Professional Corporations – Just What Are They?

As a new or existing business, you can choose from just about any of the various business entities out there. The choice includes entities such as corporations, limited liability companies, partnerships and limited partnerships to name just a few. In most states, however, the number of choices is dramatically restricted if you are a professional.

Business entities exist for public policy reasons. This is a legal concept that sounds rather vague. It sounds this way because, frankly, it is. The general idea is we are going to allow or disallow something things because it is just a smart move. The statistics show that a lot of business start ups will fail regardless of the quality of the idea or the people running them. Instead of having millions of small business owners going bankrupt, we allow them to shield themselves from the horror.

What happens when two public policy reasons run into each other? This is exactly what happens with professional practices. On one hand, we believe they should be protected. On the other, they should be held personally responsible for any damage they cause from malpractice. Every state has wrestled with the best way to deal with this issue. In some states, the answer is a professional corporation.

A professional corporation is an odd bird by any definition. Let's look at the version used in California. Let's say Dr. Smith forms one for his medical practice. His professional corporation enters into a lease for his office. After a few months, he treats a patient named Ms. Johnson. Now the fun starts.

Dr. Smith keeps having problems with his office. The air conditioning keeps going out making the working environment unbearably hot. He refuses to pay rent till the landlord fixes it. The landlord files a lawsuit against him. On the same day, Ms. Johnson sues him for malpractice based on a misdiagnosis of a condition she has. Dr. Smith loses both cases.

What happens? Well, the landlord is limited to trying to recover the damages he or she won from the assets of the corporation. The professional corporation protects the good doctor from being personally liable. Ah, but what about Ms. Johnson? Well, the professional corporation will not provide protection for that lawsuit because it is based on a malpractice claim.

This example is the reason professional corporations in California are often referred to as hybrid business entities. They will protect the shareholders from all claims that are not based on malpractice. If a malpractice cases arises, they opposite is true.

So, why would a professional decide to choose this type of business entity? In many states, they are given no other choice. They can't go with a LLC or basic corporate entity.

Rick Chapo is with SanDiegoBusinessLawFirm.com - providing California professional corporation formation services.