California Professional Corporations: Why Many Licensed Professionals Cannot Use an LLC and Form a PC Instead

If you hold a state license to practice a profession in California, the LLC you planned may not be an option. California law keeps many licensed professional services out of the LLC structure and requires a professional corporation instead. This guide explains who has to use one, why the rule exists, how the filing works, how the entity is taxed, and the ownership limits that often surprise people. Use it to frame your questions. It does not replace the answer from your licensing board or your advisors.

Informational notice: This article is general information, not legal or tax advice. Whether the rule applies to you depends on your profession's licensing act and your specific facts. Consult a qualified business attorney and a CPA before you form or convert any entity.

The rule: an LLC cannot render professional services

Under Corporations Code section 17701.04(e), a California limited liability company may not render "professional services." Corporations Code section 13401(a) defines that term as services that can be lawfully rendered only under a license, certification or registration issued under the Business and Professions Code, the Chiropractic Act or the Osteopathic Act.

The rule is not a blanket ban on licensed owners. Under Corporations Code section 17701.04(b), an LLC may hold a license when the licensing law for that profession allows an LLC to hold it. The answer therefore depends on the licensing act that governs your profession. Do not assume that holding a license lets you use an LLC, and do not assume a colleague's LLC settles the question for you.

Why the rule exists

The rule traces back to the corporate practice of medicine. Business and Professions Code section 2400 states that corporations "shall have no professional rights, privileges, or powers" for the practice of medicine. The Moscone-Knox Professional Corporation Act gives licensed professionals a corporate form that keeps the practice in the hands of licensees.

Physicians should confirm the rule before forming any entity. Check with the Medical Board of California at https://www.mbc.ca.gov and a health care attorney. Ownership and management arrangements that go beyond the basic structure are specialized, and this guide does not address them. Ask a health care attorney about those questions.

Which professions the rule depends on

This guide does not list which professions can or cannot use an LLC, because the answer comes from each licensing act and can change. To find your answer:

1. Identify the licensing act that governs your profession in the Business and Professions Code, the Chiropractic Act or the Osteopathic Act.
2. Check whether that act allows an LLC to hold the license.
3. Ask your licensing board in writing whether it accepts an LLC, whether it requires a professional corporation, and whether it requires a certificate of registration. The Department of Consumer Affairs lists its boards at https://www.dca.ca.gov.

If you practice law, check with the State Bar of California at https://www.calbar.ca.gov before you form any entity, because the rule depends on the licensing act that governs your practice.

California professional corporation vs LLC: the key differences

The table below compares the two entity types on the points that matter most when you choose. Confirm current amounts on the Secretary of State and Franchise Tax Board websites before you file.

Feature	LLC	Professional corporation
Can render professional services	Not in general, and only where the licensing act allows an LLC to hold the license	Yes, for licensed professionals under the Moscone-Knox Act
Formation document and fee	Articles of Organization (Form LLC-1), $70	Articles of Incorporation (Form ARTS-PC), $100
Required periodic filing	Statement of Information, $20 every two years	Statement of Information, $25 every year
Annual tax	$800 minimum annual franchise tax, plus an LLC fee once California-source total income reaches $250,000	No $800 in the first taxable year, then the $800 minimum each year; corporate income tax applies to net income

Who must form a professional corporation

Licensed professionals who may not use an LLC form a professional corporation under the Moscone-Knox Professional Corporation Act, which begins at Corporations Code section 13400. Under section 13401(b), a professional corporation is engaged in a single profession, with limited exceptions set out in that section. Read those exceptions before you assume a second service line fits inside the same entity.

Ownership limits

Only licensed persons of the same profession may normally hold shares in a professional corporation. Medical corporations have a specific exception under Corporations Code section 13401.5. Certain other licensees may own shares in a medical corporation, but two limits apply:

• Their combined shares cannot exceed 49%.
• The number of those owners cannot exceed the number of persons licensed by the regulating agency.

Do not read this exception as permission for outside investors. Any ownership arrangement beyond these limits needs review by a health care attorney before you commit.

How to form a professional corporation

The formation document is Articles of Incorporation on Form ARTS-PC, filed with the California Secretary of State through bizfile Online at https://bizfileonline.sos.ca.gov/. The filing fee is $100. Online filings are normally processed within 5 days or less. Filings submitted as PDF take 10 or more days, so plan your timeline around the method you choose.

Keep these requirements in mind when you draft the articles:

• Purpose: The articles must state the corporation's purpose as the profession.
• Required statement: The articles must contain the statement required by Corporations Code section 13404.
• Name: A name may not end in "Professional Corporation," "Prof Corp," "P.C." or "PC" unless the entity is a professional corporation (2 CCR 21003). Check name availability at the Secretary of State name availability page.
• Certificate of registration: Some licensing boards require a certificate of registration for the professional corporation. The statute exempts certain boards from that requirement, so check with your licensing board whether a certificate of registration is required for your entity.

After formation, the corporation files a Statement of Information with the Secretary of State. The fee is $25 each year, and the first one is due within 90 days of filing the articles. Calendar the deadline the day the articles are accepted.

How a professional corporation is taxed

For tax purposes, a professional corporation is a corporation, not an LLC. The key rules are:

• First year: A newly incorporated or qualified corporation owes no $800 minimum in its first taxable year.
• Later years: The $800 minimum applies each year after the first taxable year.
• C corporation: Income is taxed at 8.84% of net income.
• S corporation: If the corporation elects S status with the IRS, it pays 1.5% of net income, subject to the $800 minimum.

The choice between C and S status changes how profits reach you and what you pay each year. Model both against your expected income with a CPA before you file. The Franchise Tax Board publishes corporate tax guidance at https://www.ftb.ca.gov.

Converting an existing LLC

An existing LLC cannot simply keep practicing as a professional service provider once the rule applies to it. It must convert. Form CONV LLC-PC converts a California LLC to a professional corporation and costs $150. Form CONV FE-PC converts a foreign entity and costs $150. Confirm with your licensing board whether conversion affects your license before you file, and have your CPA review the tax consequences of the change.

Other registrations you will need

California has no general state business license. The Secretary of State issues none, and the CDTFA seller's permit is not a business license. A professional corporation typically handles these steps:

• Entity: Register the corporation with the Secretary of State, as described above.
• Sales tax: If you sell taxable goods, register with the California Department of Tax and Fee Administration at https://www.cdtfa.ca.gov/. The seller's permit is free. The statewide base rate is 7.25%, and with district taxes, city rates run 7.25% to 11.75%.
• Payroll: If you have employees, register with the Employment Development Department.
• Local tax and licenses: Most cities charge a local business tax or registration certificate. 445 of 483 cities report revenue from one, with no common formula, so the right answer depends on your city. Counties license only regulated activities. Check with your city and county clerk before you open.
• Regulated activities: Add the licenses and permits your activity requires from the relevant state board.

If you want help with the planning, the California Small Business Development Center network at https://californiasbdc.org/ can point you to local advisors.

Questions to bring to your professionals

• Does the licensing act for my profession allow an LLC to hold my license?
• Does my licensing board require a certificate of registration for a professional corporation?
• Does my planned ownership fall within the limits that apply to my profession?
• Should my professional corporation be taxed as a C corporation or an S corporation?
• What local business tax or registration does my city require?

Start with your licensing board, then file with the Secretary of State, then bring your CPA and attorney in before the articles are filed. Changing course after the entity exists costs more than getting the structure right at the start.

Reminder: This article is informational, not legal or tax advice. Professional licensing rules and state fees can change. Consult a qualified attorney and CPA for your situation.