When the experienced attorneys at San Diego Corporate Law speak to registered nurses and nurse practitioners about the best corporate structure in which to operate their nursing practice, one of the most frequently asked business entity questions is about the difference between a California S-Corp and a California Professional Nursing Corporation.

Many times, accountants and other tax advisors will recommend that a registered nurse or nurse practitioner form a California S-Corp to render professional services for their nursing practice. However, it is important to understand that in California, a Professional Nursing Corporation is often required for registered nurses and nurse practitioners who wish to practice nursing in corporate form as an S-Corp. While a California S-Corp can offer certain tax advantages, it does not meet the specific legal and regulatory requirements set forth by California law for nursing practice, which requires a California Professional Nursing Corporation to practice nursing in corporate form.

This article will introduce both California S-Corps and California Professional Nursing Corporations, clarify the most common terminology used when referring to corporate entities for registered nurses and nurse practitioners, and highlight the tax benefits of S Corporation taxation.

Executive Summary: Putting the Conclusion First for Busy Registered Nurses and Nurse Practitioners

A California Professional Nursing Corporation is a specific type of California Corporation used by registered nurses and nurse practitioners to render professional services. A California Professional Nursing Corporation may elect to be treated as an S Corporation for tax purposes, making it the right business entity for a registered nurse or nurse practitioner who wants to practice nursing while being taxed as a California S-Corp.

A California Professional Nursing Corporation taxed as an S Corporation benefits registered nurse or nurse practitioner shareholders with paying taxes on their personal tax returns without the tax implications of self-employment tax of sole proprietorship or partnership and while avoiding double taxation and dividend income taxes, as California Professional Nursing Corporations taxed as S Corporations pass net income through to shareholders without dividends paid to shareholders.

California Professional Nursing Corporations also provide limited liability protection to shareholders for most debts, liabilities, obligations, and legal judgments, but licensed professionals remain liable for their own acts of malpractice.

By strategically managing compliance, taxes, liability, governance, business planning, and employee and patient relations, a California Professional Nursing Corporation can maximize its benefits. Professional practices should consistently consult with legal, tax, financial, and business advisors to adapt and thrive in the dynamic business environment.

The experienced corporate attorneys at San Diego Corporate Law form Professional Nursing Corporations for registered nurses and nurse practitioners throughout California. Contact us today to schedule an consultation to discuss how a California Professional Nursing Corporation may help you take your nursing practice to the next level.

What is a California S-Corp?

A California S-Corp, or S Corporation, is a special type of California Corporation that is designed to meet certain tax regulations enforced by the Internal Revenue Service (IRS). A California S-Corp operates under Subchapter S of the Internal Revenue Code, which allows profits, and some losses, to be passed through directly to the personal income tax returns of shareholders without being subject to corporate tax rates.

IRS Requirements for California S-Corps

To qualify as a California S-Corp, a business must meet several IRS requirements: it must be a domestic corporation, have only allowable shareholders (which include individuals, certain trust estates, and certain tax-exempt organizations but not partnerships, corporations, or non-resident alien shareholders), have no more than 100 shareholders, have only one class of stock, and not be an ineligible corporation (i.e., certain financial institutions, insurance companies, and domestic international sales corporations).

California Requirements for California S-Corps

S-Corps in California also need to comply with state-specific requirements. These include filing Articles of Incorporation with the Secretary of State, obtaining an Employer Identification Number (EIN) from the IRS, adopting corporate Bylaws, and holding initial and annual meetings of shareholders and members of the board of directors.

Tax Benefits of California S-Corps

One of the primary benefits of a California S-Corp is the avoidance of double taxation, which is a significant concern with traditional California Corporations. By contrast, the net profit of a California S-Corp is only taxed at the shareholder level as income, but otherwise does not pay federal income tax (other than the franchise tax paid to the California Franchise Tax Board). Additional benefits of the S-Corp include the potential savings on self-employment taxes, provided the shareholder-employees receive a reasonable salary for their services.

Taxation of Traditional California Corporations

A California Corporation must pay income taxes at the corporate level before the shareholders pay tax on dividends at the shareholder level. This income taxation of a California Corporation at both the corporate and shareholder level is double taxation.

Thanks to the Tax Cuts and Jobs Act of 2017, at the time of this writing in 2024, federal corporate income tax on California Corporations is 21% of net income. However, unless extended before expiration on December 31, 2025, when the Tax Cuts and Jobs Act of 2017 expires, the federal corporate income tax on California Corporations will go back to 28%. The California corporate tax rate on California Corporations is the greater of the $800 minimum franchise tax or 8.84% of net income.

