Choosing the right business structure is a critical decision for physical therapists establishing their private practices in California. Professional physical therapy practices must comply with applicable rules set forth by California statutes and regulatory agencies. A California Professional Physical Therapy Corporation is a type of corporation engaging in the profession of physical therapy, subject to unique legal requirements. While general stock corporations, such as California S-Corps, California Corporations, foreign S-Corps, and foreign corporations are popular for their limited liability protection and tax benefits, physical therapy practices in California are expressly prohibited from operating as a general stock corporations. Only properly registered California Professional Physical Therapy Corporation may practice physical therapy in California.

The questions, “Can a Physical Therapist Practice Using a General Stock Corporation in California?” and “Can a Physical Therapist Practice Using a Foreign Corporation in California?” have been answered in those previous article and in the articles cited and summarized below. However, the experienced corporate attorneys at San Diego Corporate Law receive frequent inquiries from physical therapists who are still receiving mixed information from other attorneys or advisors leading them to believe that it might be permissible to practice physical therapy in a general stock corporation in California. The California Secretary of State plays a key role in checking name availability and registering professional entities, ensuring compliance with state requirements.

The purpose of this article is to highlight and explore the specific provisions of the California Corporations Code and California Business and Professions Code that prohibit the use of California general stock corporations and foreign general stock corporations to render professional services as a physical therapist in California as well as the legislative intent behind those prohibitions. The California Corporations Code provides the structure for forming and organizing California Professional Physical Therapy Corporations in California, and law expressly applicable to California Professional Physical Therapy Corporations governs their formation and operation.

Executive Summary: Key Takeaways for Busy Physical Therapists in California

• California Professional Physical Therapy Corporations are exclusively for licensed individuals, ensuring that only qualified professionals provide specialized services, which maintains public trust and accountability.

• The Moscone-Knox Professional Corporation Act requires California Professional Physical Therapy Corporations to adhere to stringent regulations, including clearly identifying their professional services and imposing strict ownership rules to maintain high standards.

• Taxation for California Professional Physical Therapy Corporations allows the election of S-Corporation status for pass-through taxation, offering significant financial advantages compared to general stock corporations. Electing S-Corporation status can also help reduce self-employment taxes for professional business owners.

California Corporations Code Section 13401

The Moscone-Knox Professional Corporations Act is found in California Corporations Code Sections 13400-13410. California Corporations Code Section 13401(b) provides the authority for licensed physical therapists to practice in California as California Professional Physical Therapy Corporations with the purpose of rendering professional services in their practice of physical therapy.

California Corporations Code Section 13401 also provides two definitions required to properly analyze the restrictions on the use of California general stock corporations and foreign general stock corporations by physical therapists for practicing physical therapy in California.

California Corporations Code Section 13401(a)

California Corporations Code Section 13401(a) provides the definition of “Professional Services” as follows:

“‘Professional services’ means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.”

Thus, Professional Services under the definition provided by California Corporations Code Section 13401(a) encompasses many professions, including physical therapy under California Business and Professions Code Sections 2690–2696.

Only licensed persons are permitted to form and own shares in a California Professional Physical Therapy Corporation.

California Corporations Code Section 13401(d)

California Corporations Code Section 13401(d) provides the definition of “Licensed Person” as follows:

“‘Licensed person’ means any natural person who is duly licensed under the provisions of the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act to render the same professional services as are or will be rendered by the professional corporation or foreign professional corporation of which the person is, or intends to become, an officer, director, shareholder, or employee.”

Thus, Licensed Person under the definition provided by California Corporations Code Section 13401(d) means those persons licensed in the professions listed above as providers of Professional Services under California Corporations Code Section 13401(a), which includes physical therapists in California.

As a general rule, only Licensed Persons may serve as professional employees, officers, or directors in a California Professional Physical Therapy Corporation.

