A professional corporation is a type of corporation that is run by a group of professionals, like doctors, engineers, accountants, or attorneys. There are many benefits to forming professional corporations, such as having the opportunity to qualify for special tax treatments, applying for liability protections, and many more. Most importantly, forming a professional corporation is a requirement for professional services.

Forming a professional corporation in California? Here are the steps that you need to go through:

1. Complete and File the Articles of Incorporation.

It all starts with the filing of well-prepared Articles of Incorporation with the California Secretary of State, along with its applicable fees. A thoroughly completed Articles of Incorporation form includes the following:

1. The name of the professional corporation.
2. The professional corporation’s clear statement of purpose.
3. The total number of shares that the company is able to issue.
4. The exact street and mailing addresses of the company.
5. If a person is listed as the agent for the service of process, that agent’s complete name and street address must be included.
6. It is imperative that the documents must include a statement that specifies that the corporation being formed is a professional corporation under California law.

You can find the specific form for professional corporations on the official website of the California Secretary of State. Simply follow the instructions that are provided with the form.

How to Choose a Name for Your Professional Corporation

When forming a professional corporation, you definitely cannot choose a name that is already being used by an existing corporation in California. When you’re deciding on a name for your professional corporation, verify its availability by checking it here: https://businesssearch.sos.ca.gov/. You can also search through the US Patent and Trademark Office if you want to ensure that the name you pick will not cause you any trademark issues.

It is also important to make sure that the name you choose for your professional corporation does not violate applicable corporate laws or any laws that relate to your company’s specific profession or industry. A professional corporation’s name must strictly comply with the rules governing the profession it belongs to.

Once you’ve selected a name for the professional corporation you are forming in California, you can reserve that name by filing a Name Reservation Request Form and pay the corresponding fee of $10.00. A name can be reserved for a period of 60 days.

The Purpose of a Registered Agent for Service of Process

All professional corporations in California are required by state law to designate one agent for the service of process. In cases wherein the professional corporation is sued, the agent is responsible for accepting receipt of the lawsuit. An agent may be an individual or entity. Individual agents must reside in California, while entities or corporate agents must file with the California Secretary of State’s office a Certificate under California Corporations Code section 1505. This certificate can be downloaded here: http://www.sos.ca.gov/business/corp/pdf/amendments/corp-1505.pdf.

Keep in mind that a professional corporation is not allowed to serve as its own agent for service of process in California. But, the company can choose an agent that is affiliated with the professional corporation.

For a list of corporate entities that serve as registered agents, you can go here: http://www.sos.ca.gov/business/private-service-companies.htm/.

2. The Professional Corporation is Required to Register with the Appropriate Government Agency

All professional corporations, according to California Corporation Code § 13401(b), are required to register with the state agency that manages the profession. Moreover, a valid certificate of registration issued by that government agency must be maintained throughout the existence of the corporation.

 

3. Construct the Corporation’s Bylaws

A professional corporation operates according to a set of rules and guidelines, which are called bylaws. These bylaws do not have to be filed with the California Secretary of State when forming the corporation, but nevertheless, a company needs to have them in order to function efficiently.

A corporation’s bylaws are, in essence, a contract between the stockholders and the company. Well-structured bylaws address issues, such as the size of the board of directors, the function and responsibility of each director, the process and length of their election, the existence of corporate offices, the method by which stockholder meetings are held, and how often they are set, etc. Properly drawn bylaws do not only establish operating guidelines but also help the corporation avoid disputes in the future.

All important documents of your professional corporation, such as minutes of meetings and stock certificate stubs, must be kept in a single organized binder. Keep this binder in a secure location at your place of business.

4. All Professional Corporations are Required to Appoint their Board of Directors

When forming a professional corporation in California, the incorporator must autonomously appoint the initial directors. The basic requirement you need in selecting your officers and directors is they must be licensed to conduct the professional activities that your corporation will be engaged in. The incorporator should indicate in the Incorporator’s Statement form the names and addresses of the initial directors. This form does not need to be filed with the California Secretary of State. However, the names of the appointed directors can be included in the Articles of Incorporation.

Generally, corporations in California are required to have a minimum of three directors on their board, unless the company has less than three stockholders. If the professional corporation has less than three shareholders, the number of directors assigned must not be less than the number of stockholders.

According to the California Corporations Code section 13404, if the corporation has only one shareholder, that shareholder can stand as the company’s only director and can serve as the president and treasurer as well. In cases like this, the other officers may not need to be licensed professionals. On the other hand, if a professional corporation has only two stockholders, those two stockholders may be appointed as the directors. The two of them can serve as president, vice president, secretary, and treasurer of the company.

5. A Board of Directors Meeting Must be Held

Once you’ve appointed the board of directors, set your first meeting with them. When forming a professional corporation in California, it is at this initial meeting that the directors can implement bylaws, appoint officers, plan and decide on a corporate seal, adopt a stock certificate form and authorize the issuance of stock, institute the corporation’s fiscal year, etc. If the company chooses to be an S corporation, it is during this meeting that the board should approve the election of S corporation status.

Keep in mind to have the board of directors’ meeting properly recorded in corporate minutes. All corporate minutes documents must be kept in a secure location for future references.

6. Issue Corporate Shares

When a professional corporation issues shares, a stock certificate is provided to establish the ownership of those shares. Shares are usually bought in exchange for a contribution, such as cash, property, or services. These contributions are typically used by the company as its initial operating capital. It is the board of directors that decides the price of each stock. Ideally, shares should be issued in connection with a stock purchase agreement. Once shares have been issued, a stockholders meeting should be held.

Individuals who are married and plan to use community assets to buy shares must have a spousal consent form signed.

