In California, establishing a California Professional Corporation is the only limited liability option that separates professional liability from personal assets for licensed professionals providing professional services in California.

In a separate article titled “What Tax Benefits Does a California Professional Corporation Provide?” the tax benefits of a California Professional Corporation will be discussed, but this article will focus solely on liability protection and asset protection for California licensed professionals rendering professional services in California.

The goal of this article is to equip licensed professionals with the information needed to make informed decisions. It is crucial to ensure that the chosen business entity aligns with the business goals of the licensed professional while adhering to California law, including the California Corporations Code, the Moscone-Knox Professional Corporations Act, the California Business and Professions Code, and other relevant regulations, as well as the rules of government agencies overseeing the practice, such as the governing board for the profession practiced.

Executive Summary: Putting the Conclusion First for Busy Professionals

A licensed professional should form a California Professional Corporation if they are concerned about liability protection or the separation of personal and business assets.

Licensed professionals should establish California Professional Corporations for liability protection and to separate their personal assets from the debts, liabilities, obligations, and legal judgments against their professional practice even if only liability protection and separation of assets is sought by the licensed professional, regardless of potential tax benefits or increased operation costs.

For most licensed professionals in most professional practices, the experienced corporate attorneys at San Diego Corporate Law recommend the use of a California Professional Corporation for the limited liability protections and tax benefits a California Professional Corporation provides.

It is worth noting that LLCs and PLLCs are not permitted for use with professional practices in California.

Choosing the right business structure for your professional practice can be a complex task. For tailored advice that considers your specific circumstances, schedule a consultation with the experienced attorneys at San Diego Corporate Law. Our team is committed to assisting licensed professionals in determining whether a California Professional Corporation or another business structure best suits their needs, maximizing tax benefits while minimizing liability risks. Schedule a consultation today to ensure your professional practice is structured for success.

Liability Protection Overview for Licensed Professionals

Licensed professionals often choose to practice in a California Professional Corporation to limit personal liability and separate their personal assets from the debts, liabilities, obligations, and legal judgments which arise from their professional practice.

Liability Protection for Professionals Generally

Unlike sole proprietorships or partnerships, California Professional Corporations offer a liability protection and personal asset protection by separating the personal assets of the licensed professional shareholder from the business debts, liabilities, obligations, and legal judgments against the California Professional Corporation.

Liability Protection for Professional Employers

Limited liability protection is vital for licensed professionals who employ other licensed individuals as employees or independent contractors to render professional services, especially when there is a significant risk of malpractice claims. By forming a California Professional Corporation, professionals can safeguard their personal assets and future earnings while adhering to state regulatory requirements and complying with agencies which govern rendering professional services in California, such as the governing board for the profession practiced.

When Does the Liability Protection Provided by a California Professional Corporation Makes Sense for a Licensed Professional?

Most licensed professionals would benefit from practicing with a California Professional Corporation in California, with the exceptions being very low revenue professional practices without employees that do not accept insurance and with no plans for future growth of the professional practice.

Liability Protection Details for Licensed Professionals

Licensed professionals often opt to practice as a California Professional Corporation to shield themselves from personal liability and to keep their personal assets separate and protected from business debts, liabilities, obligations, and legal judgments related to their professional practice. It is essential for licensed professionals to understand the liability protection differences between sole proprietorships and general partnerships compared to those offered by a California Professional Corporation when deciding on the ideal business structure for their professional practice.

General Liability

Licensed professionals selecting a business structure for their professional practice should understand the distinctions in general liability protection between sole proprietorships and general partnerships compared to California Professional Corporations.

In this section, “general liability” refers to liabilities arising from contracts with vendors, claims of bodily injury, property damage, and other liabilities not related to employment relationships, malpractice, or professional errors and omissions.

For instance, consider scenarios such as a long-term lease of office space or specialized equipment, a bodily injury resulting from a visitor slipping and falling in the office of a licensed professional, property damage to leased premises or neighboring properties due to the professional practice, or claims of libel, slander, and other reputational harm stemming from professional advertising.

General Liability for Sole Proprietors and General Partnerships

Sole proprietors and general partners encounter substantial liability risks due to the absence of a distinction between personal and business assets. In a sole proprietorship, the professional owner is personally liable for all business debts, liabilities, obligations, and legal judgments related to general liability claims against the professional practice.

