Are you looking to start a professional corporation in California, but you’re not sure where to start?
Professional corporations are those owned and operated by licensed professionals, like doctors, lawyers, and architects. There are quite a few important steps you’ll need to take to create your California professional corporation and maintain it, so this guide will outline the rules and regulations involved with this process.
We’ll cover everything you need to know, from picking names, choosing a board, navigating taxes, and more. To get started, please reference our guide below or hire a professional online incorporation service.
What is a California Professional Corporation?
On the surface, a professional corporation and a regular corporation look very similar. Both businesses can issue stock, both have bylaws, and both are governed by a board of directors and an executive team. Both pay corporate income taxes, too.
And more importantly, both corporation types offer personal asset protection. Simply put, a shareholder or member of the business isn’t liable for the business’s debts. So a member of the corporation can’t be sued; the corporation is sued. However, in a professional corporation, there’s one exception: individual members can be sued for malpractice.
That’s especially important because professional corporations usually offer professional services, such as lawyers, dentists, doctors, chiropractors, and more. All of those trades can be sued for malpractice. But in a PC, only the person responsible for the malpractice can be sued. That makes it a better option for most professionals.
In California, a corporation is allowed to offer professional services (i.e., form a professional corporation) if at least half of the corporation’s shares are owned by someone licensed in the PC’s profession. This does reduce a PC’s ability to fundraise somewhat, but the advantage of liability protection remains. There’s a good variety of trades that can form a PC; for the full list, look here.
7 Steps to Start a Professional Corporation in California
Now let’s jump into the specific steps you’ll need to take to form a professional corporation in California. Later on in this guide, we’ll discuss the steps you need to take in order to maintain your corporation in California. But let’s start at the beginning.
1. Select Your Board of Directors
A professional corporation is only as good as its board of directors, so you’ll want to appoint carefully. And while the bulk of people involved in the day-to-day operations of your business will be licensed in your profession, we recommend having your board be a bit more diverse.
For example, a dental PC might want a director with legal experience, one with business growth expertise, a financial expert, and so on. This gives you diverse input to help the business succeed.
California makes it pretty simple to choose your board; there are only a few rules. Any corporation type in California must have 3 directors on the board (PCs with less must have as many directors as they have shareholders), and no more than half of the board members can receive financial compensation from the business. Not all of your directors have to be licensed. For a full look at rules for your directors, please consult the Professional Corporations Section of the California Code.
2. Designate a Registered Agent
Every California professional corporation—and even other entity types—must appoint a registered agent. This individual accepts “service of process” from the state on your behalf. Basically, if the state ever needs to notify you regarding a lawsuit or an upcoming annual report due date, they’ll contact your registered agent. Your agent forwards that notice to you.
California has a few legal requirements for your registered agent, though:
- Every entity that files with the Secretary of State (both domestic and foreign) must appoint a registered agent
- The agent must be a resident of California or a corporation that has not terminated its capacity to act as a registered agent
- An agent must be continuously maintained
You can find a full rundown of the state laws in The California Corporations Code.
Technically, you (as an individual; not your PC) can serve as your own registered agent, but we don’t recommend it. First, you’ll be busy running the day-to-day affairs of your professional corporation. It’s also important to note that the registered agent’s address goes on the public record; some entrepreneurs are uncomfortable with that idea. Because of that, it’s a good idea to appoint a third-party, like an individual you trust or one of our top registered agent services.
3. Choose a Name for Your Corporation
Technically, you can complete this step at any point during the process, but we’ve put it here—depending on how involved your board of directors or fellow incorporators are, they may want to be involved in the naming process.
Choosing a name can be one of the most fun—and challenging—parts of starting a PC. There are a few things to keep in mind when picking a name.
Meet California’s Legal Requirements
The trickiest part of naming a business is adhering to the state’s legal requirements for naming a business. Thankfully, California keeps its laws relatively simple:
- Your name cannot include words like “bank” or “trust” unless you have the legal right to do so
- Your name cannot mislead the public regarding your corporate purpose
- Your name cannot “be the same as, or resembles so closely as likely to deceive” anyone looking for another entity; basically, your name must be distinct
Pick a Descriptive Name That You Like
As long as you meet legal requirements, you have a lot of leeway to pick the perfect name for your professional corporation. In general, you should choose a name that’s memorable, describes what your business does, and is easy to say and remember. More importantly, you should pick a name that you and your team likes. You should feel good when you tell other people about your business, and your name is a big part of that.
