In the state of California, attorneys are required to form a California Professional Law Corporation in order to practice law in corporate form. A California Professional Law Corporation is a type of corporate structure that offers liability protection for its owners while providing significant tax benefits and allowing them to maintain control over the operations of their legal practice. In order to form a Professional Law Corporation in California, there are certain requirements that must be met, including choosing a permissible name.

This article discusses the selection of a business name by a California Professional Law Corporation, covering the requirements of the California Corporations Code, Moscone-Knox Professional Corporations Act, and California Business and Professions Code. It also discusses conducting a name search to avoid likelihood of confusion with other practices and trademark infringement.

Executive Summary: Putting the Conclusion First for Busy California Lawyers

• A business entity, such as a California Professional Law Corporation, is formed to provide limited liability protection and separate personal and corporate assets.
• California law requires licensed attorneys to form a California Professional Law Corporation, rather than a limited liability company (LLC) or general stock corporation, to practice law in corporate form.
• The Moscone-Knox Professional Corporations Act governs California Professional Law Corporations.
• Business entities, including California Professional Law Corporations, must comply with applicable rules and regulations, including name requirements and name restrictions.

Schedule a consultation to discuss your specific needs and the formation of a California Professional Law Corporation with the experienced corporate attorneys at San Diego Corporate Law today!

Introduction to California Professional Law Corporations

Choosing the right business structure is a fundamental decision for any attorney offering legal services in California. The of the most advantageous options for most licensed attorneys is the California Professional Law Corporation. California Professional Law Corporations are specifically designed for licensed attorneys, offering unique liability protections and tax benefits that are not available through other structures like a sole proprietorship or a general partnership.

Under California Corporations Code Section 17701.04(e), the California Corporations Code does not permit a domestic or foreign limited liability company (California LLC or foreign LLC) to render professional services as defined in the Moscone-Knox Professional Corporation Act.

What Is a California Professional Law Corporation?

A California Professional Law Corporation is a special type of corporation created for the purpose of providing attorney services that require a state license. Unlike a general stock California Corporation or California S-Corp, a California Professional Law Corporation can only be formed by individuals who hold a valid California license to practice law.

The primary purpose of a California Professional Law Corporation is to allow licensed attorneys to gain the liability protection and tax advantages of a corporate structure. Without it, these attorneys might operate as sole proprietors or partnerships, leaving their personal assets exposed to business debts, liabilities, obligations, and legal judgments while practicing in an inefficient tax structure.

California law strictly regulates which professions can only form a California Professional Law Corporation to practice in corporate form. The Moscone-Knox Professional Corporation Act outlines the specific rules, ensuring that the corporate entity does not shield attorneys from malpractice claims related to their own legal services.

Who Can Form a Professional Law Corporation?

State-licensed attorneys are required to form a California Professional Law Corporation if they wish to practice law in corporate form in California. The State of California wants to ensure that the individuals behind the California Professional Law Corporation are qualified and accountable for the legal services they render.

It is critical to note that, with exception to California Corporations Code Section 13401.5 or as otherwise permitted by the California Business and Professions Code, all shareholders, directors, and officers of a California Professional Law Corporation must be licensed to practice law.

Key Benefits of Forming a California Professional Law Corporation

Why go through the effort of setting up a California Professional Law Corporation? California attorneys choose this structure for several compelling legal and financial reasons that provide both protection and opportunities for growth.

Tax Advantages of California Professional Corporations

When properly operated, California Professional Law Corporations offer significant tax advantages and tax efficiency for licensed attorneys. A California Professional Law Corporation can elect to be taxed as either an S-Corp or a C corporation (commonly referred to as a personal service corporation or professional service corporation). Each has distinct advantages.

