I've received a bunch of requests as to whether a service provider in California should form a Limited Liability Corporation (LLC). An LLC is a business structure that is similar to a corporation, but requires fewer formalities. Also, an LLC can help protect individual owners from being personally liable for business debts.
But is an LLC really appropriate for your business? My first question is: what are the services being provided?
Under California law, providers of "professional services" cannot legally form an LLC. Corporations Code §17375. "Professional services" means "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" and the Yacht and Ship Brokers Act. Corporations Code §§13401, 13401.3.
But who really are "professional" service providers? Some providers of services have been clearly deemed to be "professional": Lawyers, engineers, accounts, architects, real estate brokers, doctors, dentists, chiropractors, speech pathologists, audiologists, physical therapists, nurses, psychologists, optometrists, pharmacists, veterinarians, marriage and family counselors, clinical social workers and shorthand reporters. They cannot form an LLC to provide services. Businesses in the banking, trust, and insurance industry, are also typically prohibited from forming LLCs.
But what about the other occupational activities require licensing under the Business and Professions Code, including barbers, locksmiths, private detectives, alarm companies, pest control companies and automotive repair dealers?
The California Attorney General issued an opinion in 2004 that provides some guidance. A "profession" requires specialized knowledge and often long and intensive academic preparation. A "profession" is an occupation requiring a high level of training and proficiency. To determine whether a particular service is "professional" or not requires an examination of the educational, training and testing prerequisites. "We conclude that a business that provides services requiring a license, certification, or registration pursuant to the Business and Professions Code may conduct its activities as an LLC if the services rendered require only a nonprofessional, occupational license." California Attorney General Bill Lockyer's opinion, No. 04-103.
It seems that providers of such other occupational activities may be able to form an LLC, but the California Secretary of State still may decline to register it. Contractors, for example, are still routinely declined by the secretary of state when they request formation of an LLC.
To learn more about limited liability companies and whether an LLC is the right structure for your company, visit the Limited Liability Company
area of Nolo's website.