The professional corporation is an entity classification used in many states for professional services. Classic examples include medical, legal and accounting practices. Professional corporations usually come with serious restrictions and the individuals who can be shareholders is often one of them.
Any article on professional corporations necessarily involves a lot of hedging with verbiage such as -usually-, -generally- and the like being used. The reason for this is these entities are controlled by state law and each state has its own requirements. For the purpose of this article, we are generally looking at California law.
By its very definition, a professional corporation is limited to the providing of professional services to clients. Given this, most people assume a certain level of skill when they attend the entity. For instance, a person going to Los Angeles Cardiology Medical Corporation generally assume they are being treated by licensed physicians who specialize in cardiology. In reflection of this, many states have instituted a public policy of restricting shareholders of professional corporations.
The classic restriction is to limit the class of shareholders to professionals in the particular field. For instance, the shareholders of a medical corporation could only be licensed physicians in the state. A non-licensed professional such as a management person could not be a shareholder.
This limitation seems fairly straightforward and simple, but it leads to odd situations. In California, for instance, what happens when a physician that owns a professional corporation passes away? Generally, the practice would pass to his spouse and heirs, but what if they are not licensed doctors? They cannot have an ownership position in the entity, so careful planning has to be undertaken to avoid serious problems. Selling the corporation will be difficult because there is no leverage in doing so and no guarantee the patients will stick with a new doctor that buys it. In the end, many entities in this situation are simply closed down. Fortunately, there are ways to plan for this financially by having the entity purchase life insurance that pays out on the passing of the sole shareholder.
The restrictions and requirements surrounding a professional corporation are extremely dependent upon the state one is in. What is required in California may be entirely different than what must be done in Oregon, New York or some other state. If you are considering forming one, it is highly advisable to speak with a business lawyer in your area who has experience dealing with them.
Richard A. Chapo forms medical and legal professional corporations for clients at SanDiegoBusinessLawFirm.com.