Selecting the Proper Business Entity When Rendering Professional Services

By: Michael Safren, Esq.

When deciding whether to create and form a business entity, individuals must consider not only the form of the entity (i.e. corporation, limited liability company, limited liability partnership), but also whether that entity form should be a professional services entity.  

 

RCW 18.100 et seq known as the Professional Services Corporation Act (PSCA) broadly governs the requirements for registering and operating a Professional Services Corporation and RCW 25.15.046 enables the formation of a professional limited liability corporation, but subjects Professional Limited Liability Companies to the requirements of RCW 18.100.

 

Am I Subject to the PSCA?

The PSCA defines the term “professional service” as “any type of personal service to the public which requires as a condition precedent to the rendering of such service the obtaining of a license or other legal authorization and which prior to the passage of this chapter and by reason of law could not be performed by a corporation, including, but not by way of limitation, certified public accountants, chiropractors, dentists, osteopaths, physicians, podiatric physicians and surgeons, chiropodists, architects, veterinarians and attorneys-at-law.” RCW 18.100.030. These examples are illustrative and not an exhaustive list.

 

Must I Form a Professional Services Entity?

The PSCA enables these licensed professionals rendering professional services to form a professional services entity and offer those professional services.  See RCW 18.100.050.  If a professional subject to this act wishes to avail themselves of the corporate entity and render services through that entity, the licensed professional must use the professional services entity structure. RCW 18.100.060.  Regardless of the specific structure, the professional services entity can only be owned by other licensed professionals in the same field.  See Morelli v. Ehsan, 110 Wn.2d 555, 756 P.2d 129 (1988). For example, doctors and architects cannot be co-owners in the same professional services entity.  Further, the professional services entity must restrict the rendering of its professionals’ services to those services in the specific field in which the owners are licensed in. See RCW 18.100.080. For example, a professional services entity composed of dentists cannot also offer legal services. 

 

Consequences of Failure to Comply with the Professional Services Act

The failure to comply with the PSCA can expose both the individuals that own and operate the entity and the entity itself to many significant negative consequences. First, the entity may be unable to enforce agreements with third parties, distribute assets to non-licensed members, or receive payment from governmental agencies or governmentally backed programs such as Medicaid or Medicare.   See Morelli v. Ehsan, 110 Wn.2d 555, 561-562, 756 P.2d 129 (1988); see also American Chiropractic Clinics, Inc. vs. Saunders, 107 Wash. App. 1002, 2001 WL 783756 (2001).  In Morelli, the Court held that a partnership for the provision of medical services between a doctor and non-doctor created an illegal entity and as such any agreements regarding the entity or entered into by the entity which violate the PSCA are void.  Id.   The court refused to allow for an accounting and distribution of the assets to the non-doctor partner who was not a licensed professional.  Id. at 563. In American Chiropractic Clinics Inc., the court prevented a chiropractic office from enforcing the terms of a $250,000 promissory note because the chiropractic practice was not incorporated as a professional services entity. 107 Wash. App. 1002, 2001 WL 783756 (2001). 

 

In Morelli the court stated, “this is consistent with the general rule that illegal agreements are void, and courts will not enforce them.” 110 Wn.2d at 562. The Court further clarified that it shall not enforce illegal agreements connected to violations of the PSCA regardless of the injury or injustice that may result to the parties who violated the PSCA and irrespective of whether violators acted in good faith stating “the parties are left where the court finds them regardless of whether the situation is unequal as to the parties.”  Id.  

 

Second, a failure to comply with the PSCA may eliminate the limitation of liability for malpractice committed by other members of the professional services entity.   See RCW 18.100.070.  Although a professional services entity will not protect individual members against liability for their own malpractice and the malpractice of those under their direct control and supervision, it does protect the other members from being held personally liable for the malpractice of another member.  See Id.  Thus, a failure to observe the requirements of the PSCA may expose the partners, members, and/or shareholders to personal liability for the negligence of others. 

 

Third, a failure to comply with the PSCA may be a violation of certain professional codes of conduct or ethical requirements for licensed professionals.  For example, if an attorney selected an improper entity, that attorney may be in violation of the Washington Rules of Professional Conduct (RPC) including: RPC 8.4(c) to engage in conduct involving dishonesty, fraud, deceit or misrepresentation, RPC 8.4(n) to engage in conduct demonstrating unfitness to practice law, RPC 5.5 unauthorized practice of law, RPC 7.1 false and misleading communications about the lawyer’s services, and RPC 1.1, competency in representation. 

 

Fourth, a failure to comply with RCW 25.15.046(3), a requirement for a professional limited liability company (PLLC), could result in unlimited liability.  RCW 25.15.046(3) requires that the entity maintain for itself and its members rendering professional services liability insurance, bonding, or evidenced of financial responsibility in the amount of at least one million dollars or a greater amount as the state insurance commissioner may establish by rule for a licensed profession or for any specialty within a profession.  If such insurance or bond in the required amount is not in maintained, then the limited liability company's members are personally liable to the extent that, had the insurance, bond, or other evidence of responsibility been maintained, it would have covered the liability in question regardless of the amount.

 

You should consult an attorney to help you understand the requirements of the PSCA and assist you in the selection of the proper business entity. 

 

Michael Safren is a Partner at The Law Offices of Jenny Ling, PLLC.  His practice focuses on business, real estate, and civil litigation.

 

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