You can also reserve your name with the Name Reservation Request form. This procedure costs $10, but it protects your name for 60 days. That buys you time for other business start-up steps. After all the work to create a name, you don’t want to lose it to another business.
4. File your Articles of Incorporation
Now that you have your board, agent, and name all lined up, you’re all set to file your Articles of Incorporation. This one-page document (plus a one-page contact information sheet) requires some foundational data about your business. This is the information you’ll need to provide:
- The name of your professional corporation
- Business address for the PC
- Name and address of your registered agent
- The number of shares you’ll be able to issue
- A statement of purpose for your corporation
- Name and signature of each incorporator
In addition to all this information, you’ll need to fill out the contact information on the attached cover sheet. It’s included in the file above, and it’s important to include.
California also accepts online filing for this document. Either way, you’ll pay a
$100 filing fee. Shortly after you file this, you’ll need to submit an initial Statement of Information, updating the state on your basic business information. It’s basically an early version of your biennial report.
5. Establish Your Corporate Record & Hold Your First Board Meeting
Now that your professional corporation officially exists, it’s time to establish your corporate record. Your board of directors will help you do this during your first board meeting.
The very first step you’ll take is drafting your bylaws. California doesn’t dictate a lot of legal requirements for the day-to-day operations of your business, so that’s where your bylaws will come in. Your bylaws are basically the operating manual for your business: how the board is appointed and maintained, shareholder policies and distributions, how officers are appointed, and much more. Every PC will have slightly different bylaws, but it’s essential to have them.
In addition to creating bylaws, at your first meeting, you’ll want to appoint someone to take minutes at each meeting. These minutes form another vital part of your corporate record, summarizing all important activities and decisions.
Other important tasks for your first meeting include appointing officers, drafting a conflict of interest policy, establishing committees (if applicable), and more. No two board meetings are exactly alike, but the first one is a crucial (and busy) one.
6. Obtain Business Licenses
As a professional corporation, you won’t be a stranger to the licenses required by your industry. But we’d be remiss not to remind you of them!
In California, over half of the shareholders for your business must be licensed in your PC’s trade, and every employee administering the trade must also be licensed. If any of your people need to renew or obtain a license, then CalGold is a great place to get started.
Some states also require a general business license on top of professional licenses, but California doesn’t. That said, we recommend double-checking with your city or county to see if there are any local licenses. A good starting point is to read our guide to CA business licenses.
7. Set up a Business Bank Account
If you don’t already have one, it’s time to get a business bank account. This enables you to ensure that your business funds and personal funds are always separate—an essential distinction to maintain your personal asset protection. Most banks will ask to see your bylaws (and maybe even your formation documents) as part of this process.
You can also look into getting a business credit card if you feel your company is ready for that step.
3 Steps to Maintain Your California Professional Corporation
Now that your business is up and running, it’s time to maintain it compliantly. There are three major areas you’ll want to tackle (or plan ahead for): taxes, insurance, and annual reporting.
1. Prepare for Taxes
Taxes are a fact of life for a corporation. Before you do anything else, we recommend obtaining an EIN, or an Employer Identification Number—even if you don’t have employees. That’s because an EIN acts like a social security number for a business. What’s more, it’s free (and quick) to obtain through the IRS.
After that, if you have employees, you’ll want to anticipate your contributions to unemployment insurance taxes and withholding taxes on the state and federal levels.
And of course, there are corporate income taxes to account for (21% for federal and 8.84% for corporate taxes). California also has an annual business franchise tax, which has a minimum fee of $800, and it’s separate from income taxes you’ve already paid. These two taxes make California’s taxes a big budget item. They’re also supplemented by the state’s miscellaneous industry taxes: cannabis and lumber are just a few of them. You can find a full explanation of business taxes with the California Department of Tax and Fee Administration.
Not every tax will apply to your California PC, and this is not an exhaustive list. Taxes are complicated and vary significantly depending on your business. We highly recommend consulting with a tax professional to ensure that you’ve covered all of your responsibilities.
To keep things organized and simple for all things tax, we recommend setting up an accounting software and working with a qualified professional.
2. Obtain Business Insurance
In addition to the malpractice insurance that each practitioner maintains, we highly recommend maintaining a general liability insurance policy for the business as a whole.
