California is a notoriously unfriendly state for business. This reputation extends to business entities for professionals practicing in the state.
California is a state with a very unique view towards business. Most business entities, for instance, are required to pay an $ 800 fee for the "privilege of doing business" in the state. This fee is in addition to any other fees charged in relation to the formation or maintenance of the business.
When it comes to professionals in the state, the state laws are fairly strict about what can be done from a business entity standpoint. The first question, however, is who qualifies as a professional. Only in California could this be such a borrowed question. A medical professional such as a surgeon is strictly within the scope of the restrictive laws, but engineers are not. A speech-language specialist is, but an architect may not be. Limited liability partnerships may also be a possibility for certain professionals. As you can see, no professional should assume he or she is or is not covered without a close review of the laws.
Licensed professionals in California are often very surprised to find that they have limited choices when it comes to forming a business entity to protect them. For instance, professionals are prohibited from forming a limited liability company for their practice. Instead, most are limited to forming a professional corporation.
A professional corporation in California is a unique beast. It provides the professional with the traditional protections found in a normal run of the mill corporation with one exception. The entity does not provide personal liability protection for claims arising from the rendering of the professional service. For instance, there is no protection if a surgeon is sued from malpractice in relation to a surgery. There is protection, however, if that same surgeon is sued in an office lease dispute.
Given the lack of personal liability protection, many wonder if it makes sense to form a corporate entity. The truth is there is no correct answer. The decision involves issues of tax analysis relating advantages that can be gained as well as the potential liability risks also faced. The decision is not one that should be made lightly without legal and tax counsel.