• Physicians' Professional Corporations Are Subject to Unique PC Rules
  • October 31, 2003 | Author: Joseph L. Ardery
  • Law Firm: Frost Brown Todd LLC - Louisville Office
  • Professional corporations are like other corporations in many respects, but physicians sometimes neglect their special characteristics when they choose the PC form. Each state's statutes governing professional corporations are unique to that state, but most contain provisions similar to the following Kentucky statutory rules.

    A Kentucky professional corporation may issue shares only to persons licensed in the profession (or professions) designated in the PC's articles of incorporation. The nonprofessional spouse, the nonprofessional (but loyal and deserving) office manager, and the nonprofessional entrepreneurial friend (with the great business plan for your practice) cannot be shareholders. The PC may also issue shares to partnerships all of whose partners are qualified professionals, professional limited liability companies authorized to render the qualified professional service, and other PCs so authorized.

    Not less than one half of the directors of a Kentucky PC must be qualified professionals. All officers other than the secretary and the treasurer must be qualified professionals.

    Kentucky PCs may not engage in any business other than the rendering of the professional service or services designated in their articles of incorporation.

    Kentucky PCs must redeem the shares of any shareholder who dies, loses his or her professional license, or merely gives notice that he or she wants to sell. The PC can establish a reasonable formula and set of procedures for such buyouts in its articles of incorporation, its bylaws, or under an express agreement with its shareholders, but unless it does the shareholder can compel a buyout through a statutory court procedure. General business corporations are not subject to any similar statutory requirement.

    If the PC and the shareholder (or his or her successor) cannot agree on the price, the PC must institute a court action to establish the price. The court has the power to appoint an appraiser in such proceedings, and the appraiser must give the selling shareholder (or shareholders) the opportunity to introduce any evidence they reasonably consider pertinent to the fair market value of their shares.

    Some other states do not go so far to favor the shareholder over the PC. Tennessee, for example, requires a buyout at death, upon professional disqualification, or upon the termination of the employment relationship, but not if the shareholder remains employed and simply asks to be bought out.

    The Kentucky rules mean that the executive officers of a Kentucky PC must be prepared to face the possibility that any shareholder or group of shareholders can require the PC at any time to buy all of their shares. It is largely for that reason that Kentucky PCs often have Shareholder Agreements that set a relatively low value for the shares, based on nothing more than the depreciated book value of the PC's tangible assets. Why should the PC create or even tolerate a potentially destabilizing situation where a small group of shareholders can force the PC to pay out so much that it would have to liquidate?

    The limitations and complexity of these rules present compelling reason for not using a professional corporation and choosing, instead, a professional limited liability company for the organization of the professional practice. PLLCs are covered by a different set of statutes. They are required to submit to the regulations of the licensing authority of the particular profession practiced through the PLLC -- for Kentucky physicians, the Kentucky Board of Medical Licensure -- but they are not subject to statutory restrictions similar to those summarized above.

    Why did Kentucky's General Assembly create all of these rules for PCs and not for PLLCs? There is no clear answer. Some day the laws may change. For the time being, use a professional corporation only with great care.