Lots of things can go wrong: fallen trees at your physical location, a fall on your property, malfunctioning equipment…it’s a long list. This general policy isn’t required by California law, but we recommend it so you’re protected no matter what. Accidents and natural disasters can be very expensive.
California does require one insurance policy, though: workers’ compensation. Any California business with one or more employees must maintain one of these policies. For more information on this requirement, please consult the California Department of Industrial Relations.
3. Anticipate Your Statement of Information
All businesses in California are required to submit a semi-annual report called the statement of information. This document is due every other year. You can file it online anytime within the six months leading up to your PC’s formation anniversary. The fee is $20.
This form doesn’t seem like much (it simply updates the state about basic information like your address and registered agent), but don’t overlook it. Delinquent filings can cause a lot of hassle. If you’d prefer to have a service handle this obligation for you, there are a handful of reliable report filing services.
Getting Help With Your California Professional Corporation
Feeling overwhelmed or just need an extra hand? Here are some of our favorite resources for California professional corporations.
Online Incorporation Services
If you would like to hire an affordable business incorporation service to create your professional corporation for you, services like LegalZoom, Rocket Lawyer and Swyft Filings can help you out. These service providers can handle most of the formation process, while still charging much lower rates than a business attorney’s fees.
There isn’t the same level of personalization that a lawyer can provide, but online incorporation services can still be a tremendous help. The only major issue with these service providers is the fact that they can’t provide any actual legal advice, so you need to know what you want ahead of time.
California Business Attorneys
There are some situations where hiring a business lawyer is a preferable route to using an online incorporation service. The professional corporation as a business structure can be highly complicated and specialized, and if you want to have the peace of mind that every single step was taken care of by a true expert, hiring a business attorney to form your California professional corporation is the way to go.
If you would like to pursue this route, there are some convenient services that can help you choose the right lawyer for your business. We like to use Avvo, which has extensive reviews and ratings for hundreds of California business lawyers, which can make it much easier to select an attorney who has your best interests in mind and also has the expertise to get the job done right.
Frequently Asked Questions
Can I speed up the process?
Processing speeds for California can take up to 15 days, with mail-order filings taking the longest. We recommend filing online to streamline the process, but if you want to speed things up, you can purchase expedited processing starting at an additional $350.
Can a California professional corporation elect S-corporation status?
In most states, there’s a big advantage to electing S-corporation status, which allows a corporation to be taxed more like a pass-through entity. Since individual income taxes are often lighter than corporate ones, this election can reduce your tax burden. To qualify for this status, a corporation must have 100 or fewer shareholders and only one class of stock.
California PCs can apply for this status with the IRS using Form 2553. However, the advantage can be limited to the federal level; California’s personal income tax rate can actually be higher than the corporate income tax (depending on your income levels). We recommend consulting a tax professional to see which approach is best for your PC.
Do I have to file my corporate record with the state?
California does not require you to file your corporate record with the Secretary of State; you’re simply required to keep one. Most professional corporations choose to keep a classic binder with these records, but you can pick the method that works best for you. Just ensure that your records are accessible somewhere onsite, and you’ll be able to add to it or consult it as needed.
What’s the difference between a PLLC and a PC? Can I form one in California?
A PLLC, or Professional Limited Liability Company, is an LLC formed by professionals in regulated industries. Some states offer it as an alternative to the PC because LLCs are a little easier to run (and have tax advantages over corporations). California, however, does not have a PLLC.
Are incorporation services like ZenBusiness and Northwest worth it?
That depends on what your needs are. If you want to keep your expenses as low as possible, then you might find yourself bewildered by the state fee and the service’s package fees put together. But if you don’t want to endure the hassle of dealing with paperwork, or you simply want a teammate to help you through the process, a service may be a big help to you.
Another important note is that neither ZenBusiness or Northwest file professional corporations. Yes, they are ideal if you’re looking to form a regular corporation or an LLC, but not professional corporations.
Should I hire a business attorney to help with my PC?
Ideally, yes (if you can afford it). But a business-lawyer relationship is a very important one, and you’ll want to find a lawyer that fits your budget, your personality, your industry, and so on. One of our favorite tools for California businesses is Avvo.com, where you can find lawyers in your city, based on the best customer reviews, and several other helpful filters. It’s a helpful tool.