• S Corporation Status: This is the most popular choice for California Professional Law Corporations, and for good reason. A California Professional Law S-Corp is a “pass-through” entity, meaning the net profits and losses are passed directly to the personal tax returns of shareholders, thus avoiding the “double taxation” that C corporations face. In addition, only the reasonable salary of employee shareholders is subject to payroll taxes as compared with all net profits of a sole proprietorship or general partnership being subject to 15.3% self-employment taxes.
• C Corporation Status: While subject to double taxation, a California Professional Law Corporation taxed as a C Corporation allows the business to retain earnings for growth and provides a wider range of deductible business expenses, such as health insurance premiums for owners. This can be beneficial for larger practices with significant revenue and reinvestment plans, but double taxation means that net income is taxed first at the corporate level and again when distributed to shareholders as dividends, which is generally a higher rate of taxation compared to California Professional Law Corporations taxed as S Corporations.

Consulting with a tax advisor is essential to determine which tax election is the most advantageous for a specific financial situation.

Limited Liability Protection of California Professional Law Corporations

Second only to tax benefits, a significant advantage of a California Professional Law Corporation is limited liability. In a sole proprietorship or general partnership, personal assets of shareholders (such as homes, cars, and bank accounts) are at risk from business incurs debts, liabilities, obligations, and legal judgments from lawsuits.

A California Professional Law Corporation creates a legal separation between the legal practice and its licensed shareholders. This means that, in most cases, shareholders are not personally liable for professional debts, liabilities, obligations, or legal judgments. If the California Professional Law Corporation cannot pay a vendor bill, creditors can generally only pursue the assets for the California Professional Law Corporation, not the personal property and assets of the shareholders.

However, it is crucial to understand that this protection does not extend to professional malpractice. Licensed attorneys are still personally liable for their professional negligence or errors in the legal services they personally provide, but a California Professional Law Corporation protects a licensed shareholder from the professional malpractice of practice partners and professional employees.

Credibility and Professional Image

Operating as a California Professional Law Corporation enhances professional credibility. The designation of corporate existence signals a more formal and established business structure to clients, partners, and financial institutions. This can make it easier to secure business loans, enter into contracts, and attract high-caliber talent.

Name Requirements for California Professional Law Corporations

California Professional Law Corporations must follow specific naming conventions set forth by the California Corporations Code generally, by the Moscone-Knox Professional Corporation Act of the California Corporations Code, and the California Business and Professions Code. The following is an overview of the requirements of each.

Name Requirements and Restrictions for California Professional Law Corporations Under the California Corporations Code and Generally

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.

Name Requirements and Restrictions for California Professional Law Corporations Under the Moscone-Knox Professional Corporation Act of the California Corporations Code

Subject to California Corporations Code Section 201, a California Professional Law Corporation may adopt any name permitted by a law expressly applicable to the profession in which the corporation is engaged or by a rule or regulation of the governmental agency regulating that profession. California Corporations Code Section 13409(a). The Secretary of State may require proof by affidavit or otherwise establishing that the name of the California Professional Law Corporation complies with the requirements of this section and of the law governing the profession in which that California Professional Corporation is engaged. Id. The statements of fact in those affidavits may be accepted by the Secretary of State as sufficient proof of the facts. Id.

Name Requirements and Restrictions for California Professional Law Corporations Under the California Business and Professions Code

“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).

Checking Name Availability for a Professional Law Corporation in California

Once a proposed name (or a few proposed names) are identified, a name should be checked for availability. Not only must the name be distinguishable in the records of the California Secretary of State, but the name also needs to not cause a likelihood of confusion with any name used throughout the United States to avoid trademark infringement claims. Follow these steps to conduct a thorough search.

Step 1: Use the California Secretary of State’s Online Business Search Tool

The first and most important step is to search the California Secretary of State’s official business database. This free, online tool allows users to search if a desired name is already in use or too similar to an existing one.

Here is how to use it effectively:

1. Navigate to the Business Search Tool: Visit the official California Secretary of State’s website and find the “Business Search” feature.
2. Select the Search Type: You can search by “Corporation Name,” “LLC/LP Name,” or “Entity Number.” Choose the appropriate option for your search. It is wise to search across all entity types to ensure a name is truly unique.
3. Enter the Proposed Name: Type the desired name into the search field to search for exact matches.
4. Be Creative with Your Searches:
   • Search for variations: Try searching for key parts of the name.
   • Check for plural and singular forms: Search for both singular and plural forms of words to find differences the California Secretary of State would deem indistinguishable.
   • Look for phonetic similarities and equivalents: Consider names that sound alike but are spelled differently, interchange “&” and “and” in names, etc. The Secretary of State may reject a name if it sounds too similar to an existing one even if spelled differently.

