent parts of both the California Business and Professions Code and the California Corporations Code, a professional is prohibited from practicing their profession using a California LLC (or any other limited liability company, for that matter!).

The Moscone-Knox Professional Corporation Act on Practicing a Profession with a California LLC

The Moscone-Knox Professional Corporation Act itself does not explicitly state that a professional cannot practice their profession using a California LLC. Instead, it outlines the structure and rules for California Professional Corporations. The prohibition for practicing a profession in a California LLC comes from the California Business and Professions Code.

The California Business and Professions Code on Practicing a Profession in a California LLC

The specific prohibitions against practicing a profession as a California LLC are stated in various California Business and Professions Code sections related to each specific profession. While too numerous to list here, many of these sections explicitly prohibit professionals from practicing their profession under any form of business organization that does not meet the requirements of the Moscone-Knox Professional Corporation Act.

Referring Back to the Moscone-Knox Professional Corporation Act on Practicing in a California LLC

Referring back to the Moscone-Knox Professional Corporation Act from the California Business and Professions Code, California LLCs may not be used for professional practice because California LLCs (or LLCs from any other state!) do not meet the specific requirements set forth within the Moscone-Knox Professional Corporation Act, thus they are prohibited from being used by professionals to practice their profession.

The California Revised Uniform Limited Liability Company Act on Practicing a Profession in a California LLC

If the restrictions that exist between the Moscone-Know Professional Corporations Act and California Business and Professions Code sections for each profession do not provide enough evidence that a professional may not practice their profession using a California LLC, the California Revised Uniform Limited Liability Company Act makes the restriction crystal clear that neither a foreign nor a California limited liability company (LLC) may be used to render professional services in California. California Corporations Code Section 17701.04(e) states:

“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.”

What are the Possible Consequences of Practicing a Profession as a California LLC?

The potential legal ramifications for a professional practicing their profession as a California LLC are severe and wide-ranging.

Disciplinary Action from their Governing Board

A professional could face disciplinary actions from their governing board, including fines, license suspension, or even revocation of their professional license.

Loss of Liability Protection and Malpractice Insurance Coverage

Operating as a California LLC could void the protection from personal liability that the LLC structure typically provides, making the professional personally liable for debts and legal liabilities of the business. This can have considerable financial implications.

It is also a foreseeable possibility that a malpractice insurance carrier might refuse to pay a malpractice claim against a professional, or other licensed professionals employed by a professional if the legal entity used to practice the profession was not in compliance with California law. The malpractice insurance carrier could claim that the professional was operating outside the scope of the coverage, which could be considered a violation of the policy terms, leading to the denial of insurance claims.

Civil Liability and Tax Consequences

It is also possible that a professional might face civil penalties, including lawsuits from patients or clients, or potential tax consequences, as the Internal Revenue Service may not recognize the California LLC for the practice of the profession, leading to potential fines and penalties.

What Are My Options If I Am Already Practicing a Profession as a California LLC?

If you are currently practicing a profession as a California LLC, you should address the situation immediately to avoid the significant legal consequences highlighted above. You have two primary options to remedy the situation.

First, you can choose to dissolve the California LLC and simultaneously or subsequently form a new California Professional Corporation compliant with the Moscone-Knox Professional Corporation Act. This approach would involve complete dissolution of the existing California LLC and its operations, and the establishment of a new, legally compliant California Professional Corporation.

Secondly, you could opt to convert the existing California LLC into a California Professional Corporation. This process would involve a legal conversion process whereby the LLC would be transformed into a Professional Corporation under the Moscone-Knox Professional Corporation Act. This method might be more suitable for those seeking to maintain the continuity of their existing business operations during the transition.

Dissolving a California LLC and Forming a California Professional Corporation

The process of dissolving a California LLC and forming a California Professional Corporation is one of the viable solutions to rectify the situation of an incorrectly structured professional practice.

This process involves legally terminating the operations of the existing LLC and establishing a new entity that complies with the provisions of the Moscone-Knox Professional Corporation Act. This transition allows professionals to continue their professional practice under a structure that is legally recognized and provides appropriate liability protections and other benefits. However, it’s important to note that this process requires careful planning, proper execution, and might entail certain costs. The following sections will delve into the specifics of this process.

Dissolving a California LLC

Dissolving a California LLC is the formal process of closing the business entity. This entails fulfilling several legal requirements to ensure that the LLC is properly wound up. Key steps include settling any outstanding debts or liabilities, distributing remaining assets among members, filing a dissolution form with the California Secretary of State, and notifying relevant parties including creditors and the California Franchise Tax Board. It’s crucial to understand that this process is more than just ceasing operations—it requires several steps to legally and effectively dissolve the LLC and avoid potential legal and tax implications.

Forming a California Professional Corporation

A California Professional Corporation is a specific type of business structure designed for licensed professionals to practice their profession in California and is a legal entity compliant with the Moscone-Knox Professional Corporation Act.