After paying federal and California income taxes, the remainder may be paid to shareholders as dividends. The current federal dividend tax rate is between 0%, 15%, and 20% depending upon the income of the shareholder, and California taxes dividends as income at rates between 1% and 13.3% depending upon the income of the shareholder.

Taxation of California S-Corps

In a California S-Corp, profits are passed through the California S-Corp to the shareholders and only taxed once, at the shareholder level.

Thanks to the Tax Cuts and Jobs Act of 2017, at the time of this writing in 2024, federal income tax rates are between 10% and 37% for shareholders of California S-Corps. However, unless extended before expiration on December 31, 2025, when the Tax Cuts and Jobs Act of 2017 expires, the federal income tax rates could adjust back to 10% to 39.6% for shareholders of California S-Corps. California taxes California S-Corps the greater of the $800 or 1.5% of net income as a part of its annual franchise tax.

In summary, a California S-Corp offers a blend of corporate structure benefits with pass-through taxation, making it an attractive option for qualifying small businesses and startups focused on avoiding double taxation and optimizing tax savings. Nevertheless, its suitability depends on the individual needs of the business and its shareholders, and prospective shareholders should consult with tax and legal professionals such as the experienced attorneys at San Diego Corporate Law to determine if a California S-Corp is the best choice for their business.

Liability Benefits of California S-Corps

In addition to the tax benefits discussed above, another principal advantage of forming a California S-Corp is the limited liability protection it offers to its shareholders.

Separation of Personal Assets and Personal Liability Protection

The personal assets of shareholders, such as their homes, cars, and personal bank accounts, are typically protected from business debts, liabilities, obligations, and legal judgments against a California S-Corp. This personal liability protection is usually confined to the amount a shareholder invested into the California S-Corp. This limited liability can be a significant safeguard, especially in situations where the corporation faces lawsuits, creditor claims, or other financial challenges.

Limitations of Personal Liability Protection

It is important to note that liability protection is not absolute. Shareholders of a California S-Corp may still be at risk if they personally guarantee business loans or leases, commit fraudulent or illegal activities, commingle personal and business funds, fail to adhere to corporate formalities such as holding meetings of shareholders and the board of directors, or otherwise does not operate as a business entity separate and apart from its ownership.

What is a California Professional Nursing Corporation?

A California Professional Nursing Corporation is a specific type of California Corporation for rendering professional services. These California Professional Nursing Corporations are governed by the Moscone-Knox Professional Corporations Act, the California Corporations Code, the California Business and Professions Code, and the California Board of Registered Nursing, ensuring they meet the stringent standards specific to the practice of nursing.

Formation Requirements for a California Professional Nursing Corporation

Forming a California Professional Nursing Corporation involves meeting several state-specific requirements. The California Professional Nursing Corporation must file Articles of Incorporation with the California Secretary of State, stating that it is a California Professional Nursing Corporation. The Articles of Incorporation and Bylaws of a California Professional Nursing Corporation must contain certain language specific to the profession of nursing.

Ownership and Management of California Professional Nursing Corporations

Ownership and management of a California Professional Nursing Corporation are restricted to registered nurses and nurse practitioners and other licensed professionals who may not outnumber the registered nurses and nurse practitioners, and these other licensed professionals must in aggregate be a minority of the equity ownership. These restrictions ensure that the professional services provided are overseen by those who are adequately qualified and accountable to the relevant professional regulatory authorities. The other licensed professionals are listed in California Corporations Code Section 13401.5 as follows:

Per California Corporations Code Section 13401.5(f)(1)-(12), in addition to licensed nurses and nurse practitioners, the following other licensed persons (as defined in Section 13401 of the California Corporations Code) may also be eligible to become shareholders of a California Professional Nursing Corporation:

Licensed physicians and surgeons. (Section 13401.5(f)(1))

Licensed doctors of podiatric medicine. (Section 13401.5(f)(2))

Licensed psychologists. (Section 13401.5(f)(3))

Licensed optometrists. (Section 13401.5(f)(4))

Licensed marriage and family therapists. (Section 13401.5(f)(5))

Licensed clinical social workers. (Section 13401.5(f)(6))

Licensed physician assistants. (Section 13401.5(f)(7))

Licensed chiropractors. (Section 13401.5(f)(8))

Licensed acupuncturists. (Section 13401.5(f)(9))

Naturopathic doctors. (Section 13401.5(f)(10))

Licensed professional clinical counselors. (Section 13401.5(f)(11))

Licensed midwives. (Section 13401.5(f)(12))

Taxation of California Professional Nursing Corporations

California Professional Nursing Corporations are subject to double taxation unless they elect to be taxed as S Corporations, although the federal corporate income tax rates for California Professional Nursing Corporations (referred to by the IRS as personal service corporations, and sometimes commonly referred to as professional service corporations).

