You’re a licensed service professional and you’ve decided to start your own business. Limited liability companies (LLCs) are more popular than ever. Plus, “limited liability” sounds fantastic. So, you go ahead and form an LLC to get started. But then you hit an unexpected road block. The regulating authority over your profession doesn’t certify or license your company because it’s an LLC. So it’s back to the drawing board.
Unfortunately, this happens all the time. Why?
- Accountability and Liability Concerns
LLCs offer limited liability protection to their members, meaning that members are generally not personally liable for the company’s debts or obligations. Legislators are concerned that, for professional services, this level of liability protection potentially undermines accountability. And licensed professionals are expected to maintain personal accountability for their actions to uphold trust in their fields.
Professional services are highly regulated for the policy objective of protecting the public. What legislators are focused on is that professions like medicine, law, and accountancy require specialized knowledge, licensing, and adherence to ethical standards overseen by professional boards. Such as the Medical Board of California or the State Bar of California. These boards enforce rules to ensure professionals prioritize their clients’ and patients’ well-being over business interests.
This explains why the California Revised Uniform Limited Liability Company Act (California Corporations Code § 17701.01 et seq.) prohibits LLCs from engaging in activities requiring a professional license. This is reinforced by regulations issued by various licensing boards, which mandate that only specific business entities may offer professional services.
- Ownership and Management Requirements
As a result, professional services in California must be provided by entities that are not LLCs and that are owned and controlled by licensed professionals. For example:
- Corporations providing (many) professional services must register as Professional Corporations (PCs) under the California Corporations Code.
- The shareholders, directors, and officers of a PC must generally be licensed in the same profession. LLCs, by contrast, do not have the same ownership or management restrictions and could permit non-licensed individuals to have control or financial interest in the company, which conflicts with the ethical and regulatory requirements of professional services.
Importantly, the word “professional” in the phrase professional corporation isn’t subjective, but defined by law. This can lead to unexpected results or gray areas, such as in the area of real estate.
- Real Estate Brokerages in Particular
What about real estate brokers and agents? Real estate licensees are indeed licensed professionals. But real estate sales isn’t a profession itemized in the Corporations Code as requiring a PC for a practicing entity. At the same time, LLCs aren’t authorized by any statute or regulation to hold a real estate license.
What this means is an ordinary stock corporation must be used when the intent is to perform real estate license activity through a single legal entity. The California Department of Real Estate presumably ensures the policy objective of accountability by requiring a Designated Officer who meets licensing requirements to bear responsibility for the corporation’s licensed activities.
As the law stands now, LLCs can only provide licensed services where the underlying license is a “nonprofessional, occupational” license. Some other states allow LLCs to provide professional, licensed services including real estate. Such other states almost certainly have a framework that provides for an LLC member to have accountability for professional services provided. Here in the Golden State, for the time being, attention must be paid at the outset to the nature of services provided before an entity is formed.
There are a number of other considerations that go into selecting the correct legal entity for your business. Are you starting a business and looking to select and form the right entity? Contact Business & Real Estate Law Firm PC for assistance today.