Moscone-Knox Professional Corporation Act: Formation and Ownership

The Moscone-Knox Professional Corporation Act, codified at California Corporations Code Section 13400 and following, requires most California-licensed professionals who want to practice through a corporate entity to use a professional corporation rather than a standard business corporation or LLC. The Act sets who can own shares, who can serve as an officer or director, how the corporation must be named and registered, and what happens when a shareholder loses their license. It reaches any profession whose services can only be lawfully provided under a license, certification, or registration issued through the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act.¹

Who the Act Covers

The Act defines “professional services” as any service that requires a state-issued license to perform lawfully, and it limits each professional corporation to a single profession.¹ A group of physicians can form a medical corporation. A group of attorneys can form a law corporation. A physician and an attorney cannot combine their practices into one entity.

The list of covered fields is long: physicians, surgeons, podiatrists, dentists, psychologists, optometrists, chiropractors, attorneys, accountants, architects, engineers, and dozens of other licensed professions. Each profession’s licensing board layers additional rules on top of the Corporations Code framework, so the specifics of registration, naming, and compliance vary by field even though the core structure is the same.

Forming the Corporation

Two things happen in parallel. You incorporate with the California Secretary of State, and you register with the licensing board that regulates your profession.

The Articles of Incorporation are filed with the Secretary of State like those of any other corporation, but they must state that the entity is a professional corporation and identify the specific profession it will practice. The name in the articles has to satisfy both Secretary of State rules and the licensing board’s rules.

Before the corporation can actually deliver professional services, it must hold a certificate of registration from the governmental agency that regulates its profession.¹ For law corporations, that means an application to the State Bar of California accompanied by a Law Corporation Guarantee, which provides security for potential claims against the firm.² For medical corporations, oversight runs through the Medical Board of California. Accountancy corporations must be approved by the California Board of Accountancy before practicing or holding out to the public under their firm name.³

Every California corporation owes a minimum franchise tax of $800 per year to the Franchise Tax Board. Newly incorporated corporations are exempt from the minimum in their first taxable year.⁴

A preliminary name search on the Secretary of State’s website is exactly that — preliminary. The final determination happens when the filing is actually reviewed, so don’t commit to stationery, signage, or contracts before the documents are on file.⁵

Naming Rules

The corporation’s name must include a designation that signals its professional status. Acceptable designations include “Professional Corporation” and “PC,” among others.⁶ The name cannot suggest that the corporation offers services outside its licensed profession.

Board-specific rules stack on top. Law corporations may also use “Corporation,” “Corp,” “Incorporated,” or “Inc.,” but the name must not be misleading under Rule 7.5 of the California Rules of Professional Conduct.² Accountancy corporations must have the name approved by the California Board of Accountancy before use, and any later name change requires a fresh approval.³

At the Secretary of State level, the proposed name must be distinguishable from existing corporations on record and cannot mislead the public.⁷ Names are compared only against entities of the same type, so a proposed corporation name is checked against other corporation names and not against LLCs or limited partnerships.⁵

Who Can Own Shares

The default rule is simple. Every shareholder must hold an active license in the same profession as the corporation. Outside investors and unlicensed individuals cannot own equity in a professional practice.

The Act carves out a meaningful exception for certain health-care professions. A medical corporation can have shareholders who are licensed podiatrists, psychologists, registered nurses, or optometrists in addition to physicians. Two caps apply. Non-physician shareholders cannot collectively own more than 49% of the total shares, and the number of non-physician shareholders cannot exceed the number of physician shareholders.⁸ The same cross-licensing structure applies to podiatry corporations, which can include physician shareholders subject to the same percentage and headcount limits.⁹

Shareholder agreements typically address voting, transfer restrictions, and buyout terms. A right of first refusal gives existing shareholders a chance to buy shares before they go elsewhere. Buy-sell provisions set out what happens when an owner retires, dies, or loses their license. Because the Act imposes strict divestiture deadlines when a shareholder becomes disqualified, having those provisions negotiated in advance is what keeps a licensing crisis from turning into a governance crisis.

Directors and Officers

A professional corporation must have at least one director, and each director must be licensed in the corporation’s profession. If there is more than one shareholder, the corporation must maintain a board.

At the officer level, the corporation needs at least a president, secretary, and treasurer. The president must be licensed in the corporation’s profession. For law corporations, every director, shareholder, and officer must be a licensed attorney, subject to the limited exceptions in Corporations Code Sections 13403 and 13406.¹⁰ Those exceptions cover certain administrative roles that unlicensed staff may fill, but no unlicensed person may exercise control over the delivery of professional services.