Taxation of California Professional Nursing Corporations without S Corporation Taxation

A California Professional Nursing Corporation must pay income taxes at the corporate level before the shareholders pay tax on dividends at the shareholder level. This income taxation of a California Professional Nursing Corporation at both the corporate and shareholder level is double taxation.

Thanks to the Tax Cuts and Jobs Act of 2017, at the time of this writing in 2024, federal corporate income tax on California Professional Nursing Corporations is 21% of net income. However, unless extended before expiration on December 31, 2025, when the Tax Cuts and Jobs Act of 2017 expires, the federal corporate income tax on California Professional Nursing Corporations will go back to 35%. The California corporate tax rate on California Corporations is the greater of the $800 minimum franchise tax or 8.84% of net income.

After paying federal and California income taxes, the remainder may be paid to shareholders as dividends. The current federal dividend tax rate is between 0%, 15%, and 20% depending upon the income of the shareholder, and California taxes dividends as income at rates between 1% and 13.3% depending upon the income of the shareholder.

Taxation of California Professional Nursing Corporations Electing S Corporation Taxation

When a California Professional Nursing Corporation elects to be taxed as an S Corporation, it is taxed identically to a California S-Corp, so profits are passed through the corporation to the shareholders and only taxed once, at the shareholder level.

Thanks to the Tax Cuts and Jobs Act of 2017, at the time of this writing in 2024, federal income tax rates are between 10% and 37% for shareholders of a California Professional Nursing Corporation taxed as an S Corporation. However, unless extended before expiration on December 31, 2025, when the Tax Cuts and Jobs Act of 2017 expires, the federal income tax rates could adjust back to 10% to 39.6% for shareholders of a California Professional Nursing Corporation taxed as an S Corporation. California taxes California S-Corps the greater of the $800 or 1.5% of net income as a part of its annual franchise tax.

In summary, a California Professional Nursing Corporation electing to be taxed as a California S-Corp offers the same blend of corporate structure benefits with pass-through taxation as a California S-Corp, making it an attractive option for most professional practices to avoid double taxation and optimize tax savings. Nevertheless, its suitability depends on the individual needs of the professional practice and its professional shareholders, and prospective professional shareholders should consult with tax and legal professionals such as the experienced attorneys at San Diego Corporate Law to determine if a California Professional Nursing Corporation taxed as an S Corporation is the best choice for their nursing practice.

Liability Benefits of California Professional Nursing Corporations

In addition to the tax benefits discussed above, another principal advantage of forming a California Professional Nursing Corporation is the limited liability protection it offers to its shareholders.

Separation of Personal Assets and Personal Liability Protection

The personal assets of shareholders, such as their homes, cars, and personal bank accounts, are typically protected from business debts, liabilities, obligations, and legal judgments against a California Professional Nursing Corporation. This personal liability protection is usually confined to the amount a shareholder invested into the California Professional Nursing Corporation. This limited liability can be a significant safeguard, especially in situations where the corporation faces lawsuits, creditor claims, or other financial challenges.

The most notable personal asset protection aspect of a California Professional Nursing Corporation is limiting the malpractice liability of a shareholder from the acts of malpractice of employees and other shareholders of the California Professional Nursing Corporation. In a sole proprietorship, a licensed professional is personally liable for acts of malpractice by professional employees through the legal theory of vicarious liability, and in a partnership structure each partner is jointly and severally liable for acts of malpractice by professional employees through the legal theory of vicarious liability and for acts of malpractice by professional partners under partnership liability rules.

Limitations of Personal Liability Protection

It is important to note that liability protection is not absolute. Shareholders of a California Professional Nursing Corporation may still be at risk if they personally guarantee business loans or leases, commit fraudulent or illegal activities, commingle personal and business funds, fail to adhere to corporate formalities such as holding meetings of shareholders and the board of directors, or otherwise does not operate as a business entity separate and apart from its ownership.

Another important limitation on personal liability protection in a California Professional Nursing Corporation is that professional shareholders remain liable for their own acts of malpractice. So, while a professional shareholder of a California Professional Nursing Corporation may protect their personal assets and enjoy personal liability protection from acts of malpractice of professional employees and other shareholders, the California Professional Nursing Corporation does not shield a professional from liability for their own acts of malpractice.

What About Using an LLC or PLLC for Professional Practice in California?

California Corporations Code Section 17701.04(e) prohibits the use of a California Limited Liability Companies or foreign Limited liability Companies or Professional Limited Liability Companies by registered nurses and nurse practitioners in California for professional nursing 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.”

Therefore, registered nurses and nurse practitioners practicing nursing in California should not form limited liability companies in California or any other state for their nursing practice.