Similarly, in general partnerships, all general partners share joint and several liability. Each individual general partner is personally responsible for all business debts, liabilities, obligations, and legal judgments arising from general liability against the partnership. This means that each licensed professional acting as a general partner for a California professional practice operating as a general partnership is personally liable for all liabilities of the professional practice.

If a visitor is injured on the premises or if the professional practice causes damage to property of a third-party, the personal assets of a California professional sole proprietor or each professional general partner in a general partnership bear unlimited liability for these claims. This unlimited personal liability imposes a significant burden on a California professional sole proprietor or individual professional general partners of a general partnership, especially if the professional practice lacks sufficient insurance or fails to effectively manage risks. It is essential for professional sole proprietors and professional general partners to be aware of these risks and consider protective measures, such as comprehensive insurance policies or restructuring the professional practice to limit personal liability exposure.

General Liability for California Professional Corporations

A California Professional Corporation offers significant protection against personal liability for licensed professionals. Unlike professional sole proprietors and professional general partners of a general partnership, who face unlimited personal liability for business debts, liabilities, obligations, and legal judgments, licensed professional shareholders of a California Professional Corporation generally enjoy protection from such business liabilities. This protection means the personal assets of licensed professional shareholders, such as homes and personal bank accounts, are typically shielded from claims related to the debts, liabilities, obligations, and legal judgments of the California Professional Corporation. As a distinct legal entity, the California Professional Corporation is accountable for its own debts, liabilities, obligations, and legal judgments, thereby insulating the personal financial exposure of its licensed professional shareholders.

It is important to recognize that the liability protection offered by a California Professional Corporation has its limitations. Licensed professional shareholders may still be personally liable for their own negligent or wrongful actions. Additionally, this protection does not cover liabilities backed by the personal guarantee of the licensed professional shareholder. To ensure limited liability protection for its licensed professional shareholders, the California Professional Corporation must be operated diligently and in compliance with California laws and regulations.

Despite the limitations mentioned above, the general liability protections afforded to licensed professional shareholders of California Professional Corporations are significant. These protections enable licensed professionals to manage their professional practices confidently with the maximum liability protection available under applicable law.

General Liability Conclusion

Some general liabilities for a California professional practice, whether it is structured as a sole proprietorship, general partnership, or California Professional Corporation, are insurable risks. However, if an incident occurs that is not covered by insurance, if the insurer denies coverage, or if the liability exceeds the insurance limits, the limited liability features of a California Professional Corporation may protect a licensed professional shareholder whereas a California professional sole proprietor or professional general partner of a general partnership would be personally liable for the same claim. The limited liability of a California Professional Corporation offers protection compared to the unlimited personal liability faced by a California professional sole proprietor or professional general partner.

Employment Liability

Licensed professionals choosing a business structure for their practice should understand the differences in employment liability protection among sole proprietorships, general partnerships, and California Professional Corporations.

In this section, the term “employment liability” refers to both the responsibility owed to employees and independent contractors and the vicarious liability to third parties arising from the actions or inactions of employees and independent contractors.

Employment liability to employees encompasses issues such as wage and hour law, sexual harassment, hostile work environment claims, privacy and information privacy claims, discrimination, wrongful termination, and a host of other potential liabilities. In contrast, vicarious liability to third parties might involve a business being held accountable for an injury to a third party arising from an auto accident caused by an employee during company time or some similar claim.

Employment Liability for Sole Proprietors and General Partnerships

Much like general liability issues, professional sole proprietors and professional general partners of general partnerships are significantly exposed to liability due to the absence of a clear divide between personal and business assets. In a California professional sole proprietorship, the licensed professional owner bears full responsibility and unlimited liability for employment-related claims made by employees or independent contractors, as well as for third-party claims concerning employee or independent contractor actions or inactions for which the professional practice is vicariously liable.

In general partnerships, professional general partners share joint and several liability. Each professional general partner has unlimited personal liability for all employee-related claims against the professional practice and for all third-party claims of vicarious liability resulting from employee or independent contractor actions or inactions.

If an employee or independent contractor files a claim for a meal break violation, wrongful termination, or other common workplace issues, the personal assets of a California professional sole proprietor or each professional general partner in a general partnership is subject to unlimited liability. Similarly, if an employee or independent contractor assaults or injures a third party, or damages third-party property, the professional sole proprietor or each professional general partner faces unlimited liability for these claims under the legal principle of vicarious liability.

