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Tag: professional corporation

Business Formation: Corporations

Starting a business in California comes with a major decision: choosing the right type of corporation. Entrepreneurs often ask, “What are my options for business formation?” and “Which structure best protects my interests?” Each type of corporation in California comes with advantages, disadvantages, and legal requirements. Lynnette Ariathurai is a California business formation lawyer with extensive experience working with corporations. In this article, you will find an overview of the corporate forms in California.

An Overview of the Difference Types of Corporations in California

C Corporation

If you hear the term “corporation” used broadly, the speaker is often referring to a C corporation. It is the standard corporate business structure in California. Business owners choose this type when they want strong liability protection and the ability to raise capital from investors. A C corporation exists as a separate legal entity. Why does that matter? It means that shareholders are not personally responsible for a company’s debts or other liabilities. Further, the structure allows for unlimited shareholders. That makes the C corporation form attractive for businesses planning to grow, issue stock, or to someday go public. On the other hand, C corporations do face double taxation. They are taxed first at the corporate level and then at the shareholder level when profits are distributed as dividends. Further, overall compliance is more complex than other entities, requiring annual meetings, minutes, and formal record-keeping. If you have any questions about creating a C corporation, our California business formation attorney can help.

S Corporation

The S corporation is another corporate form. It offers many of the same liability protections as a C corporation but provides a different tax structure. Business owners in California often choose this type to avoid double taxation. An S corporation allows profits and certain losses to “pass through” directly to shareholders, who report them on their personal tax returns. There are some cases in which setup can lower overall tax burdens. That is especially true for some small and medium-sized businesses. However, unlike a C corporation, an S corporation comes with strict eligibility requirements. Shareholders must be U.S. citizens or legal residents, and the number of shareholders cannot exceed 100. Further, only one class of stock may be issued. An S corporation still requires formalities such as board meetings, record-keeping, and annual reporting. It can be more expensive to maintain than an LLC. If you have questions about creating an S corporation, our California business formation lawyer can help.

Professional Corporation

A professional corporation in California is a specialized entity designed for licensed professionals such as doctors, lawyers, accountants, architects, and other regulated fields. The state requires many licensed service providers to form professional corporations instead of LLCs or standard corporations. By forming a professional corporation, owners protect themselves from liability for business debts and obligations, while maintaining accountability for their own professional conduct. A professional corporation has similar formalities to a C or S corporation, but the owners (shareholders) and operators (officers and directors), as well as the transferability of the shares are limited to qualified people.

Contact Our California Business Formation Lawyer for Corporations Today

Lynnette Ariathurai is a top business formation attorney. If you have any questions about corporations, we can help. Contact us today for a fully confidential, no obligation initial consultation. With an office in Fremont, we provide corporation formation services throughout the Bay Area.

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LLPs vs Professional Corporations

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All businesses need the proper legal structure to thrive. For certain professionals that operate a business with more than one owner—attorneys, accountants, and architects—there are two options available: A limited liability partnership (LLP) or a professional corporation (PC). There are advantages and disadvantages to each of these entities. In this article, our Fremont business formation lawyer explains the key things to know about LLPs and PCs in California. 

An Overview of LLPs and Professional Corporations

As a starting point, it is useful to have a basic understanding of the two types of professional business structures. Here is a brief overview of these business entities:

  • Professional corporation (PC): Governed by California’s Moscone-Knox Professional Corporation Act, a PC is a specialized type of business entity that is registered for certain businesses that offer professional services.
  • Limited liability partnership (LLP): As explained by the California Franchise Tax Board, an LLP is a type of partnership business that allows certain eligible professionals to access many of the benefits—liability protection, pass through taxation, etc.—offered by an LLC. 

A Limited Number of Professionals Can Choose Between the Two Options

Not all licensed professionals in California have the option to choose between an LLP and a PC. In fact, you are only allowed to set up your business as an LLP if you are one of the following professions:

  • Licensed attorneys
  • Accountants
  • Architects

California law holds that other professionals are not eligible to operate their business as an LLP. In other words, medical doctors, physicians’ assistants, chiropractors, clinical social workers, dentists, nurses, optometrists, veterinarians, physical therapists, pharmacists, marriage, family and child counselors, and court reporters must operate as a PC.

LLPs Offer Additional Flexibility in Certain Circumstances

As LLPs share many common characteristics with LLCs, they offer several potential benefits to eligible professionals. Most notably, they offer business owners additional flexibility to customize their operations. As a partner in an LLP, you have access to enhanced protection from liability for professional malpractice claims filed against one of your partners, but the license holder for the LLP remains personally liable for all malpractice of the business. This differs from a general partnership where all partners are liable for the malpractice of one partner. Therefore, adequate malpractice insurance coverage is still recommended, as is errors and omissions insurance.

Setting up a well-structured LLP is complex. It is crucial that you have a properly crafted partnership agreement that clearly lays out ownership/operational rights and responsibilities. If you are a lawyer, accountant, or architect preparing to form an LLP in the Bay Area, an experienced California partnership agreement attorney can help. 

Know the Tax Differences: LLP vs. PC

In California, a PC is generally taxed as a C-corporation unless an S-corporation election has been made. LLPs in California are usually taxed as pass-through entities. A 2021 reform passed by state lawmakers (California Assembly Bill 150) created a new pass-through entity elective tax option. If you have any questions about what type of entity offers a more advantageous tax structure for your business, it is best to consult with a licensed certified public accountant (CPA).

Get Help from a Business Formation Attorney in the Bay Area

Lynnette Ariathurai is a California attorney with experience helping entrepreneurs start business. If you have any questions about LLPs vs professional corporations, we can help. Contact us today for a confidential initial consultation. With an office in Fremont, we serve communities throughout the Bay Area.

business attorney, business entities, business structures, limited liability partnership, LLP, PC, professional corporation