Professional Corporations

Under the Moscone-Knox Professional Corporations Act (Corp. Code §§ 13400-13410) certain professionals may only incorporate their practice as a Professional Corporation.

Professional Corporations can not shield the professional from malpractice claims against them, stemming from the practice of their profession.

However, a Professional Corporation offers the same protection as other corporations for all other claims against the corporation (other than malpractice).

Currently, practitioners of the following professions may incorporate their practices as Professional Corporations:

  • Accounting
  • Acupuncture
  • Architecture
  • Chiropractic
  • Clinical social work
  • Dentistry
  • Law
  • Marriage, family, and child counseling
  • Medicine
  • Nursing
  • Optometry
  • Osteopathy
  • Pharmacy
  • Physical therapy
  • Physician assistants
  • Podiatry
  • Psychology
  • Shorthand court reporters
  • Speech-language pathology and audiology

Requirements for a Professional Corporation

In addition to being a member of one of these professions, a practice that wishes to incorporate as a Professional Corporation must abide by the following rules:

  • The practice must be authorized to incorporate by the relevant professional board having jurisdiction over it
  • Generally, only licensed professionals in that industry may be shareholders in the corporation
  • Shareholders must maintain minimum amounts of malpractice liability insurance; the minimums are generally set by the governing board of each profession
  • The purpose clause in the Articles of Incorporation must state the professional practice that the corporation will engage in – and only that profession may be practiced by the corporation.

Advantages of a Professional Corporation

  • Limited Liability – While shareholders in a Professional Corporation are personally liable for obligations arising from their own malpractice, and for payroll taxes – they are NOT personally liable for other liabilities of the corporation
  • Favorable Tax Benefits – The corporation may take an income tax deduction for the payment of health insurance premiums and the benefit will not be treated as compensation to the employee.
  • Asset Protection – In some circumstances, qualified retirement plans belonging to a corporation may be exempt from creditors

Disadvantages of a Professional Corporation

  • Professional Corporations who choose “C” Corporation status may be treated as “Personal Services Corporations,” subject to a flat thirty-five (35%) percent tax rate, instead of the graduated tax rate afforded to individuals.
  • Choosing an “S” Corporation format may help avoid being classified as a Personal Service Corporation, but this election causes the shareholders to be treated as self-employed for many fringe benefits – thereby negating some of the primary benefits of incorporation.

Conclusion

As with traditional corporations, the decision to incorporate one’s professional practice should be made in consultation with appropriate legal counsel.

We invite you to contact our offices to discuss your business and legal needs in greater detail.