Unlimited personal liability places a heavy burden on professional sole proprietors and individual professional general partners of general partnerships, particularly when the professional practice is underinsured or poorly manages risks. It is crucial for professional sole proprietors and individual professional general partners to recognize these risks and explore protective measures. Options such as employment practices liability insurance can guard against employee claims, while comprehensive general liability insurance addresses vicarious liability from employee and independent contractor actions or inactions. Alternatively, restructuring the professional practice can help mitigate personal liability exposure.

Employment Liability for California Professional Corporations

A California Professional Corporation provides significant protection against personal liability for licensed professional shareholders, shielding them from employee-related claims. Unlike professional sole proprietors and professional general partners of general partnerships, who face unlimited personal liability for employee and independent contractor claims and incidents caused by employees and independent contractors, licensed professional shareholders in a California Professional Corporation typically enjoy protection from both types of employment liability.

The liability protection provided by a California Professional Corporation ensures that the personal assets of licensed professional shareholders, such as their homes and bank accounts, are generally shielded from claims arising from employment liability related to the professional practice. As a separate legal entity, the California Professional Corporation assumes responsibility for employee and independent contractor claims and third-party claims based on employee and independent contractor actions or inactions under the legal theory of vicarious liability, thereby significantly reducing the personal financial exposure of licensed professional shareholders of a California Professional Corporation.

It is important to recognize that a California Professional Corporation holds liability for employee and independent contractor claims as well as third-party claims due to vicarious liability for the actions or inactions of employees and independent contractors. Although this is preferable to unlimited personal liability for licensed professionals, such liability can still significantly impact a California professional practice, even as it protects the assets of the licensed professional shareholders.

Similar to general liability, a California Professional Corporation must operate diligently and comply with California laws and regulations to ensure its licensed professional shareholders receive limited liability protection. This protection extends to both employee claims and third-party vicarious liability claims.

Despite the previously mentioned limitations, licensed professional shareholders enjoy significant employment liability protections with California Professional Corporations, and the safeguards provided allow them to conduct their practices with confidence with the maximum liability protection available under applicable law.

Employment Liability Conclusion

Employment practices liability insurance can cover many, but not all, liabilities related to employee and independent contractor liabilities. Similarly, many general liabilities are insurable risks for a California practice whose employees may expose it to third-party claims under vicarious liability. Whether operating as a sole proprietorship, general partnership, or California Professional Corporation, having comprehensive insurance is crucial. However, if an incident is not covered by insurance, if a claim is denied by an insurer, or if liability exceeds the limits of insurance coverage, the limited liability status of a California Professional Corporation can protect a licensed professional shareholder from personal liability. This stands in contrast to a California professional sole proprietor or professional general partner of a general partnership who would face unlimited personal liability for the same claim.

Malpractice Liability

Licensed professionals selecting a business structure for their professional practice should understand the differences in malpractice and errors and omissions liability protection offered by sole proprietorships, general partnerships, and California Professional Corporations.

In this section, “malpractice” is defined as the professional errors and omissions that occur when an individual professional fails to meet the accepted standards of professional practice, resulting in harm or damage. Malpractice liability pertains to the legal accountability professionals may incur for not adhering to these standards, which can lead to claims and lawsuits.

For professionals selecting a business entity in which to practice in California, understanding the assignment of malpractice liability is vital. In a California professional practice, the consequences of malpractice can be significant. This section explores the intricacies of malpractice liability, focusing on the risks associated with professional errors and omissions, and examines the liability of professional practice owners in sole proprietorships, general partnerships, and California Professional Corporations.

Malpractice Liability for Sole Proprietors and General Partnerships

California professional sole proprietors and professional general partners of general partnerships bear unlimited liability for their own malpractice, errors, and omissions. Consequently, these professionals are personally liable for any malpractice claims filed against them by their clients or patients.

In a general partnership, each of the professional general partners not only bear unlimited liability for the malpractice and errors and omissions claims against them personally, but they also have unlimited liability for the malpractice and errors and omissions of all other professional general partners in the general partnership, giving each professional general partner unlimited personal liability for the malpractice and errors and omissions of each other professional general partner.

Furthermore, as previously mentioned regarding vicarious liability for employees and independent contractors, professional sole proprietors and professional general partners of general partnerships bear unlimited liability for malpractice claims of the professional employees and professional independent contractors who practice for the sole proprietorship or general partnership. This liability stems from the alleged malpractice or errors and omissions of their professional employees under the legal theory of vicarious liability.

