Professional Corporations – Understanding Liability Issues

Corporations are generally considered to provide an asset protection function for shareholders, a shield of sorts between the debts and liabilities of the business and the shareholders personal assets. This assumption is usually correct, but gets turned on its head when we are discussing professional corporations.

Professional corporations are a state government creation, which is to say some states have them while others don’t. The basic idea behind these entities is to force professionals to conduct business in a particular way in the states. Making things even more confusing, each state handles how this will happen in a different way. Having stated this, please keep in mind that I am discussing general professional corporation liability concepts in this article and you should speak with local counsel in your state to nail down the specifics in your area.

So, what is the deal with professional corporations and liability issues? Well, these entities provided the shield against debts and liabilities that a normal corporation would do…except when they don’t. In this case, we are talking about one big exception. That exception is for liability rising from the professional services provided. For example, a doctor practicing in a medical corporation would not be shielded from a medical malpractice claim.

Now things get interesting. What about a practice with say three doctors and two nurses? Is there any liability protection afforded by the corporate entity? Yes and no. There will be no liability protection for any malpractice I commit or which is committed by anyone under my supervision. Malpractice committed by one of my fellow doctors, however, is not going to ensnare me as the entity will protect me.

What about liability for other items. The professional entity will provide the shareholders will protection from non-service claims. Using our medical corporation as an example, there would be no personal liability in a dispute with the landlord, a dispute over a piece of equipment or a loan that goes unpaid. The corporate entity would provide a shield against personal liability in each case.

There are definite positives and negatives when it comes to liability and the professional corporation. You are encouraged to speak with local counsel to get a grasp of how things work specifically in your state so you can make the determination as to whether forming one is a good choice.

Richard A. Chapo provides California professional corporation formation services at SanDiegoBusinessLawFirm.com.