Professional Services as an LLC – Yes or No.

In my practice I have noted, what appears to me, an upswing in persons requesting Limited Liability Companies (LLC) filings with the State.  According to the U.S. Chamber of Commerce in a report published on 7/31/23, the forecast is that the startup of new and especially small business was likely to increase by 7 percent for the first half of 2023 with the trend continuing throughout the remainder of 2023 and well into 2024.  It appears, as with many other changes in our society, that due to the pandemic many individuals have decided to venture forward with their own businesses either in the form of sole proprietor, partnership, LLC, or other corporate entities.  Many of my clients coming to me are professionals and perhaps it is a good time for a quick review of the rules.

It is important to remember that unlike most states, California imposes limitations on what business entities can qualify for LLC status. Simply put, under California Corporations Code Section 13401 et al, LLCs in California are generally not permitted for business to provide “Professional Services”. 

The Code Section 13401 (a) defines “Professional Services” 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.”

Section 13403.3 goes on to say that professional services can be defined as any type of professional services that may be lawfully rendered only pursuant to a license, certification, or registration authorized by the Yacht and Ship Brokers Act.” Simply put, if the person needs a license or certification to act in a professional capacity, then they are providing professional service.

The code is long and the application is involved. For example, the California Attorney General has stated plainly that nonprofessional, occupational licensees can form an LLC.  So, the determination must also be made if the applicant is a nonprofessional, occupational licensee.

However, one can look for some clarity from Section 17701.04(b) of the California Corporation Code which reads: “…A domestic or foreign limited liability company may render services that may be lawfully rendered only pursuant to a license, certificate, or registration authorized by the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act, if the applicable provisions of the Business and Professions Code, the Chiropractic Act, the Osteopathic Act, or the Yacht and Ship Brokers Act authorize a limited liability company or foreign limited liability company to hold that license, certificate, or registration.”

Therefore, as a simple reminder, especially to the general practitioner, it is imperative to review the applicable sections of California law for applicability of the profession in question and that you further review with the licensing body of said profession, to fully determine that your client who is a licensed or certified professional in the field in question can indeed operate as an LLC.

This e-bulletin was prepared by Ron Newton, Esq., Law Office of Ronald Newton, ron@rdnewtonlaw.com.