The unlimited personal liability associated with malpractice claims for all other professional general partners, employees, and independent contractors makes sole proprietorships and general partnerships less appealing for professional practices because these business entities expose the personal assets of professional owners to unlimited liability for the alleged malpractice of other professionals.

Malpractice Liability for California Professional Corporations

Similar to professional sole proprietors and professional general partners in a general partnership, licensed professional shareholders of a California Professional Corporation face unlimited liability for their own malpractice and professional errors and omissions. This means that licensed professional shareholders remain personally liable for their own acts of malpractice and errors and omissions due to their own negligence.

However, licensed professional shareholders of a California Professional Corporation do enjoy protection from liability related to malpractice and errors and omissions allegedly made by employees, independent contractors, and other professional shareholders. A California Professional Corporations function as a legal entity separate and apart from its shareholders, safeguarding individual shareholders and their personal assets from malpractice liability, except for their own acts of malpractice and their own errors and omissions. In essence, while licensed professional shareholders of a California Professional Corporation are accountable for their own professional negligence, they are not held personally liable for the malpractice or errors and omissions of employees, independent contractors, or fellow professional shareholders within the California Professional Corporation.

This protection exists because the California Professional Corporation, not the individual licensed professional shareholder, is considered the employer of any employee, independent contractor, or other professional shareholder accused of malpractice. As a result, vicarious liability for malpractice falls on the California Professional Corporation rather than the individual professional shareholder. Consequently, while the professional alleged to have committed malpractice or an error or omission and a California Professional Corporation may face lawsuits for malpractice claims due to the actions of employees, independent contractors, or other professional shareholders, the personal assets of licensed professional shareholders not alleged to have personally committed an act of malpractice or an error or omission are typically protected.

As with general liability and employment liability, the limited liability framework for malpractice and errors and omissions relies upon the diligent operation of the California Professional Corporation in compliance with California laws and regulations.

Malpractice Liability Conclusion

Licensed professionals, regardless of their chosen business structure, are personally liable for their own acts of malpractice and their own errors and omissions. However, operating as a sole proprietorship or general partnership in California exposes licensed professionals to unlimited liability for malpractice and errors and omissions committed by employees, independent contractors, and professional co-owners. In contrast, forming a California Professional Corporation provides protection from personal liability for professional negligence committed by employees, independent contractors, or fellow professional shareholders. While malpractice insurance can cover errors and omissions, its limitations and the possibility of claim denial make malpractice liability a significant concern for licensed professionals and California Professional Corporations provide the maximum legal protection available under applicable law.

Conclusions About Liability Protections

Choosing the right business entity for a California professional practice requires careful consideration and consultation with legal experts, such as the experienced corporate attorneys at San Diego Corporate Law. It is crucial to have adequate insurance coverage, including general liability insurance, employment practices liability insurance, and malpractice liability insurance (professional liability insurance), to protect against claims regardless of the chosen professional business entity. However, insurance is limited in coverage and coverage amounts, and insurers deny claims when possible, so understanding professional liability and selecting an appropriate corporate structure, such as a California Professional Corporation, can offer further peace of mind for professionals and safeguard both their personal and professional assets in ways even the best insurance policies cannot.

Establishing a Business Structure for Future Liabilities

Establishing a business structure conducive to anticipated growth involves selecting a formation that not only accommodates current operations but also facilitates future expansion.

For licensed professionals foreseeing growth of their professional practice, choosing to start as a California Professional Corporation is advantageous because it allows these professionals to establish their practice once, avoiding the establishment of a practice as a sole proprietorship or general partnership for a year or two before facing the need to establish the professional practice a second time when liability protection and separating personal assets from professional debts, liabilities, obligations, and legal judgments related to the professional practice become a concern.

Finally, for professionals who accept insurance, work with a regional center, or otherwise engage with third-party payor panels, the insurance paneling process will need to be repeated for a licensed professional first establishing a sole proprietorship or general partnership and later incorporating to take advantage of the liability protections of a California Professional Corporation.

If within the means of such a licensed professional, the recommendation is to start with a California Professional Corporation formed as a part of starting the professional practice.

A Quick Note on LLCs and PLLCs

A licensed professional may not use a foreign or California limited liability company (LLC), nor may a foreign professional limited liability company (PLLC) be used to practice as a professional in California. Pursuant to California Corporations Code Section 17701.04(e):

“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.”

This comes as a surprise to many licensed professionals, as professional limited liability companies (PLLCs) are commonly used to render professional services in other states.