Moscone-Knox Professional Corporations Act

California Corporations Code Sections 13401(a)-(b), together with the rest of the Moscone-Knox Professional Corporations Act in California Corporations Code Sections 13400-13410, defines and regulates California Professional Corporations, including California Professional Physical Therapy Corporations. These sections prohibit California general stock corporations and foreign general stock corporations from rendering professional physical therapy services, as defined in Section 13401(a), unless they are specifically formed as a California Professional Physical Therapy Corporation and meet the requirements of California Corporations Code Sections 13400-13410. A California Professional Corporation or other corporation must be organized for the purpose of providing services in such profession, and the law may require recognition of such predecessor organization for compliance.

Licensed physical therapists in California are generally prohibited from forming a California general stock corporation or foreign general stock corporation to provide professional services. Instead, they must form a professional services corporation such as a California Professional Physical Therapy Corporation. Physical Therapists currently using either a California general stock corporation or foreign general stock corporation to practice should also review the following articles: “5 Steps to Convert a California General Stock Corporation to a California Professional Physical Therapy Corporation” or “12 Steps to Convert a Foreign Corporation into a California Professional Physical Therapy Corporation” for information about options for coming into compliance with the California Corporations Code, the California Business and Professions Code, and other applicable laws and regulations enforced by the Physical Therapy Board of California.

Reasons for Prohibition Against General Stock Corporations for California Physical Therapists

In California, professional physical therapy practice is not permitted to California general stock corporations or foreign general stock corporations primarily due to stringent state laws and regulations, including the California Business and Professions Code and the California Corporation Code, designed to maintain ethical standards and public trust between licensed physical therapists and their patients, but also with professional licensing boards such as the Physical Therapy Board of California.

Key legal frameworks like the Moscone-Knox Professional Corporation Act dictate that only licensed physical therapists and certain other licensed professionals (see: “Who May Be a Shareholder of a California Professional Physical Therapy Corporation?”) can own and control entities offering specialized physical therapy services, ensuring only qualified individuals provide such services. California Professional Physical Therapy Corporations help protect the personal assets of licensed physical therapists from certain business liabilities, such as injuries occurring at the business location, but do not shield against personal liability for malpractice. California does not permit licensed physical therapists to form a California general stock corporation or foreign general stock corporation to offer or provide professional physical therapy services; instead, they must use a California Professional Physical Therapy Corporation to legally render their physical therapy services.

Understanding Professional Physical Therapy Practice in California

Professional services in California are defined as those requiring certification, license, or registration. These same professional services are not just about technical skills but also encompass legal and ethical responsibilities that enhance accountability and protect the public interest. For instance, when rendering professional services as a physical therapist, the professional conduct of the physical therapist offering professional services is under stringent scrutiny by regulatory bodies such as the Physical Therapy Board of California.

The legal framework for licensed physical therapists in California is notoriously complex. California laws and regulations, governed by a governmental agency regulating qualified individuals such as the Physical Therapy Board of California, are designed to ensure that only qualified and licensed individuals offer specialized physical therapy services, which helps maintain high standards of professional conduct. This complexity, while daunting, serves to uphold public trust and safety, ensuring that physical therapy professionals are adequately vetted and continuously held accountable under California law. A California licensed physical therapist must meet specific legal requirements to form or join a California Professional Physical Therapy Corporation, as outlined in the California Corporations Code, California Business and Professions Code and related statutes. Compliance with these statutes and applicable rules is essential for lawful operation.

California physical therapists seeking to form a California Professional Physical Therapy Corporation must grasp these laws. The formation of a California Professional Physical Therapy Corporation involves more than just filing paperwork; it requires a deep understanding of the relevant provisions in the California Business and Professions Code and the California Corporations Code. This knowledge is crucial for navigating the specific regulations and benefits of California Professional Physical Therapy Corporations. The experienced corporate attorneys at San Diego Corporate Law have the knowledge and expertise to help physical therapists with forming a California Professional Physical Therapy Corporation.

Legal Distinctions Between General Stock Corporations and Professional Corporations

One of the fundamental distinctions between California Professional Physical Therapy Corporations and general stock corporations is ownership. California Professional Physical Therapy Corporations are exclusively for licensed professionals (see: “Who May Be a Shareholder of a California Professional Physical Therapy Corporation?”, while general stock corporations can be owned by anyone. This distinction ensures that control and decision-making within California Professional Physical Therapy Corporations remain within the hands of qualified individuals who are licensed physical therapists.

