Most California Professionals
Can’t Form LLCs
How to form an LLC in California
This Quick Start Guide is a brief overview of how to form an LLC in California.
California LLC Costs:
California state fee: $70
Statement of information: $20 (every two years)
Annual franchise tax: $800 (every year)
(check out Northwest vs LegalZoom)
In most states, licensed professionals (architects, accountants, doctors, lawyers, therapists, etc.) offering professional services cannot form a “regular” LLC, but instead must form a Professional LLC (PLLC).
California is unique in that not only are professionals prohibited from forming an LLC (with minor exceptions), but the state doesn’t even have a PLLC entity type.
The reason for this is that professionals are held to a higher standard and have a responsibility to uphold the public’s safety. Therefore, the California Legislature doesn’t allow professionals to limit their personal liability for their mistakes.
This begs the question, “Which California professionals can and cannot form an LLC?”
Accountants, architects, attorneys, chiropractors, clinical social workers, court reporters (shorthand reporters), dentists, dental hygienists, doctors, marriages and family counselors, nurses, optometrists, pharmacists, physical therapists, psychologists, and veterinarians cannot form an LLC.
But what about the 150+ additional licensed professionals in California?
We wish there was a simple list that we could provide you. Unfortunately, things get a little complicated. We’ll explain the details below, but our recommendation is to speak with an attorney to determine your professional requirements and restrictions in California.
The evolution of California laws for licensed professionals
1. As per Section 17701.04(e) of the California Corporations Code:
“Nothing in this title shall be construed to permit a domestic or foreign limited liability company to render professional services, as defined in subdivision (a) of Section 13401 and in Section 13401.3, in this state.”
Simplified: California LLCs can’t provide professional services.
2. As per Sections 13401(a) and 13401.3 of the California Corporations Code:
“‘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.”
“As used in this part, ‘professional services’ also means any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Yacht and Ship Brokers Act.”
3. The above definition created confusion. So in 2004, the California Secretary of State requested an opinion letter from the California Attorney General. The Attorney General opinion letter is worth a read (takes 5-10 minutes), however, the Attorney General’s summary was as follows:
“… a business that provides services requiring a license, certification, or registration pursuant to the Business and Professions Code may conduct its activities as an LLC if the services rendered only require a nonprofessional, occupational license.”
Simplified: Nonprofessional, occupational licensees can form an LLC.
Note: Although this opinion letter was issued in 2004, this doesn’t mean this is “outdated”. In fact, the California legal community references this letter and it holds weight in court.
4. So naturally, this begs the question, “What is a nonprofessional, occupational license?”
Within the AG’s opinion letter, while looking at multiple sections of California law, in addition to a few California court cases, the consensus of what makes someone a “professional” versus a “non-professional” is by looking at how extensive and “rigorous” their education, training, and testing was.
One example used is that of a Food Processor’s License. This is considered a nonprofessional, occupational license since there is no extensive education needed and it can be obtained without certain skill requirements. As an alternative example, think about the education, training, and testing that would be required for a nurse.
5. In later years, the LLC Act was amended a few times. As a result, section 17701.04(b) of the California Corporation Code reads:
“…A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act, if the applicable provisions of the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act authorize a limited liability company or foreign limited liability company to hold that license, certificate, or registration.”
Simplified: A California licensed professional can form an LLC if the bodies of relevant law state an LLC can hold that license.
6. In summary, not only do you need to evaluate your education, training, and testing (to see if you’re a professional versus a non-professional), but you also need to review the applicable sections of California law to see if your activities are expressly allowed to operate within an LLC. This means, along with the recommended assistance of an attorney, you’ll need to review the relevant California laws:
- Corporations Code
- Professional Corporation Act
- Business and Professions Code
- Code of Regulations
- Chiropractic Act
- Osteopathic Act
- Yacht and Ship Brokers Act
Contractors can form California LLCs
As of January 1st, 2012, contractors and construction companies in California can form an LLC.
This change came about from Senate Bill 392, which amended multiple sections of the LLC Act and the Business and Professions Code.
The new laws specifically allow California LLCs to become licensed contractors with the Contractors’ State License Board.
California professionals can form an LLC for other reasons
Just because you’re a licensed professional doesn’t mean you can’t form an LLC for other reasons. You just can’t form an LLC to offer professional services.
For example, if you want to form an LLC to invest in real estate or to open a coffee shop, you can certainly do so.
Registered Limited Liability Partnership (RLLP) and Professional Corporation (PC)
Besides an LLC, there are two primary alternative entities for professionals.
- Registered Limited Liability Partnership (RLLP)
- Professional Corporation (PC)
A Registered Limited Liability Partnership (RLLP) is, at times, loosely referred to as a “Professional LLP”. “Registered” simply means that the entity is registered with the California Secretary of State.
A California Registered Limited Liability Partnership used to be available for 3 types of professionals (architects, attorneys and public accountants), however, since 2019, architects have been removed (as per Section 16101 of the California Corporations Code).
Only attorneys and public accountants can form a California RLLP.
A California RLLP is formed by filing Form LLP-1 with the Secretary of State.
For other professionals, the most commonly used alternative is the Professional Corporation. A California Professional Corporation is formed by filing Form ARTS-PC.
While a Professional Corporation is similar to a regular Corporation, it differs in a number of ways:
- Only licensed professionals can form a Professional Corporation
- It must be formed for the sole purpose of rendering professional services
- The director, president, vice president, treasurer and secretary must be licensed professionals
- The shareholders must be licensed professionals
- The shares of stock can only be transferred to other licensed professionals
- A shareholder cannot delegate his/her powers to a non-licensed person
- While a Professional Corporation may employ non-licensed workers, they are not allowed to provide professional services in the business
- The Professional Corporation has to follow the rules of the licensing body or government agency that regulates it
Fees and registration with your board or governing body
If you form a Professional Corporation with the California Secretary of State, you’ll then need to have your Professional Corporation apply for a license with the board or governing body that regulates your profession.
A license from the board or governing body is needed before a corporation can practice a profession. Processing time, filing fees and documentary requirements may vary, so be sure to call your profession’s board/governing body for details.
Professionals are not shielded from malpractice claims simply by forming a business entity. Therefore, it’s important to make sure you are adequately covered.
In addition, make sure to speak with your attorney about any insurance requirements that have been set by applicable laws and/or your regulatory board.
Taxation of a Professional Corporation
If you decide to form a Professional Corporation is needed for your business, know that you can leave it taxed in its default status (taxed as a C-Corporation) or you can elect to have your Professional Corporation taxed as an S-Corporation. This may save you money on self-employment taxes once your business’ net income is substantial.
While we don’t have an article on Professional Corporations being taxed as S-Corporations, we do have an article on LLCs being taxed as S-Corporations (while not exactly the same, the principles still apply). After checking out that article, we also recommend speaking with an accountant to see if S-Corporation taxation is a fit for your California Professional Corporation.
Summary & recommendation
The California laws governing licensed professionals is complex and challenging to navigate. Furthermore, there’s over 150 different types of professional and nonprofessional licenses in California.
We recommend speaking with an attorney to determine if you can or cannot operate your professional services business with a California LLC.