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In California, certain professions are prohibited from forming a limited liability company or a traditional corporation and must instead incorporate as a professional corporation.

Professions that are required to be professional corporations include many of those that require a state license, such as dentists, certified public accountants, doctors, veterinarians, lawyers, optometrists, marriage and family therapists, psychiatrists, and psychologists.

What Is Different About Professional Corporations?

Professional corporations have more restrictions than traditional corporations.

For example, with a few limited exceptions, officers, directors, and shareholders of a professional corporation must be licensed to conduct the professional activity.

In addition, professional corporations are subject to the regulations of the applicable governmental agency overseeing the profession in which the professional corporation is engaged. For example, some agencies have restrictions on what you can name a professional corporation and require specific language to be included in the professional corporation’s bylaws regarding who can own shares or be officers of the professional corporation.

Who Can Be A Shareholder Of A Professional Corporation?

Professional corporations are also subject to specific rules in the California Business and Professions Code. For example, only licensed persons can be shareholders of a professional corporation.

Why Form A Professional Corporation?

While professional corporations do not provide liability protection for malpractice, you could have limited liability protection for claims not based on malpractice, such as a slip and fall accidents.

In addition, forming a professional corporation may allow you to deduct payments for benefit plans, such as disability or health plans and group term insurance.

Finally, you should speak with your CPA or other tax professional about whether forming a professional corporation and electing to have it taxed as an S corporation may provide tax savings.

Please c ontact u s at (415) 633-6841 or info@bendlawoffice.com to discuss whether your company is required to be a professional corporation and, if so, the steps necessary to set it up right.

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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Why should your company have strategic bylaws? California does not require a company to have written bylaws. However, every business should have a set of strategic, written bylaws to optimize company operations and legal protections. Here are 6 reasons why:

1. They are the Company’s Legal Backbone

A company’s bylaws provide the legal framework for how it operates. This includes the number of people who serve on the board of directors, how to call a board meeting, and the officer positions for the company.

2. What if Your Company Does Not Have Bylaws?

If your company does not have bylaws in place, the laws of California will control how the company is run. It is much better for the owners to determine how the company should operate than to rely on the state’s default.

This is similar to an individual not having a will or trust. If they die, the state’s statutes determine how the individual’s assets are distributed. Instead, each individual should thoughtfully think through how they would like their assets distributed and to set up the legal mechanism to enforce their plan.

Similarly, it is much better for business owners to think strategically about how they would like their company to operate. Relying on state statutes might not always be the best fit for the company. The bylaws then serve as the legal framework that supports the business strategy.

3. They Provide Owners With Piece of Mind

Every company runs into challenges eventually. It is better to consider some of the potential turning points in your company and provide for them in your bylaws. This preemptive approach allows you to determine how you would like the outcomes of these situations to be determined, rather than waiting to make tough decisions when interested parties and passions may create the perfect storm for litigation.

For example, what will happen if there is a legal dispute between the owners? Do you want the company to be tied up in the expense and distraction of litigation or would you prefer arbitration? What happens if one of the owners dies? What if one of the owners wants out of the company?

The bylaws present an opportunity to calmly and objectively reflect on these issues before they occur. It is wiser to answer these types of questions ahead of time and determine what might be the best solutions for your company than to rely on the default rules in the state’s statutes or to try to resolve them when clear heads are less likely to prevail.

4. Bylaws Help Protect Your Company’s Limited Liability

One of the primary reasons to form a corporate entity is to possibly have personal limited liability from the potential business debts and judgments against your company.

If a company does not have bylaws and is sued, a plaintiff could try to “pierce the corporate veil” by claiming the company should not be provided with the shield of limited liability protection because its owners did not follow corporate formalities.

In determining whether to pierce the corporate veil, the court would evaluate a number of factors to determine whether your company is legitimate, including whether you have the proper corporate documents and records. By not having bylaws, a business owner is risking not being provided limited liability protection if sued.

5. They Prevent Misunderstandings Among Owners

Communication and clear expectations are key to any successful relationship including the relationship between business owners. Bylaws clearly lay out how the company will be run which can be crucial in preventing misunderstandings over how the owners expect the company to be managed.

6. You May Need Bylaws To Get a Bank Account, Loans, and Insurance

Finally, if you would like to open a business account or apply for loans most banks will require you to provide a copy of your bylaws. In addition, insurance companies may require you to provide a copy of your company’s bylaws before providing certain types of polices.

As a business owner, it is often tempting to cut corners to lower costs. A strategic, thought out set of bylaws should not be one of these corners. Instead, bylaws should be recognized for what they are – one of the wisest investments a business owner can make to ensure the long-term effectiveness of their company.

If you have any questions regarding bylaws or any other business legal issue, please contact us at (415) 633-6841 or info@bendlawoffice.com.