The process involves drafting Articles of Incorporation specifically drafted in compliance with the Moscone-Knox Professional Corporation Act and filing those compliant Articles of Incorporation with the California Secretary of State, drafting bylaws which include specific provisions required by the Moscone-Knox Professional Corporation Act, issuing shares, and obtaining an Employer Identification Number (EIN) from the IRS, among other steps.

This structure not only allows professionals to practice their profession in California legally, but also provides benefits such as limited liability protection, potential tax advantages, and more.

Converting a California LLC into a California Professional Corporation

The conversion of a California LLC into a California Professional Corporation is an alternative route for professionals seeking to rectify an incorrectly structured professional practice without completely dissolving their existing business.

This process involves a legal transformation of the LLC into a professional corporation compliant with the Moscone-Knox Professional Corporation Act. It allows professionals to continue their practice within the same business structure, albeit now legally recognized and offering suitable liability protection. This method is beneficial for those aiming to maintain operational continuity during the transition. The following sections will provide detailed insight into this process.

The conversion of a California LLC into a California Professional Corporation involves a series of steps, which are designed to ensure legal compliance and continuity of the business structure.

Draft and Adopt a Plan of Conversion for Converting a California LLC into a California Professional Corporation

The first step in the process of converting a California LLC into a California Professional Corporation is to adopt a plan of conversion.

A Plan of Conversion is a comprehensive document that details the procedural roadmap for transitioning a California LLC into a California Professional Corporation. It highlights the terms and conditions of the conversion, including the legal name changes, the transformation of membership interests into shares, the proposed operational structure post-conversion, and the required filings with the California Secretary of State and other relevant entities.

Draft and File Articles of Incorporation Conversion for Converting a California LLC into a California Professional Corporation

After drafting the Plan of Conversion, the next step is to draft and file the Articles of Incorporation Conversion. This document marks the legal transition of the LLC into a California Professional profession Corporation. It must be drafted in accordance with the provisions of the Moscone-Knox Professional Corporation Act, and include details about the converted business entity, such as the new name, the number of shares being authorized, and a statement that the entity is a professional corporation for the practice of the specific profession being practiced.

Draft Moscone-Knox Professional Corporation Act Compliant Bylaws for Converting a California LLC into a California Professional Corporation

Bylaws are a crucial legal document that outlines the operational rules and procedures of the corporation. Not only do they provide guidance on how the business entity is to be managed and governed, but they also lay the foundation for dispute resolution and decision-making processes.

It is a legal requirement for every California Professional Corporation to adopt bylaws compliant with both the California Corporations Code (especially the Moscone-Knox Professional Corporation Act!), the California Business and Professions Code, and the specific practice act for the profession to be practiced, respectively.

Completing All Other Requirements for the Formation of a California Professional Corporation

After the compliant Articles of Incorporation Conversion have been drafted and filed and Bylaws have been drafted and adopted by the newly converted California Professional Corporation, there are additional steps to be taken to fully establish a California Corporation.

The California Corporation must hold an initial meeting of its board of directors, must issue shares to its shareholder(s), and must file a Statement of Information with the Secretary of State within 90 days of filing the Articles of Incorporation Conversion.

Additionally, following the conversion of a California LLC into a California Professional Corporation, the new California Professional Corporation is required to file a notice in accordance with the California Corporations Code Section 25103(h) with the California Department of Financial Protection & Innovation to maintain compliance with California securities laws.

Some California Professional Corporations must report to their governing board after incorporation, and some annually thereafter, providing details of all professionals licensed in California or elsewhere who are shareholders of those California Professional Corporations. This step ensures that the governing board is aware of the practicing professionals associated with the California Professional Corporation.

There are other steps not mentioned here that are applicable to all California Professional Corporations, but these are too numerous to mention here.

Let San Diego Corporate Law Get Your California Professional Corporation Done for You

Regardless of the path chosen, it is highly advisable to seek the advice and counsel of a corporate attorney experienced with converting a California LLC into a California Professional Corporation to navigate the process and ensure compliance with all California laws and regulations pertaining to the professional practice and the formation of a California Professional Corporation for the specific profession.

At San Diego Corporate Law, our team of experienced attorneys is well-versed in navigating the complexities of both dissolving a California LLC and forming a California Professional Corporation. Given the significant legal implications involved, it is crucial to have expert legal guidance.

We urge you to get in touch with us right away to schedule a consultation with our corporate and healthcare attorneys if you are currently practicing as a California LLC or otherwise need assistance with the formation of a California Professional Corporation taxed as an S Corporation or C Corporation. We will ensure your transition to a compliant business structure is handled meticulously, safeguarding your rights and interests. Don’t delay—contact us now to schedule a consultation and start the process of securing the future of your professional clinical practice or the professional service you provide to protect your professional license today.