How to Form a California Professional LLC

Should You Just Form an LLC?

In California, an LLC is not permitted to provide “professional services,” which are defined as “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 means that most licensed professionals in California cannot form an LLC. You should check with your profession’s regulatory board to determine whether your services are considered “professional services” under California law. If not, an LLC may be an option for you.

PLLCs and LLCs are very similar entity types. The main difference is that only licensed professionals may form PLLCs.

In states that offer both entity types, the formation process is largely the same. Forming a PLLC simply requires a few additional steps, such as providing evidence of professional licensure or obtaining approval by the applicable state licensing board.

The LLC is a popular business type because it offers the following benefits:

Flexibility

It’s relatively easy to form and maintain. It’s also suitable for a variety of ownership structures, from one-person businesses to multiple classes of owners.

How the business is managed is flexible as well — your LLC can be managed by the owners (which are called the “members” of the your LLC), or the members can appoint managers (much like the board of directors of a corporation). The members can agree to govern the LLC however they’d like by preparing and signing an operating agreement.

Liability Protection

Limited liability companies are designed to protect the personal assets of their owners. This means if your business is sued, creditors can only go after the assets of the company. Your personal assets as a member — such as your personal bank accounts, home, and other property — can’t be seized to pay liabilities or debts of the company.

One important exception is that each member is personally liable for their own malpractice, and no member is liable for the malpractice of any other member. For this reason, it’s wise for each member to maintain their own professional liability insurance.

Taxes

Many business owners like the LLC structure because these types of companies are generally classified as “pass through” entities for tax purposes. This means that the income and losses of the LLC are “passed through” to the members, and the members report the income and losses on their personal tax returns. In other words, any income tax is paid by the members, and not the entity itself.

A corporation’s income, on the other hand, is generally subject to “double taxation”. The corporation pays taxes on its income on the entity level, and if the corporation distributes profits to shareholders by paying a dividend, the shareholders must pay taxes on the dividend as well.

If you decide the LLC is the right structure for your California business, the formation process is relatively straightforward. To form an LLC, you can complete the six-step process outlined in our step-by-step guide yourself, enlist the help of an attorney, or use an LLC formation service.

Your Other Options

The standard LLC isn’t the only business structure option available in California. Another common business type for licensed professionals is the professional corporation.

Note, however, that corporations are generally subject to stricter requirements than LLCs regarding how you can manage and run your business. You can learn more about California professional corporations in our How to Form a Professional Corporation in California guide.

If you have a one-person business, you may also choose to just operate as a sole proprietorship. A sole proprietorship is not a legal business entity formed with the state, and there’s no distinction between the business and the sole owner for legal or tax purposes. This is the simplest form of operating a one-person business and gives the owner complete control. However, a major disadvantage is that the owner of a sole proprietorship is subject to unlimited liability for all of the liabilities and debts of the business.

If your business has more than one owner, you can also form a partnership. In California, there are three types of partnerships:

General Partnership: A general partnership, or GP, consists of at least two owners, which can be either individuals or entities. Like a sole proprietorship, a GP is not a legal business entity that is formed with the state. Who controls the GP and how it’s managed can be outlined in a partnership agreement, but if there’s no partnership agreement, the partners generally share equal control and management rights. As with a sole proprietorship, the owners are subject to unlimited personal liability, meaning that their personal property can be seized to pay the liabilities and debts of the GP.

Limited Partnership: A limited partnership, or LP, is a legal business entity that consists of at least one general partner and at least one limited partner. The general partners control and manage the LP, while the limited partners can only have very minimal participation in running the business. In exchange for giving up management control, the limited partners only risk their financial investment in the LP. General partners, on the other hand, are responsible for all of the liabilities and debt of the LP.

Limited Liability Partnership: In California, a limited liability partnership, or LLP, is a partnership that may be formed to engage in the practice of public accountancy, law, architecture, engineering, or land surveying, or to provide services or facilities to either a California registered LLP that engages in the practice of public accountancy or law or to a foreign LLP. An LLP is a legal “person” separate from its partners. Each partner of the LLP is an individual or entity admitted to the LLP. All partners can actively manage the LLP, but the LLP should have a limited liability partnership agreement that defines the role of each partner. The liability of each partner can be limited to his or her respective financial contribution.

Many professional businesses with two or more owners choose to form an LP or LLP because like an LLC, they offer limited liability, “pass through taxation,” and flexibility. Each type of entity has legal and tax implications, so if possible, you should consult with an attorney and accountant to discuss your specific situation.

Resources for California Professional Business Owners

We also recommend contacting your profession’s state licensing board to discuss their requirements before forming an entity for the purpose of rendering professional services. California’s Department of Consumer Affairs maintains a list of professional regulatory boards in the state on its website. Contact information for some common professional regulatory boards in California is below.