California is unique among the states in very explicitly prohibiting all licensed professionals from forming any kind of limited liability company (LLC). In every other state, at least some kinds—and often many kinds—of licensed professionals are permitted to form either a standard LLC or, in many cases, a more specific entity called a professional limited liability company (PLLC). (The term PLLC is often used for any LLC formed by licensed professionals and offering professional services.) In other states, a PLLC is a popular business structure, because it simultaneously protects its owners from several important types of liability (as with a corporation), but also may provide certain tax advantages (as with a partnership or sole proprietorship).
While PLLCs are not allowed in California, California’s partnership law, like an equivalent law in many other states, does provide for the creation of a special kind of partnership called a limited liability partnership or LLP. (Because formation of this type of business entity requires you to register with the state, it is sometimes more specifically—and perhaps redundantly—called a registered limited liability partnership or RLLP.) California LLPs are very similar to PLLCs in other states. Perhaps the most significant difference between California LLPs and PLLCs is that, as of January 1, 2016, California limits LLPs to just three professions:
If you are not licensed in one of these three professions, you won’t be able to form an LLP in California. In that case, your best remaining option most likely will be to form a professional corporation (see below). (In other states, where PLLCs are permitted, they are also sometimes limited to certain professions, though generally more than just the three listed above in relation to California LLPs.)
Also, as California’s LLP law currently stands, two additional professions that previously have been allowed to form California LLPs—engineering and land surveying—will be barred from forming LLPs as of 2016. If you currently practice one of the latter two professions and are interested in creating an LLP, make sure to check for any new updates in the LLP law or consult with a local business attorney.
An LLP in California provides more or less the same benefits as a PLLC would in another state. Most notably:
Be aware that California law requires all LLPs to have minimum amounts of professional liability insurance coverage. The exact requirements vary depending on which of the three allowed kinds of professional services is involved. For more details, check the California LLP statute or consult with a local business attorney.
If you’re licensed to provide professional services in California, you usually can form a California professional corporation (PC). PCs in California give their owners some of the benefits that PLLC owners get in other states. According to California’s professional corporations statute, a California PC can be formed to provide “any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act. ”This covers a wide range of licensed professions (including the three professions that are also allowed to form LLPs). However, it’s always possible that your particular licensed, certified, or registered California occupation is not considered a profession for the purpose of forming a PC. If you’re unsure, check the PC statute or consult with an attorney.
Corporations generally, and PCs specifically, are older ways of structuring a business than LLCs (including PLLCs). They often are more cumbersome to create and run than LLCs and, at least by default, lack some of the potential tax advantages of LLCs. However, like LLCs, they do protect the individual business owners from people with claims for many types of financial debts or personal injuries.
Forming your California professional service business as an LLP or PC will protect you personally from:
However, you are personally responsible if:
Because you are not protected from your own malpractice, you should make sure you have professional liability insurance—and, if applicable, that your coverage meets any minimum insurance requirements under the laws or regulatory board rules for your particular profession. (As noted above, for LLPs, minimum professional liability insurance is a legal requirement under the LLP statute.)
One other point to keep in mind is that, by default, a PC must pay income taxes separately from individual shareholders. This is different from PLLCs as they exist in other states, where as a rule only the PLLC members are liable for income taxes. In many cases, the fact that the PC itself has its own income tax obligations can result in double taxation (where income tax is paid twice, once by the PC and once by the individual shareholders). However, it is also possible for a PC to elect S corporation status, which makes the PC a so-called pass-through tax entity (meaning only the shareholders have income tax obligations). Unlike PCs, California LLPs are not subject to income tax; however, they are required to pay a flat annual LLP tax.
Other Nolo articles can provide you with additional information on forming LLPs or PCs and related tax issues. For information on forming a PC in California, see How to Form a Professional Corporation in California. For more on the requirements for forming and operating a non-professional LLC (the only kind allowed in California), see Nolo’s article, 50-State Guide to Forming an LLC, and other articles on LLCs in the LLC section of the Nolo website.