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California Professional Corporations: What Happens if an Owner Loses Their License?

Under the Moscone-Knox Act, California professional corporations can only be owned by those holding a professional license as set forth in the Act. Moreover, services of only a single profession can be provided by any given California professional corporation, such as marriage and family therapy service or midwifery services or optometry services or speech language pathology services, etc. These sorts of professional services may not be provided by a corporate entity of any other sort in California. See our discussion here. In general, the definition of “professional service” is a service that requires a license and whose membership is governed by some sort of regulatory board, agency or authority. See Cal. Corp. Code, § 13401(a).

Because a California professional corporation can only have owners who are licensed, one question that occasionally arises is: What happens if one of our owners becomes disqualified by, for example, losing his or her license?

Pursuant to section 13407 of the California Corporations Code, the answer depends on whether the license has been permanently revoked, temporarily revoked, the length of the suspension, and whether there has been a death.

Section 13407 provides a “safe harbor” of 90 days if an owner has been disqualified from rendering professional services in California. Thus, if a professional license has been suspended for 90 days or less, then there is no issue with respect to the continued validity of the California professional corporation. If there is a death, the “safe harbor” is six months. If a disqualified person continues to own shares in your California professional corporate beyond the deadline, then section 13407 states that

“… the certificate of registration of the corporation may be suspended or revoked by the governmental agency regulating the profession in which the corporation is engaged. In the event of such a suspension or revocation, the corporation shall cease to render professional services in this state. ”

In simple terms, if an owner becomes disqualified, with a very short window, the California professional corporation itself will be unable to legally operate and provide services.

What can be Done?

This problem should be handled in the governing corporate bylaws and buy-sell agreement. An experienced San Diego corporate attorney can provide advice and counsel with respect to drafting your corporate governing documents and buy-sell agreement. Essentially, your bylaws and buy-sell agreement should provide for an automatic revocation of ownership rights and membership on the board of directors if a license is lost or suspended. Specifically, what must be automatically revoked/suspended is involvement in management and ownership decisions. Economic issues — such as the amount and timing of the buy-out — can be negotiated contemporaneously, however, the disqualified professional must immediately and automatically lose any right to vote on or have involvement management decisions.

California Professional Corporations: Contact San Diego Corporate Law Today

If you need legal advice related to setting up or operating your professional corporation, call your trusted business attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard has been named a “Rising Star” for four years running by Contact Mr. Leonard at (858) 483-9200 or by email. Like us on Facebook.

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