For medical corporations, every shareholder, director, and officer must hold a valid physician’s and surgeon’s certificate, except for the cross-licensed shareholders described above, who must hold a valid license in their respective field. Any professional employee who will practice medicine or a related discipline must be individually licensed as well.⁹

What Happens When a Shareholder Loses Their License

This is where the Act’s requirements have the sharpest edges. Shares can only be issued to and held by properly licensed individuals, and any transfer must satisfy the same licensing requirement that applied at issuance.

Under Section 13407, a shareholder who becomes disqualified through license suspension, revocation, or failure to renew has 90 days to transfer the shares. The permitted transferees are the corporation itself, another current shareholder, or any person licensed in the same profession. If a shareholder dies, the estate has six months rather than 90 days to complete the transfer.¹¹

Miss the deadline and the licensing board can suspend or revoke the corporation’s certificate of registration, which shuts the practice down. This is the practical reason a buy-sell agreement matters. Without a mechanism already in place, the corporation ends up trying to negotiate a fair buyout under a statutory clock.

What Liability Protection Actually Covers

The professional corporation form provides real, but limited, liability protection. Shareholders are generally protected from personal liability for ordinary business debts of the corporation, such as leases and vendor obligations. If the corporation defaults on a loan, creditors ordinarily cannot reach a shareholder’s personal assets.

Malpractice sits outside that shield. A professional who commits malpractice remains personally liable for their own negligent acts regardless of the corporate form. The corporation itself may also be liable. The other shareholders, however, are generally not personally liable for a colleague’s malpractice, so the corporate structure does protect them from each other’s professional errors.

Courts can pierce the corporate veil where shareholders ignore the entity’s separateness. Mixing personal and corporate funds, undercapitalizing the corporation at formation, or using it to commit fraud can lead a court to disregard the structure and reach individual shareholders. Separate bank accounts, proper minutes and resolutions, and adequate malpractice insurance are the baseline defenses.

Staying in Good Standing

Compliance runs on two tracks and never stops. Every shareholder, officer, and director must maintain an active license at all times. A lapse for any reason — missed renewal, discipline, voluntary surrender — puts the corporation’s standing at risk.

Law Corporations

Each law corporation must hold a currently effective certificate of registration from the State Bar and submit an annual renewal with the required fee. Failure to submit a complete renewal results in automatic suspension of the corporation’s authority to practice law. If the suspension lasts more than one year, the State Bar involuntarily terminates the registration.²

A law corporation must also file a special report within 45 days of any change in directors, officers, share ownership, articles of incorporation, or bylaws. If the change affects the information in the Law Corporation Guarantee, an updated guarantee signed by all shareholders must accompany the report.²

Accountancy Corporations

Accountancy corporations need approval from the California Board of Accountancy before practicing or holding out to the public. The firm name must satisfy Business and Professions Code Section 5060, and prior approval is required before practicing under any amended name.³

Consequences of Noncompliance

Licensing boards have broad authority to investigate complaints, hold hearings, and impose sanctions. The Medical Board can act against a physician-owned corporation for fraud, patient harm, or negligence. The State Bar can suspend or disbar individual attorneys, which directly affects whether a law corporation can continue operating if a key shareholder is removed.

Sanctions escalate with the severity of the violation. Administrative issues, such as a missed annual renewal, draw fines, corrective action plans, or automatic suspension of the right to practice.² Failure to divest a disqualified shareholder within the 90-day or six-month window lets the licensing board suspend or revoke the corporation’s certificate of registration.¹¹ Malpractice, fraud, or unlicensed practice can bring license revocation for individual professionals, dissolution of the corporation, and, in some cases, criminal charges. Officers who knew of misconduct and did not act may face personal liability.

The corporations that get into trouble tend to share a pattern. They treat corporate formalities as paperwork rather than as the foundation holding their liability protection and licensed status together.

1
California Legislative Information. California Corporations Code 13401
2
The State Bar of California. Chapter 2 – Law Corporations
3
California Department of Consumer Affairs. Accountancy Corporations
4
California Franchise Tax Board. Corporations
5
California Secretary of State. Name Reservations
6
California Secretary of State. Business Entity Name Regulations and Additional Statutory Requirements
7
California Secretary of State. Business Entity Names
8
California Legislative Information. California Corporations Code 13401.5
9
Cornell Law School. California Code of Regulations Title 16, Section 1343 – Requirements for Professional Corporations
10
California Legislative Information. California Business and Professions Code Division 3, Chapter 4, Article 10
11
California Legislative Information. California Corporations Code 13407