Can a Professional Service Provider in California form an LLC? And, Who’s a “Professional Service Provider,” anyway?

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.

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New Patent Laws may Affect your Pending Business Method and Software Applications

The most recent in the raft of new cases redefining patent law in the United States may directly affect your business method and software applications. You may want to start the new year by double-checking your patent claims are drafted properly in light of the new laws coming down.

There is a case that just came down from the Federal Circuit – the most authoritative court in the US (next to the Supreme Court) - which may be of concern to claims drafted in the style: A method of doing or achieving X result, comprising steps A, B and C. The case is called: In re Bilski, Case No. 07-1130 (Fed. Cir., Oct. 30, 2008).

Recently, the USPTO rejected a patent application that was a "system" based upon this case: Ex parte Koo, No. 2008-1344 (BPAI Nov. 26, 2008). In Koo, appellants sought to patent a "method for optimizing a query in a relational database management system." The PTO board of appeals affirmed the examiner's rejection based on obviousness, but also rejected it on a new ground of rejection under 35 U.S.C. § 101, i.e., that the claimed invention was non-patentable subject matter.

The idea is that that you cannot patent a pure idea (namely a system or a method), without the system transforming or being tied to a physical thing/machine or tangible result.

You may want to prod your counsel about these new rules, and take any steps needed before any final rejection is made on this or your other applications.

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