California Corporations Code Section 13401 is the definitional statute for professional corporations in California. It says a professional corporation is one organized under the General Corporation Law for the sole purpose of providing professional services in a single licensed profession, and it can only do so under a certificate of registration issued by the government agency that regulates that profession.1California Legislative Information. California Corporations Code 13401 – Definitions Everything else that governs these entities — who can own shares, who can sit on the board, what happens when a license lapses — flows from the definitions this section sets.
Section 13401 sits in Part 4 of the Corporations Code, starting the framework that runs through Section 13410. A medical corporation gets its certificate from the Medical Board. A law corporation gets it from the State Bar. An engineering corporation gets it from the Board for Professional Engineers. Filing articles with the Secretary of State by itself does not make a professional corporation; the certificate from the licensing board is what completes the picture.1California Legislative Information. California Corporations Code 13401 – Definitions
Who Counts as a Licensed Person
Section 13401 defines a “licensed person” as an individual who holds a valid license under the Business and Professions Code, the Chiropractic Act, or the Osteopathic Act to render the same professional services the corporation provides.1California Legislative Information. California Corporations Code 13401 – Definitions This term does most of the work in the rest of the statute. Every shareholder, director, and officer of the corporation must fit within it, subject to the limited exception discussed below.
When a person stops fitting the definition — because a license is revoked, suspended, or surrendered — they become a “disqualified person,” and the corporation has to act. The statute treats disqualification as a triggering event rather than a permanent bar on the entity, but the timelines are short.
The Single-Profession Rule
A professional corporation exists to render services in one profession. You cannot form a single professional corporation that provides both legal and accounting services, for example. The articles of incorporation must explicitly state that the entity is a professional corporation, and the corporation’s name generally must carry a designation like “Professional Corporation” or an approved abbreviation, with the exact requirement set by the licensing board involved.2California Legislative Information. California Corporations Code CORP 134043California Secretary of State. Articles of Incorporation of a Professional Corporation
The Healthcare Exception in Section 13401.5
Section 13401.5 relaxes the single-profession ownership rule for certain healthcare corporations. Licensed professionals from related fields can hold shares in a designated healthcare professional corporation as long as they collectively own no more than 49 percent of total shares, and their number does not exceed the number of shareholders licensed in the corporation’s primary profession.4California Legislative Information. California Corporations Code 13401.5
A medical corporation, for instance, can have shareholders who are licensed psychologists, podiatrists, chiropractors, optometrists, registered nurses, or pharmacists, among others. A psychological corporation can include physicians and surgeons, marriage and family therapists, and clinical social workers, among others. The statute lists specific eligible professions for each type of healthcare corporation, and the combinations are not interchangeable.4California Legislative Information. California Corporations Code 13401.5
This exception does not apply to law corporations, accounting corporations, engineering corporations, or other non-healthcare professional corporations. For those, every shareholder must hold a license in the same profession the corporation practices.
Ownership and Transfer Rules That Flow From Section 13401
Because Section 13401 restricts the corporation to licensed persons, the sections that follow enforce that restriction on the stock itself. Shares may only be issued to a licensed person, or to someone licensed to practice the same profession in whichever jurisdiction they practice in. Shares issued in violation of this rule are void.5California Legislative Information. California Corporations Code 13406
Transfers face the same constraint. Shares can only be transferred to a licensed person, an existing shareholder of the same corporation, a person licensed in the same profession in another jurisdiction, or another professional corporation. A transfer that violates this restriction is void.6California Legislative Information. California Corporations Code CORP 13407
There is also a blanket prohibition on voting trusts and proxies given to non-shareholders. Any arrangement that hands voting authority to someone who is not a shareholder is void.5California Legislative Information. California Corporations Code 13406 Control has to stay with people who are professionally accountable for the services the corporation provides.
When a Shareholder Becomes Disqualified or Dies
If a shareholder becomes disqualified from practicing the profession, their shares must be transferred within 90 days. If a shareholder dies, the estate has six months to transfer the shares to an eligible person or back to the corporation.6California Legislative Information. California Corporations Code CORP 13407
Missing those deadlines gives the licensing board grounds to suspend or revoke the corporation’s certificate of registration. Once that happens, the corporation must stop providing professional services entirely.6California Legislative Information. California Corporations Code CORP 13407 The corporation is permitted to buy back its own shares to solve the problem, without regard to the usual legal restrictions on share repurchases, so long as at least one share remains outstanding.
Because the timeline is short, buy-sell provisions in the bylaws or a shareholder agreement should already spell out how a forced transfer will work. Sorting out the mechanics after the license is gone is how corporations lose their registrations.
Licensing Board Oversight and Personal Liability
A professional corporation is subject to all disciplinary rules and regulatory authority of the agency governing its profession. Incorporating does not create a buffer between the licensing board and the individual professionals inside the entity.7California Legislative Information. California Corporations Code CORP 13410 The board keeps full power to investigate, discipline, and sanction licensed individuals, and it can restrict or prohibit any disqualified person from participating in the corporation’s management or sharing in its income.
Section 13410 also preserves the professional relationship between the licensed person and the people they serve, along with all conduct standards that apply to that relationship. The corporate form gives limited liability for general business debts. It does not shield a licensed professional from personal liability for their own professional negligence or malpractice.7California Legislative Information. California Corporations Code CORP 13410 If a doctor in a medical corporation commits malpractice, the corporate structure does not stop the lawsuit from reaching the doctor personally. This is a core difference between a professional corporation and a standard business corporation, and it is why malpractice insurance matters for every professional working within one.
What Happens if the Corporation Falls Outside the 13401 Definition
A corporation that fails to meet the Section 13401 requirements is not entitled to operate as a professional corporation. The certificate of registration can be suspended or revoked by the licensing board for violations like failing to transfer a disqualified shareholder’s stock within the 90-day window.6California Legislative Information. California Corporations Code CORP 13407 That is a separate track from anything the Secretary of State or the Franchise Tax Board may do for missed filings or unpaid taxes, and a corporation can face action from more than one agency at the same time.8Franchise Tax Board. My Business Is Suspended
Once suspended or forfeited, the corporation loses all rights, powers, and privileges to do business in California. It cannot legally enter into contracts, file lawsuits, or defend itself in court.8Franchise Tax Board. My Business Is Suspended For a firm whose entire revenue depends on providing licensed professional services, that is a business-ending event until the deficiencies are cleared with every agency that took action.