Starting a Professional Corporation in California [The Right Way]

Making the decision to start your own healthcare practice is very exciting, but it can also be nerve-racking and a journey full of questions. What type of entity should you form? What documentation do you need to get started? How do you know if you’re in compliance, or what steps to take next?

We’ll review the dos and don’ts of setting up your California professional corporation to get your practice started — the right way.

1. Understand the Benefits of a Professional Corporation

First, how do you know if a professional corporation is a right entity for your practice? In California, a doctor can only practice as a professional corporation if they want to practice under a corporate entity. A professional corporation is a type of corporation that is run by a group of professionals, like doctors, dentists, or optometrists. There are many benefits to forming a professional corporation including:

• Special tax treatments
• Liability protection
• Retain profits to improve business
• Offer higher contribution limits on retirement plans

2. Choose a Name

Finding the right name for your corporation can be a fun process, but California has strict naming requirements for professional corporations that you must adhere to. The name you choose must be available and also be distinctive enough from other entity names already in existence.

Plus, the name of a professional corporation (depending on the specific profession you’re licensed in) may be restricted by your professional board. For instance, dentists forming a California professional corporation will be restricted to the last name of one or more of the shareholders. The name must also contain specific verbiage, such as “dental corporation” and abbreviations denoting the corporate existence.

Mistakes to Avoid

For professional corporations, the name must be very specific and needs to include certain elements for the Secretary of State’s approval. Also, make sure no other corporation already exists using your chosen name.

3. Select a Registered Agent

This is fairly straightforward. California law states that professional corporations are required to designate an agent for service of process in that state. The Secretary of State outlines that:

“An agent for service of process is an individual who resides in California, or a corporation, designated to accept service of process (court papers) if the business entity is sued. If a corporation is designated as agent for service of process, that corporation must have previously filed a certificate pursuant to California Corporations Code section 1505.”

Mistakes to Avoid

When choosing a registered agent, you can choose yourself. However, you must use a California address where you can receive important documents in the mail (and not a P.O. Box). If you decide to use another person, be sure you trust and feel comfortable with them handling important business mail.

(Pro Tip: Pacific Health Law Group is able to serve as a registered agent for any of our clients interested in this service!)

4. Draft your Articles of Incorporation

The Articles of Incorporation is the document which forms your new corporation. It should include the following:

• Name of the Professional Corporation
• Purpose of the Professional Corporation
• The number of shares that the Professional Corporation is able to issue
• The street address and mailing address of the Professional Corporation
• Name and address of the Professional Corporation’s Registered Agent

Mistakes to Avoid

If you don’t have the correct wording for your specific profession displayed in the Articles of Incorporation, the Secretary of State will be quick to reject the Articles. If rejected, you’ll need to redraft the Articles of Incorporation to correct any mistakes and pay to refile. The process can be lengthy at times, as it takes about two weeks after filing for the Secretary of State to return the Articles with a certification or rejection letter.

5. File Articles of Incorporation with the Secretary of State

You’ll find several ways to file your Articles on the Secretary of State website. Be sure to file using the appropriate Professional Corporation form as opposed to mistakenly filing for a General Stock Corporation.

Mistakes to Avoid

Review the wording, language, signature, and form details very carefully. If any one of these elements is missing, you may, once again, be subject to a rejection from the Secretary of State’s office. Keep the process from becoming expensive or time-consuming by consulting with an experienced healthcare attorney for guidance during this process.

6. Prepare Corporate Documents & Keep Corporate Records

There are certain documents that a corporation must draft and keep on hand for use or reference throughout its operation. Corporate bylaws are one of these crucial documents which set forth the rules of operation for the corporation. They generally address the size and function of the board of directors, the existence of corporate offices, and how or when shareholder and director meetings are held.

Bylaws and other documents, like corporate minutes, must be kept in an official permanent record that is accessible whenever necessary. This can be done digitally, with a physical professional corporate binder, or both.

Mistakes to Avoid

Preparing corporate documents, like bylaws and corporate minutes, are documented tools to help you set rules and expectations for your corporation right from the start. Without these guidelines in place, the board of directors and corporate officers have no reference point in the event of a disagreement.

7. Handle Tax and State Responsibilities

There are quite a few steps that may seem tedious but are required under California law and/or IRS before you’re fully compliant and ready to begin operating. These obligations include:

• Filing a Statement of Information
• Obtaining a Federal Employer Identification Number (FEIN)
• Deciding on C-Corp or S-Corp status and filing a necessary form with the IRS

Mistakes to Avoid

Neglecting to file any one of the documents listed above will have serious repercussions for your professional corporation:

A Statement of Information must be filed within 90 days of your Articles of Incorporation’s certification; otherwise, the Franchise Tax Board will assess a penalty on the business and you could also face suspension or forfeiture of your corporation.

If you fail to obtain an EIN, you will not be able to open business bank accounts, properly pay employees, file employment tax returns, or apply for any applicable business licenses.

Failing to file your S-Corp election within the first 90 days can cause you to miss out on certain tax benefits. Thankfully, there are ways to file even after the deadline has passed and the IRS can be fairly lenient if you are able to give reasonable cause for a late filing.

8. Issue Corporate Shares

A stock certificate is a document that signifies the ownership of shares. The shares may only be issued to a person who is licensed to provide the same professional services in the jurisdiction in which the person practices.

Mistakes to Avoid

When issuing shares for your professional corporation, compare the number of shares you issue to any one person with the number of shares the corporation is designated to issue (as outlined in your Articles of Incorporation).

Additionally, only another professional able to render services in your professional designation is able to be issued shares. For example, if you’re a dentist operating a professional dental corporation, you can’t issue shares of your corporation to a family member or employee who isn’t also a practicing dentist or a dental allied professional.

Professional Corporations in California are also required to file a Limited Offering Exemption Notice (LOEN), which may exempt you from certain California securities laws. This is a filing that you need to make, but the information requested can be very complicated as each issuance involves federal and state securities laws.

Next Steps

Yes, there are many requirements to satisfy when setting up a professional corporation in California. Additional steps not listed above can vary by city and county including obtaining business licenses and paying taxes to the California Franchise Tax Board.

As a healthcare professional, you likely have certain objectives in mind when starting a practice, such as providing great treatment to your patients and securing your financial future in the process. Having an experienced healthcare attorney can mitigate the time, anxiety, and risk involved in getting your practice started so that you can focus on your primary goals and objectives. Contact Pacific Health Law for more information on how we can help with your practice formation by calling (310) 776-5384 or booking a meeting with us.