Real Estate Law: Restrictions on Ownership and Control of a California Professional Corporation
A professional corporation (PC) is a specialized business entity that allows licensed professionals to operate their practices within a corporate structure. In the state of California, professional corporations are subject to specific regulations and restrictions regarding ownership and control. These restrictions are in place to ensure that the PC remains compliant with the laws governing licensed professions and maintains the integrity of the professional services it provides. In this article, we will explore the key restrictions on ownership and control of a California professional corporation in the context of real estate law.
1. Licensed Shareholders and Officers:
One of the fundamental requirements for a California professional corporation is that all shareholders and officers of the corporation must hold valid licenses in the regulated profession for which the corporation is authorized. In the context of real estate law, this means that all shareholders and officers of a professional corporation engaged in real estate activities must be licensed real estate brokers or salespersons authorized by the California Department of Real Estate.
This requirement ensures that the individuals responsible for the management and decision-making within the professional corporation have the necessary qualifications and expertise to provide services within the regulated profession.
2. Limited to One Profession:
A California professional corporation is limited to providing services within a single regulated profession. This means that all activities of the PC must fall within the scope of the licensed profession for which it is authorized. For example, a professional corporation formed by licensed real estate brokers and salespersons can only engage in real estate brokerage activities and related services.
The restriction to a single profession helps maintain the specialization and focus of the professional corporation and ensures that all activities align with the licensing regulations and ethical standards of the specific licensed profession.
3. Professional Licensing Board Approval:
Before a California professional corporation can be formed, it must receive approval from the relevant professional licensing board or authority overseeing the regulated profession. For real estate professionals, this approval is granted by the California Department of Real Estate.
The licensing board reviews the application to ensure that all shareholders and officers hold valid licenses in the regulated profession and that the proposed business activities align with the scope of the licensed profession. The board also assesses the corporate documents and governance structure to confirm compliance with the relevant laws and regulations.
4. Shareholder Limitations:
The number of shareholders in a California professional corporation is subject to certain limitations. The exact limitations may vary depending on the type of licensed profession involved and the specific regulations governing that profession. For example, the California Department of Real Estate imposes certain restrictions on the number of shareholders in a professional corporation formed by real estate brokers and salespersons.
Additionally, some licensed professions may have restrictions on who can be a shareholder in a professional corporation. For instance, some regulatory authorities may require that only actively practicing professionals in the regulated profession can be shareholders.
5. Shareholder and Officer Qualifications:
In addition to holding valid licenses, shareholders and officers of a California professional corporation must meet certain qualifications and requirements. These qualifications may include a minimum number of years of experience in the regulated profession or specific continuing education requirements.
For real estate professionals, the California Department of Real Estate may require that shareholders and officers have a certain level of experience in real estate brokerage or have completed specific real estate-related education courses.
6. Corporate Formalities and Compliance:
A California professional corporation must observe corporate formalities and comply with all relevant laws and regulations governing corporate entities and the licensed profession. This includes holding regular shareholder and director meetings, maintaining corporate records, and adhering to corporate governance requirements.
Additionally, a professional corporation must also comply with the regulations specific to the licensed profession, such as those set forth by the California Department of Real Estate. This may include meeting continuing education requirements, disclosing conflicts of interest, and observing the ethical standards of the licensed profession.
7. Avoiding Unauthorized Practice:
A significant concern in the ownership and control of a California professional corporation is the risk of unauthorized practice. Unauthorized practice occurs when individuals who are not licensed in a particular profession engage in activities that are reserved for licensed professionals.
To avoid unauthorized practice, a professional corporation must ensure that all individuals providing services within the corporation are appropriately licensed for the specific activities they are performing. For example, only licensed real estate brokers or salespersons can engage in real estate brokerage activities within a professional corporation in the real estate industry.
8. Limitation on Non-Licensed Ownership:
California law prohibits individuals who are not licensed in the regulated profession from owning shares or having control in a professional corporation. This means that non-licensed individuals, such as investors or passive owners, cannot be shareholders in a professional corporation engaged in a licensed profession.
9. Compliance with Department of Real Estate Guidelines:
Real estate professionals forming a professional corporation must comply with the guidelines and requirements set forth by the California Department of Real Estate. The department issues guidelines on various aspects of professional corporation formation, including licensing, shareholder qualifications, corporate governance, and compliance with real estate laws.
10. Change in Shareholder Structure:
If there is a change in the shareholder structure of a professional corporation, such as a new shareholder joining or an existing shareholder leaving, the corporation must promptly notify the relevant licensing board or authority and comply with any approval or reporting requirements.
11. Impact on Liability:
A professional corporation offers limited liability protection to its shareholders, which means that shareholders are generally shielded from personal liability for the debts and obligations of the corporation. However, this liability protection does not extend to personal malpractice claims arising from the provision of professional services. Professionals in a professional corporation may still be personally liable for professional malpractice claims related to their licensed profession.
12. Other Regulatory Considerations:
In addition to the restrictions on ownership and control, a California professional corporation must comply with other regulatory considerations, such as advertising rules, fee arrangements, and client confidentiality requirements. These considerations may vary depending on the specific licensed profession and the regulations governing that profession.
A California professional corporation offers licensed professionals in the real estate industry the opportunity to operate their practices within a corporate structure while benefiting from limited liability protection. However, there are significant restrictions on ownership and control to ensure compliance with the laws governing licensed professions and the integrity of the professional services provided.
Professionals forming a professional corporation must ensure that all shareholders and officers hold valid licenses in the regulated profession and comply with the requirements set forth by the relevant licensing board or authority. Corporate formalities must be observed, and the corporation must remain focused on providing services within the scope of the licensed profession.
By adhering to these restrictions and requirements, real estate professionals can establish and operate a compliant and successful professional corporation in California.
Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal or professional advice. The restrictions on ownership and control of a California professional corporation may vary based on individual circumstances and the specific licensed profession involved. Professionals should seek legal advice tailored to their specific needs and consult with the relevant licensing board or authority for guidance on compliance with regulations.