Month: November 2015

Requirements for a Professional Corporation for Veterinarians, Chiropractors, and Other Professional Services

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One of the first questions to ask when starting a company is what type of entity it should be. Tax implications, potential for investment, and management structure are just a few of the many factors to consider. For businesses in California that provide certain services requiring a professional license or certification, however, only one entity… Read More

One of the first questions to ask when starting a company is what type of entity it should be. Tax implications, potential for investment, and management structure are just a few of the many factors to consider. For businesses in California that provide certain services requiring a professional license or certification, however, only one entity type is permitted: a California professional corporation, or PC.

The types of professional services requiring a license or certification that necessitate a PC are wide ranging, including doctors, dentists, pharmacists, veterinarians, architects, physical therapists, nurses, and optometrists. (For a full list see Cal. Corporations Code 13401.) While most of the formation requirements for a California PC are the same as a regular California corporation, the following distinctions apply:

Corporate Purpose in the Articles of Incorporation

The “corporate purpose” for a general stock corporation in California is typically as broad as “to engage in any lawful act or activity.” In contrast, a Professional Corporation must declare in its Articles of Incorporation that the purpose of the corporation is to engage in its specific profession.

Naming Requirements

California statute dictates naming requirements for Professional Corporations, and most PCs are required to include the type of professional services they offer in their names. For example, veterinary PCs must include the words “veterinary corporation” or some other wording denoting corporate existence in their names.

Other professions have additional naming requirements, such as chiropractic PCs. The name of a chiropractic PC must include the word “chiropractic,” the name or last name of one or more of the present, prospective, or former shareholders, and the word “corporation” or some other word denoting corporate existence.

Each profession’s naming requirements are different and so the applicable statues should be reviewed before submitting the Articles of Incorporation, as they will be rejected if the name does not comply.

Licensed Directors, Officers, and Shareholders

All of the directors, officers, and shareholders of a Professional Corporation must be licensed to practice the professional services of the PC, with only two exceptions. First, if there is only one shareholder in certain PCs, the PC may be allowed to fill specific officer positions with non-licensed people.

Second, in some cases, people holding a license that is different from that designated by the Professional Corporation may serve as shareholders, officers, or directors of the PC. For example, a licensed clinical social worker may be part of the governance of a medical corporation, even though the social worker does not have a medical license, as long as people without medical licenses do not exceed the number of people with medical licenses in the PC and do not own more than 49% of the company. See Cal. Corp. Code 13401.5.

Potential Registration with a Governing Board

One other requirement that applies to some PCs, but not all, is that the governing board of the particular license may require the PC to separately register with the board. For example, the California Board of Chiropractic Examiners requires all Chiropractic Professional Corporations to submit a Certificate of Registration after the PC has been formed.

The considerations listed above apply to nearly all California Professional Corporations, but the exact details and applicability of each depends on the type of professional services offered. Therefore, it is very important to review the applicable laws and guidelines and consult a lawyer before starting a Professional Corporation.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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How Cumulative Voting Impacts Majority Shareholders in a California Corporation

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We often hear about how majority shareholders have the power to make big decisions, including who might sit on the board of directors. And while that is true, under California law, for non-publicly traded companies, cumulative voting is required and can impact an important vote. At its basic level, cumulative voting provides that the number of votes… Read More

We often hear about how majority shareholders have the power to make big decisions, including who might sit on the board of directors. And while that is true, under California law, for non-publicly traded companies, cumulative voting is required and can impact an important vote.

At its basic level, cumulative voting provides that the number of votes available to a shareholder is equal to the number of votes owned by the shareholder multiplied by the number of positions up for a vote. Therefore, if multiple positions are up for a vote, a shareholder may cast all or most of his or her votes for a signal nominee, making a minority share a lot more powerful.

To show how this might play out, let’s assume that Alex owns 600 shares, Bill owns 250, and Catherine owns 250. Under a conventional structure, if there were three board seats available the board would be compromised of board members Alex chose, as he out-votes the other two shareholders 600 to 500 every time, even if we assume Bill and Catherine are voting together.

Now lets look at cumulative voting. Assume there are three board positions available and six candidates (Dave, Erin, Frank, George, Hilary, and Ian). Because each shareholder is able to cast his or her total number of votes (remember: number of shares x positions up for vote) towards one nominee, the result could be as follows:

Dave: 750 (all of Bill’s Votes)
Erin: 600 (one third of Alex’s votes)
Frank: 0
George: 750 (all of Catherine’s votes)
Hilary: 1200 (two third’s of Alex’s votes)
Ian: 0

Under cumulative voting, even though Alex was the majority shareholder, he would only be successful in bringing on board Hilary, as he would need to use up his votes to win one seat and then would be out-voted for the other positions. The best-case scenario for Alex would be if he strategized and casted 900 votes each towards two candidates, but even then Bill or Catherine would be successful in bringing on at least one of the board members if they decided to use all of their votes on one board seat.

Per California law, cumulative voting is a statutory right provided to shareholders in a non-publicly traded company that cannot be taken away (see Corp. Code 708(a)). However, a shareholder is only entitled to cumulate their votes if the candidate name has been placed in nomination, and the shareholder has given their intention to cumulate their shareholder votes prior to the vote. Furthermore, it only takes one shareholder to give notice to allow all shareholders to cumulate their votes in a nomination (see Corp. Code 708(b)). Another important consideration is that cumulative voting can apply to your corporation even if you are a foreign corporation conducting business in California if you are considered a “pseudo-foreign” corporation under California Corporate Law (see Corp. Code 2115).

As a founder or a minority shareholder it is important to know your rights when it comes to corporate actions. If you have questions or concerns about your setup, don’t hesitate to give us a call at (415) 633-6841, or email us at info@bendlawoffice.com.

Disclaimer: This article discusses general legal issues and developments. Such materials are for informational purposes only and may not reflect the most current law in your jurisdiction. These informational materials are not intended, and should not be taken, as legal advice on any particular set of facts or circumstances. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  Bend Law Group, PC expressly disclaims all liability in respect of any actions taken or not taken based on any contents of this article.

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