Aug 22, 2014   |   by admin   |   Uncategorized  |  No Comments

What is a professional service corporation?

California law permits the establishment of a form of business organization called a ‘Professional Service Corporation’ between persons who belong to specified professions, i.e., persons who have a professional license. These include any type of professional activity that may be lawfully rendered pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act or the Osteopathic Act.

The distinctive characteristic of this form of business is that all the shareholders/members are required to be members of the specific profession. For example, a professional service corporation consisting of doctors and providing medical services can have only duly licensed doctors as its shareholders. The nature of the business is restricted to the services that the shareholder/members are licensed to perform. The name of the corporation requires to be followed by the term ‘Professional Corporation’ or the suffix ‘P.C.’ and should contain the name of at least one shareholder.


A professional service corporation is formed by filing the articles of incorporation with the relevant authority, adopting the by-laws and drafting the shareholders agreement. The by-laws govern the daily functioning of the corporation, while the shareholders agreement governs the relationship between the shareholders.

Advantages and disadvantages

The primary advantage of establishing a professional service corporation is that it limits liability of the members only to activities that are related to the professional services rendered. Members of a professional service corporation would not be held personally liable for causes of action not related to the service rendered – for example., liability arising out of a slip and fall accident on the premises. However, members would be liable for acts by an employee not supervised by a member. Members also remain personally liable for acts of negligence and professional malpractice of other members. Professionals in California are barred from forming limited liability companies so forming a professional service corporation is less of a choice, but rather the best available option to ensure limited liability.

Another advantage provided by this form of business organization is that may provide some tax advantages and favorable tax treatment in some situations. Professional service corporations may also be able to benefit from better group insurance plans, disability, health and accident plans.

Like corporations, shares held by shareholders of a professional service corporation are freely transferable with one important restriction. They may only be transferred to another member possessing the required license for providing services. For example, shareholders of a professional service corporation providing chiropractic services may only transfer their shares to another duly-licensed chiropractor.

However, it does not come without its disadvantages. Professional service corporations are subject to double taxation – wherein the corporation pays tax on its profits, and the members pay tax on any income/disbursements they receive. While this can be avoided by careful tax planning, it is an important consideration.

The other disadvantage concerns the fact that the professional service corporation is a separate entity. This means, that like a limited liability company, it is required to comply with certain legal requirements. These include conducting annual meetings, maintaining corporate records, maintaining minutes of meetings and the like. A board of directors comprising of the shareholders manage the day-to-day functioning of the entity.

Foreign professional service corporations

Foreign professional services corporations are permitted to establish and operate in California, andare subject to the laws of its state of incorporation. However the professional service is required to be one that is authorized in the California Business and Professions Code for performance by a foreign professional corporation. Reference to a ‘foreign professional services corporation’ here is a reference to an organization incorporated in a state other than California.