What Is A Professional Corporation or Professional LLC (and Are You Required to Have One?)
For a lot of very good reasons, I recommend that most business owners organize their business as either a corporation or limited liability company (LLC). An LLC, and especially a corporation, has many advantages, including some additional layers of asset protection, certain options and opportunities for managing owner compensation and tax liabilities, and more options for benefits and retirement plans for both you as the owner and your employees. If you are a member of a licensed profession, the reasons for having a corporation or LLC are particularly important. This, of course, does not mean that you are required by law to incorporate or form an LLC to practice your profession. In most states, you are free to do so simply as a sole proprietor; but that’s definitely not something I recommend. Moreover, you’d be missing out on many advantages of having a properly formed business entity.
However, there are certain types of professionals who cannot simply incorporate or create an LLC using the normal form of corporation or LLC. Many states require a special category of entity to be used by a professional wishing to form a corporate or LLC entity. These special entities are called a “professional corporation” or a “professional limited liability company.” The requirement to use such a professional entity typically applies to persons who are members of a profession who are required to be licensed or certified by the state.
Why do states require this special category or form of corporation or LLC? It is so that the state can enforce the additional requirements and restrictions that exist on the ownership of entities used to practice a licensed profession. These restrictions typically include limiting the ownership of the company to only persons who are in fact licensed to practice that profession. (This prevents non-licensed owners from having any company control when they don’t understand the professional standards that might be violated by certain company actions. Obviously, this protects the public. It also protects the professional from corporate decisions by a non-licensed business owner that might cause revocation of the professional’s own licensing.) The state also wants to ensure that, before the company is formed and registered with the Secretary of State, there is a process to certify that the owner of the proposed entity really is licensed, and is in good standing to practice that profession. Finally, many states also require that the proposed company name meets the requirements of, and has been approved by, the regulatory authority that governs that profession.
So, if you are a member of a licensed profession in your state, and you wish to form a corporation or LLC under which to operate your practice, you may be required to have such a professional corporation or LLC. For practitioners in the Kansas City metro area, it is important to know that there are some differences between the Kansas and Missouri law governing professional entities.
In Kansas, there are 28 categories of professional services that must, if they wish to form a business entity, use either a professional corporation or professional LLC. These include:
certified public accountant;
osteopathic physician or surgeon;
physician, surgeon or doctor of medicine;
specialist in clinical social work;
licensed physical therapist;
registered professional nurse;
real estate broker or salesperson;
clinical professional counselor;
clinical marriage and family therapist;
licensed physician assistant;
licensed occupational therapist;
licensed speech-pathologist; and
licensed naturopathic doctor.
If you are in one of those professions in Kansas, then you are prohibited from using either a general, for-profit business corporation or LLC. It must be created as a professional corporation or professional LLC. In Kansas, a professional corporation’s name must contain either the designation of “Chartered” or “Professional Association” or the abbreviation “P.A.”
Missouri law lists 14 categories of professionals who must use a professional corporation if they are going to incorporate. These include:
attorney at law;
physician, surgeon, doctor of medicine, or doctor of osteopathy;
any natural person licensed as a real estate salesperson;
If you are such a licensed professional in Missouri, you are prohibited from using a regular for-profit corporation. It must be a professional corporation. In Missouri, a professional corporation’s name must contain either the designation of “Professional Corporation” or the abbreviation “P.C.” Interestingly, Missouri law only provides for a professional corporation. It does not provide for a professional LLC. However, even if a professional in Missouri could ostensibly form a regular Missouri business LLC, the ownership restrictions and other licensing restrictions would still have to be complied with.
When forming a professional entity, some additional steps are required over and above those needed to form a regular for-profit entity. First, you must obtain a certificate from the board, commission or other regulatory authority that licenses you, certifying that you are, indeed, a licensed member of the profession and are in good standing before that regulatory authority. That certificate must also state that the regulatory authority has approved your proposed company name. The Secretary of State cannot register and form your business entity without such a certificate accompanying your proposed Articles of Incorporation or Articles of Organization. Second, a special form of Articles of Incorporation or Articles of Organization must be used and filed with the Secretary of State to register your professional entity. The Articles must contain certain restrictions and requirements relevant to the professional entity designation. Finally, specialized internal company documents are required to comply with corporate or LLC formalities. You must have a special version of Corporate Bylaws or a special version of an LLC Operating Agreement. Those special versions will contain certain wording, provisions, and restrictions that are different from, or not included in, the Bylaws or Operating Agreement for a regular business entity. Your Corporate Stock Certificates or LLC Member Unit Certificates must also be a special form of certificate with special content and legends, different from those of a regular business entity.
One other important distinction for a professional entity is the limitation on who else can become an owner. You cannot add a new co-owner (whether as a corporate Shareholder or as an LLC Member) unless that person is also a licensed member of your profession. You are also prohibited from selling your corporate stock or LLC member units to any other person unless they are also a licensed member of your profession. Non-licensed persons (including even a spouse) are prohibited from becoming owners of your professional entity. There are some specific, but narrow, estate-planning rules and exceptions, but those are beyond the scope and limitation of this article.
Finally, you might ask, “What if my corporation or LLC was not formed as a professional entity but was required to do so?” Great question, and it’s important.
Here is the problem: If your state law prohibits you from practicing your profession using a regular business corporation or a regular LLC, then your corporation or LLC may be treated just as if it was never properly formed (because it, in fact, was not). That means that you do not have any of the liability protection as an owner that a properly formed corporation or LLC might have afforded you. It might also mean that your company does not have legal standing to collect its debts or file court proceedings. It might also render company transactions or contracts invalid, or worst of all, render them your own personal obligations, not the obligations of a separate legal entity. You will be treated for liability purposes just as if you were a sole proprietorship. Your company creditors can “pierce the corporate veil” to pursue your personal assets for company debts. And, although in practice I have not personally seen this occur to any client, it might be arguable that your company’s tax status may be at risk; if nothing else, there is arguably a concern that in some circumstances the failure to properly form the required entity could cause disqualification of any employee benefits or retirement plans that required you to have a particular type of entity in place to qualify the plan.
There are solutions available. In many instances, the Secretary of State in question has permitted us to convert a client’s regular business entity into a professional entity. It’s an “undocumented feature” for which you won’t find any form, and it takes proper coordination between you, your corporate lawyer, and the Secretary of State. If worse came to worse, the ultimate last resort might be to dissolve the old non-compliant entity and properly form a brand new professional entity (which then, of course, requires all contracts and agreements to be re-entered on behalf of the new entity). None of those solutions are perfect, however. They cannot retroactively fix issues from past transactions, but there is at least a roadmap to becoming compliant going forward.
Even more than with a regular for-profit business entity, you can appreciate why I strongly recommend that you use a business lawyer to start your business and continue an ongoing relationship with your business lawyer. You should have periodic conversations and status evaluations about your entity, to make sure your entity is, and continues to operate, in compliance with the laws that you as the owner want and need to provide you with protection.