Forming a New Business as a Licensed Professional

One of the first steps in opening a new professional practice is to form a business entity. That process looks a little different for licensed professionals than it does for other types of business. It’s important for licensed professionals to be aware of those differences when they go to start their practice.

Washington’s Professional Service Corporation Act (RCW 18.100) places additional requirements on any business formed for the purpose of offering professional services to the public. A “professional service” is any personal service that requires a license or other legal authorization. This includes physicians, architects, dentists, massage therapists, mental health counselors, acupuncturists, CPAs, and attorneys among many other professions.

Unlike other types of business, licensed professionals are limited to forming either a professional limited liability company (“PLLC”) or a professional service corporation (“PS” or “PC”). A third option, the limited liability partnership (“LLP”), is also available to practices with multiple owners.

The PLLC and the PS function just like a regular LLC or corporation, but have certain rules intended to promote accountability and protect the relationship that exists between a professional and his or her patient or client. These include:

• Incorporation. The individual that incorporates a PS or forms a PLLC (meaning the person who signs the articles of incorporation or certificate of formation) must be one of the licensed professionals for whom the company is being organized. Other types of business commonly delegate this task to their attorney, accountant, or other third party assisting with the formation. That practice is not allowed if you are forming a professional business entity.

• Business Purpose. Regular business entities are free to engage in any (lawful) business undertaking they choose. Not so for a professional business entity, which is limited to providing only the services stated in its articles of incorporation (if a PS) or certificate of formation (if a PLLC).

• Ownership and Governance. As general rule, all owners of a PS or PLLC must be licensed to provide the service for which the company was organized. The same is true for the company’s leadership: all directors and officers (except the secretary and treasurer for a PS) are required to be licensed in that profession.

But there are some exceptions to this rule. The law specifically allows registered architects and registered engineers to jointly own and render professional services through one business entity. Certain types of healthcare providers may do the same. If you have questions about whether your practice is eligible for this kind of joint operation, you should consult an experienced business attorney for closer analysis.

• Succession. When the owner of a professional business entity dies or becomes incapacitated, his or her ownership interest may be controlled by someone who receives that right by operation of law but is not licensed in the profession – such as a guardian or executor – for up to twelve months. After that, unless the interest is redeemed by the company or transferred to an eligible owner, it will be cancelled and its value paid out to the holder.

That scenario is often the last thing on a professional’s mind when he or she goes to start a new                  business, but this limitation is an important estate planning and business succession issue that                  should be considered early on.

It’s not uncommon to see licensed professionals provide services through a regular LLC or corporation by mistake. That mistake can undermine the liability protection those entities are meant to provide and, in some cases, even violate the ethics rules governing their profession.

If you chose the wrong type of entity or completed your formation documents incorrectly, you should correct the issue(s) right away. The good news is this can usually be accomplished by filing an amended certificate of formation or articles of incorporation with the Washington Secretary of State, amending any bylaws or operating agreement, and holding a special meeting of the members or shareholders to approve the change.