Business Forms for Professionals

April 13, 2006

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Some types of professions are limited when choosing an organizational form for your business. When state laws were changed to allow professionals, such as doctors, lawyers, engineers, etc., to form corporations, the laws imposed certain conditions on this choice.

Specifically, the laws require that:

All owners of the corporation be licensed within the same profession. However, some states allow individuals in similar professions (e.g., psychiatrists and psychologists) to own shares in the same corporation.
The business must use the term "PC" (Professional Corporation) in its name.

All states, except California, now allow professionals to form limited liability companies (LLCs) as well as corporations. All of these states impose on the LLC the same first condition imposed on the PC (i.e., all of the owners must be licensed in the same profession). However, curiously, many states do not impose the second condition on LLCs. Accordingly, in these states, no special designation other than the standard LLC is required in the name of the business. In some states that do impose the second condition on LLCs, the term "PLLC" (professional limited liability company) is used.

If you are considering a professional LLC, find out if the state in which you are forming requires you to use the term "PLLC" in the business's name. In addition, it is always a good idea to check with the professional association in your state to determine if there are any special ethical rules regarding the operation of an LLC.

In California, professionals cannot operate in the LLC form, and a one-owner professional business must be formed as a corporation. However, in California, two or more professionals have the choice of operating in the form of an limited liability partnership (LLP) (in the case of accountants, architects and lawyers) or a corporation. Despite its many shortcomings, California does offer full shield protection in the LLP, not the limited shield as in some states.

Both New York and California limit the use of LLPs to professionals, and in California this means only lawyers, architects and accountants.

Finally, where professionals operate in the LLP form, many states impose mandatory insurance requirements on the owners. Because mandatory insurance is likely to be expanded in the future, professionals in LLP states that do not require it now, and professionals operating in the form of LLCs or corporations, should check with state authorities or their professional association for updates in this area.