Maximizing the Benefits of a California Professional Nursing Corporation

Maximizing the benefits of a California Professional Nursing Corporation requires a comprehensive understanding of the legal entity separate and apart from its professional shareholder(s), S Corporation status, income and self-employment tax liability, legal requirements, and strategic financial management. Here are key strategies to ensure that registered nurses and nurse practitioners can fully leverage the advantages of California Professional Nursing Corporations, especially those business entities making an S Corporation election under federal law.

Understanding the Regulatory Framework

It is essential to fully comply with the California Corporations Code, and particularly the Moscone-Knox Professional Corporations Act in Sections 13400-13410, as well as pertinent sections of the California Business and Professions Code.

Ensuring compliance involves maintaining all required licenses, adhering to ethical standards set by the California Board of Registered Nursing, and timely filing necessary documents with state authorities.

Engaging the services of experienced legal professionals such as the attorneys at San Diego Corporate Law can help keep California Professional Nursing Corporation business structures in good standing and avoid costly legal issues.

Optimizing Tax Benefits

To achieve the maximum tax benefits, it is advisable to work with a competent accountant or tax attorney, which starts with diligently maintaining financial accurate financial records for a California Professional Nursing Corporation to allow the accountant or tax attorney to assist with strategic tax planning.

The key to maximizing tax efficiency with a pass-through taxation of business structures such as California Professional Corporations taxed as S Corporations begins with allocating reasonable salaries to employee shareholders and distributing remaining profits through the shares of stock to reduce payroll taxes and avoid self-employment tax.

Considering the timing of income and expenses to optimize tax brackets and take advantage of any available deductions and credits for business expenses is another area where an accountant or tax attorney may make up for their professional fees in tax savings to the shareholders of the California Professional Nursing Corporation. Engaging a knowledgeable tax advisor to navigate the complexities of the Tax Cuts and Jobs Act provisions and other pertinent tax laws is advisable for comprehensive tax optimization.

Limiting Liability Effectively

Although California Professional Nursing Corporations provide significant liability protection, further measures can enhance its effectiveness. Shareholders of California Professional Nursing Corporations should avoid personal guarantees whenever possible and ensure clear the separation of personal and business assets.

Maintaining separate business bank accounts for a California Professional Nursing Corporation is mandatory.

Adhering to corporate formalities, such as holding annual meetings and recording minutes of both shareholders and the board of directors, reinforces the legitimacy of the California Professional Nursing Corporation and avoids the loss of the limited liability protection a California Professional Nursing Corporation is designed to provide.

Professional liability insurance, commonly referred to as malpractice insurance, is recommended to cover the personal malpractice liability that a California Professional Nursing Corporation does not protect against.

Other business insurance, such as a business office policy, employment practices liability insurance, and similar insurance coverage is also advisable, as a plaintiff is unlikely to attempt to pierce the corporate veil or otherwise attempt to enforce a judgment against the personal assets of a shareholder if sufficient insurance coverage is in place to satisfy claims.

Enhancing Corporate Governance

Strong corporate documentation and governance structures are vital.

Attorney-drafted Articles of Incorporation, such as those drafted by the attorneys at San Diego Corporate Law, provide protections not included in California Secretary of State Form ARTS-PC, the Articles of Incorporation form used by some attorneys, most accountants, and nearly all online and non-attorney filing services.

Comprehensive Bylaws, in combination with attorney-drafted Articles of Incorporation, which outline the responsibilities of directors, officers, and shareholders can prevent internal conflicts and fortify the business structure of a California Professional Nursing Corporation.

Holding annual shareholder meetings and meetings of the board of directors combined with the maintenance of detailed meeting minutes, or maintaining consents of shareholders and members of the board of directors, provides transparency to the corporate decision-making processes, ensuring that the California Professional Nursing Corporation operates smoothly and keeps shareholders and board members informed.

Strategic Business Planning

A well-formulated business plan for a California Professional Nursing Corporation can be an excellent tool for the strategic business planning needs of a professional practice.

A good business plan sets both short-term and long-term goals, includes market research, and creates a roadmap for sustainable growth of a nursing practice.

Financial planning for a California Professional Nursing Corporation should include budgeting, forecasting, and performance tracking to ensure the California Professional Nursing Corporation remains financially healthy.

Continuous innovation and adapting to market changes will help maintain a competitive edge for the nursing practice.

Employee and Patient Relations

Happy employees and satisfied patients are the backbone of a successful professional practice.

Implementing robust human resource policies for a California Professional Corporation that include training programs, performance incentives, and employee benefits can enhance productivity and loyalty.

Patient relations can be bolstered by maintaining high standards of service, obtaining regular feedback, and ensuring clear communication channels.