If a search returns “No records found,” that is a good sign! However, if it shows a list of similar names, review them carefully to determine if the desired name is distinguishable enough.

The experienced corporate attorneys at San Diego Corporate Law conduct Secretary of State searches of all California Professional Law Corporation names before filing Articles of Incorporation when engaged to form a California Professional Law Corporation for their clients.

Step 2: Perform a General Web and Trademark Search

Even if a name is available with the Secretary of State, it might be in use elsewhere. A broader search can help avoid potential trademark conflicts down the road.

• Search Engines: Use Google, Bing, or another search engine to look for your proposed name. See if other businesses, especially those in your geographic area or industry, are using the same name or a similar name that might cause a likelihood of confusion.
• Trademark Database: Conduct a search on the U.S. Patent and Trademark Office’s (USPTO) Trademark Electronic Search System (TESS). This will indicate if a name, or a similar name, is already federally trademarked.

While this step is not required for state-level registration, it is a smart business practice that can save from a costly legal dispute in the future.

Step 3: Find an Available Internet Domain Name

In the digital age, having a strong online presence is crucial for any professional practice. This includes having a website with a memorable and relevant domain name.

When considering a potential name for a California Professional Law Corporation, it is important to also check if a corresponding domain name is available. This can be done through various domain registrars such as GoDaddy or Bluehost.

If a desired domain name is already taken, consider purchasing an alternative variation; provided, however, that an unavailable domain name might indicate another company is already using the name.

Found an Available Name? How to Set Up a Professional Law Corporation in California!

Congratulations! Finding an available and compliant name is a major milestone. The next step is forming a California Professional Law Corporation. The process requires careful attention to detail to ensure compliance with state laws and the regulations of your specific professional licensing board. The easiest way to form a California Professional Law Corporation is to schedule an initial consultation with an experienced corporate attorney.

The following is an outline of some of the legal requirements for forming a California Professional Law Corporation:

File Articles of Incorporation

The first step is to file Moscone-Knox Professional Corporations Act compliant Articles of Incorporation with the California Secretary of State. These Articles of Incorporation must include specific language stating that the California Professional Law Corporation is a California Professional Corporation under the Moscone-Knox Professional Corporation Act and specify the exact professional service the California Professional Corporation will provide.

Draft Corporate Bylaws

Bylaws are the internal rulebook for a California Professional Law Corporation. For a California Professional Law Corporation, the bylaws must include Moscone-Knox Professional Corporations Act, professional-specific provisions that comply with California law, such as restrictions on who can be a shareholder. These rules ensure that only certain licensed professionals can own shares in the California Professional Law Corporation.

Issue Stock and Appoint Directors

Once the California Professional Law Corporation is formed, it must issue shares of stock to the founding licensed attorneys. It is essential to properly document this issuance in compliance with both corporate and securities laws, as well are making necessary filings with the appropriate California and federal securities regulators. The California Professional Law Corporation must also appoint the initial board of directors, who must also be licensed attorneys.

Obtain an EIN and File for Tax Election

After formation, the California Professional Law Corporation needs to obtain an Employer Identification Number (EIN) from the Internal Revenue Service. This is the federal tax identification number of the California Professional Law Corporation. Following this, the forms necessary to elect the preferred tax status as an S corporation should be prepared and filed if electing S-Corp status.

Is a Professional Corporation Right for You?

Forming a California Professional Law Corporation offers a powerful way for licensed attorneys to protect their personal assets and optimize their tax situation. By establishing a separate legal entity, these attorneys can build a more credible and durable practice while mitigating many of the risks associated with being a sole proprietor.

While the process is more complex than other business structures, the long-term benefits of liability protection and tax flexibility often make it a worthwhile investment.

If you are a licensed attorney in California, exploring the possibility of forming a California Professional Law Corporation could be a crucial step toward securing your financial future. Contact the experienced corporate attorneys at San Diego Corporate Law to schedule a consultation to discuss your specific needs and navigate the formation process successfully.