By: Ted Sutton, Esq.
Mike has worked as an attorney at a large San Francisco law firm for five years. After graduating law school and passing the California bar exam, he was hired as an associate at the firm. Like many others in Mike’s position, he regularly worked 90-hour work weeks with little vacation time. This workload has led to a whole host of health-related issues, including anxiety and sleep deprivation. Overwhelmed with what he had gone through over the last five years, Mike decided it was time to make a change. He took a leap of faith and decided to become a solo practitioner. This would give him the freedom to set his own hours, control his workload, and improve his overall wellbeing.
The first step for Mike was to determine what type of entity to form. At first, Mike thought that he would be fine forming an LLC for his practice. However, after doing some research, he discovered that California only allows for attorneys to practice under professional corporations and limited liability partnerships. Mike, along with many other licensed professionals in California, are not allowed to form an LLC for their business.
As a general matter, if your job requires a license and/or you render professional services, you cannot form an LLC for your line of work in California. The California Corporations Code provides very few exceptions to this rule, most notably for contractors. This short list is as follows:
Licensed Professionals Allowed to Form an LLC in California:
- Alarm companies
- Alcoholic beverage licensees
- Cemetery authority
- Foreign labor contractors
- Gambling enterprise owners
- Home improvement salespersons
- Horse racing track operators
- Outdoor advertising
- Private investigators
- Seller of travel
- Surplus medication collection and distribution intermediaries
But because most licensed professions do not fall under this list, you are much better off forming a professional corporation at the beginning.
California has a few requirements to properly form a professional corporation. First, the articles of incorporation must clearly state that the corporation is a professional corporation. Second, all shareholders, directors, and officers must be licensed professionals in California. However, the corporation may employ non-licensed professionals.
Mike is happy that he did his research. After learning of California’s restrictions, he properly formed a professional corporation, indicating such in the articles of incorporation. He was the only shareholder, director, and officer because he is the only one in the business that is licensed to practice law in California. He also planned on hiring one paralegal and one secretary to assist him, neither of whom would serve as shareholders, directors, or officers. Mike has checked all the boxes. He can now practice law on his own terms under his newly formed professional corporation.
Professional corporations are also subject to the same rules that apply to other corporations. They must obtain an EIN from the IRS, maintain corporate records, and file annual reports with the California Secretary of State. A professional corporation can be taxed either as an S Corporation or a C Corporation. Because Mike’s CPA suggested using an S Corporation to help minimize payroll taxes, Mike, like most other professionals, chose the S Corporation. Other laws relating to the practice of each licensed profession may also apply to each professional corporation.
It is also worth mentioning that California also allows some licensed professionals, including lawyers, accountants, and engineers, to practice through a limited liability partnership. But because Mike is a solo practitioner and has no other partners, he will have to form a professional corporation.
If you are a licensed professional in California, be aware that you most likely will not be able to form an LLC for your practice. To properly form your professional corporation in California, we here at Corporate Direct will be happy to assist you.