A California Professional Physical Therapy Corporation is also subject to different legal requirements compared to a general stock corporation, including specific licensing and regulatory obligations that do not apply to general stock corporations.

General stock corporations are permitted to engage in a wide array of legal activities, whereas California Professional Physical Therapy Corporations are confined to providing the specific licensed professional services stated in their Articles of Incorporation. This restriction maintains the specialization and quality of services provided by a general stock corporation. In addition, California Professional Physical Therapy Corporations are also prohibited from engaging in activities such as banking and trust company business, which are governed by separate legal and regulatory frameworks, but may engage in other business as permitted by the Physical Therapy Board of California.

When considering alternative business structures for a professional physical therapy practice, it is important to note that licensed physical therapists in California may operate as a sole proprietorship or a general partnership to provide professional services, however, being a sole proprietor or general partner as a physical therapy professional does not provide liability protection, does not separate personal assets from business assets, and is usually the least tax efficient business entity type for the practice of physical therapy in California.

Tax treatment also varies between the two types of corporations. While both can elect S Corporation status to benefit from pass-through taxation, California Professional Physical Therapy Corporations (as personal service corporations or professional service corporations) may face a flat federal tax rate if they do not make the S Corporation election. This difference can significantly impact the financial strategy and tax planning for California Professional Physical Therapy Corporations, making it essential for licensed physical therapists to carefully consider their options.

Shareholder Requirements for Professional Corporations in California

In California, the rules governing who may own shares in a California Professional Physical Therapy Corporation are much more stringent than those for other business entities. Under the California Corporations Code, only individuals who are licensed physical therapists may become shareholders (with the exception of those professions and professionals listed in California Corporations Code Section 13401.5). This means that in a California Professional Physical Therapy Corporation formed to render professional services, every shareholder must hold a valid license as a licensed physical therapist (or be expressly permitted under the terms of California Corporations Code Section 13401.5).

This requirement ensures that control of California Professional Physical Therapy Corporations remains exclusively in the hands of those qualified to provide the professional services offered by the business entity. The California Corporations Code is clear: a California Professional Corporation cannot have shareholders who are not licensed to practice the same professional services as the California Professional Corporation itself (except as permitted under California Corporations Code Section 13401.5). This rule applies whether forming a new California Professional Physical Therapy Corporation or joining an existing California Professional Physical Therapy Corporation.

It is essential to ensure that all shareholders meet the licensing requirements set forth in the California Corporations Code. Failing to comply with these shareholder requirements can jeopardize the corporate existence and may result in disciplinary action from the relevant licensing board. By adhering to these rules, California Professional Physical Therapy Corporations help maintain the integrity of professional services and protect the public by ensuring that only qualified, licensed physical therapists (or be expressly permitted under the terms of California Corporations Code Section 13401.5) are in a position to control and render professional services through the California Professional Physical Therapy Corporation.

Conclusion

The main reason for prohibiting the use of California general stock corporations and foreign general stock corporations by licensed physical therapists is to ensure compliance with professional regulations and protect the public from potential harm caused by unqualified or unethical individuals providing physical therapy services by upholding public accountability standards specific to the practice of physical therapy.

The State of California wants to ensure that only licensed physical therapists who have met certain education and training requirements are able to offer their expertise and advice in a professional capacity as a physical therapist.

The reasoning behind this restriction stems from the nature of physical therapy services, which requires specialized knowledge and experience, and is subject to stringent regulation by the State of California and the Physical Therapy Board of California. Professions such as physical therapy demand accountability not just to patients but also to the Physical Therapy Board of California.

California general stock corporations and foreign general stock corporations have been deemed incompatible with the heightened accountability standards the State of California applies to physical therapists. Thus, physical therapists practicing in California must choose an alternative business entity structure that better aligns with the regulatory oversight and public protection goals of the State of California. To comply with California law and protect the public, licensed professionals must select a professional services corporation that is an approved professional business entity, such as a California Professional Corporation, when forming their practice.