You often have a number of options when forming an entity to protect your business. This is not the case in many states when it comes to protecting a professional business such as a medical or accounting practice. There are plenty of restrictions regarding what you can and can't do. One most don't realize has to do with who can be an owner.

When it comes to a business entity, it is critical to understand that there is no federal law dictating what is or is not allowed. Instead, each state has its own laws on the subject and each handles the issue differently. In some states, you are allowed to be a professional LLC. In others, you are required to be a professional corporation. If you are a professional, you need to check with a lawyer to determine the requirements in your state to avoid making a major mistake.

Many states deal with the issue by requiring doctors, lawyers and so on to form a professional corporation. The entity is unique among corporations. It has odd rules such as being exempt from securities filings. This is often due to the fact the ownership of the entity is high restricted. Specifically, many states restrict ownership to individuals licensed in the profession in question. For instance, a professional corporation for a dental surgery practice could only have licensed dentists as owners.

So, why should care about this restriction? Well, many people form businesses without really thinking it through. The initial ownership group will often consist of a few professionals and then a key employee is given a small percentage because they are valued and key to actually keeping the business running. This may be in violation of your state laws and can lead to a firestorm of problems, particularly if the non-licensed employee wants to leave at some point under less than ideal circumstances.

There are many business entities you can form with relative simplicity. The professional business entity is one that really requires a professional hand because there are so many restrictions regarding who can own it and how it can be run.

Richard A. Chapo writes about professional corporation topics as part of his practice at SanDiegoBusinessLawFirm.com.