Compliance with Securities Law

Issuing stock is not as easy it seems. It can be very complicated considering that each issuance implicates federal and state securities laws. Professional corporations in California are required to file a Limited Offering Exemption Notice (LEON). This notice, assuming you qualify, will exempt you from certain California securities laws under the California Corporations Code section 25102(f). As regards federal law, if a corporation issues stocks to ten people or less who are actively participating in operating the company, the business typically qualifies for exemptions to securities registration requirements. The best way to know if your corporation qualifies or not is to seek the advice of an expert.

In situations where founders’ stocks will confer in the long run, founders may choose to make a Section 83(b) filing with the IRS.

For more information about issuing shares, check California Corporations Code section 416. You might also want to visit the California Department of Corporations website to learn more about the State’s securities laws. Go to http://www.dbo.ca.gov/.

7. Professional Corporations are Required to File a Statement of Information

A company’s Statement of Information is an integral part of forming a corporation in California. After you have filed the Articles of Incorporation with the California Secretary of State, make sure to file a Statement of Information within 90 days and pay the corresponding filing fees as well. The Statement of Information form can be downloaded through https://www.sos.ca.gov/business-programs/. Filing will then be done yearly during the filing period, which is defined as the period covering five months prior to the filing of the Articles of Incorporation up to the month they were officially filed.

According to the California Corporations Code § 1501, all professional corporations must submit a yearly report to their stockholders within 120 days of the end of their fiscal year. But, if a corporation has fewer than a hundred stockholders – and is waived by their bylaws – this requirement is not necessary.

8. Staunchly Adhere to Paying California Taxes and Fees

All professional corporations and foreign corporations in California must pay taxes to the California Franchise Tax Board.

The annual state tax for corporations in California could be as great as 8.84% of the company’s net income of $800. The minimum annual tax, therefore, that professional corporations need to pay is $800. This tax must be paid during the first quarter of each accounting period. This amount needs to be paid even if the corporation becomes inactive, operates at a loss, or does not perform any business within California.

What state taxes does a California professional corporation have to pay? As of the writing of this article, the annual state tax in California for corporations is greater than 8.84% of the corporation’s net income or $800. In other words, the annual minimum tax that corporations must pay is $800. This tax must be paid during the first quarter of each accounting period, even if the

Exemptions to the annual minimum tax during the first year may be applied to certain professional corporations if they qualify. The tax they need to pay is based on the income of the company during its initial year of operation. For more information about these exemptions, visit https://www.taxes.ca.gov/.

A Corporation Franchise or Income Tax Return (California Form 100) must be filed by professional corporations on or before the 15th day of the third month after the close of its taxable year. S corporations should file the S Corporation Franchise or Income Tax Return (California Form 100S). You can download these forms via https://www.ftb.ca.gov/forms/.

Professional corporations are also required to comply with California’s payroll tax if they pay more than $100 of wages. Even if the company only has a president and there are no other employees, if that office is being paid more than $100, then the corporation is subject to pay California’s payroll tax. For more information about this, go to the California Employment Development Department (EDD) website: http://www.edd.ca.gov/.

In addition to all of the above, you may also have to pay fees to the state entity that governs the profession that your corporation belongs to.

9. Comply with All Remaining Federal Obligations

Professional corporations in California must comply with federal laws in addition to state laws. Corporations, for example, must obtain a federal Employer Identification Number (EIN). Learn about how to obtain an EIN here: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html.

All corporations must pay federal taxes. But, S corporations do not have to income tax. To know your federal tax obligations, it is best to seek the counsel of an expert tax professional.

How to be an S Corporation?

S corporations are corporations that have chosen to be taxed as a pass-through entity. This means that the corporation does not have to comply with the same taxes that C corporations need to.

For a C corporation to become an S corporation, you would have to submit Form 2553, Election by a Small Business Corporation. This form can be found here: https://www.irs.gov/forms-pubs/about-form-2553. There are many other requirements to forming S corporations. To find out more, seek the advice of an expert.

10. All Prudent Professional Corporations Must Obtain the Necessary Local Business License and Comply with Local Laws

Each locality has a unique set of rules that apply to professional corporations within their jurisdictions. Businesses in Los Angeles, for example, must obtain a business license from the city. Besides the local business permits and licenses, a locality may also require additional fees and follow add-on rules.

Since each locality has different requirements, it is best to consult with an expert before starting a professional corporation in any city. Incorporation Attorney is not only a trusted specialist in forming corporations but is also an expert on all the local laws and licenses in Orange County and California.

What are Foreign Corporations?

A foreign corporation is a corporation that is registered to do business in a state or city other than where it was originally incorporated. Professional corporations formed outside California but intend to do business in the state must register with the California Secretary of State. A Statement and Designation by Foreign Professional Corporation form must be completed and filed with the associated fees.

Foreign professional corporations are required to file a Certificate of Good Standing from the state where they were formed. The certificate must not be older than six months. Moreover, if the professional corporation’s name is already taken in California, the company must provide an assumed name.

All foreign corporations that intend to do business in California must provide the exact address of the corporation’s principal business office in the state if it has one.

Why Do You Need a Corporate Attorney to Assist You?

Besides these ten steps, there are many more subtleties in between this complex process of forming a corporation. Most of the time, companies get into legal problems or encounter difficult issues later on in the business because of errors and details overlooked during the formation stage. The best way to prevent these avoidable difficulties is to seek the help of an expert when forming a professional corporation in California.

Incorporation Attorney has over a decade of experience in helping businesses incorporate in Orange County and California. We can help you form a professional corporation as well as assist you in complying with the local licenses and other requirements. Call us today! Click here!