How to Form a Professional Psychological Corporation in California – Crucial 17 Steps

Are you a licensed psychologist in California seeking to fortify your practice against personal liability while optimizing tax advantages?

Establishing a professional psychological corporation might be the strategic step you’ve been contemplating.

How to Form a Professional Psychological Corporation in California - Crucial 17 Steps

By structuring your practice as a professional corporation, you not only safeguard personal assets but also unlock potential tax savings, offering a financial boost compared to a sole proprietorship.

In this blog post, we’ll navigate through the essential steps to form a professional psychological corporation in California, empowering you to make informed decisions and set your business on a path to success.

How to Form a Professional Psychological Corporation in California

Here are step-by-step processes to form professional Psychological corp in Cal. Follow them meticulously to get the professional corporation benefits.

Step 01: Learn the Eligibility of Professional Corporation

When considering the formation of a professional psychological corporation in California, it’s imperative to understand the eligibility criteria, especially regarding shareholders and corporate leadership roles.

As per the guidelines outlined in the California Corporations Code section 13403, the structure of the corporation varies based on the number of shareholders:

In a Single Shareholder Scenario, the sole shareholder assumes the roles of director, president, and treasurer within the corporation.

For a Two Shareholder Scenario, both shareholders become directors, distributing responsibilities such as president, vice president, secretary, and treasurer between them.

Furthermore, it’s crucial to note that licensed psychologists must hold at least 51% of shares. The remaining shares can be allocated to professionals such as nurses or physicians.

However, it’s essential to ensure compliance with the Moscone-Knox Professional Corporation Act to operate legally.

This act upholds rigorous professional standards and ethical practices within the field of psychology in California. Understanding these eligibility requirements is vital before proceeding with the incorporation process.

Step 02: Buy-Sell Agreement for Multi-Shareholder for Psychological Professional Corporation

As your professional psychological corporation in California evolves to include multiple shareholders, it becomes paramount to establish a buy-sell agreement.

This agreement, also called a shareholder’s agreement, serves as a legal safeguard, dictating the course of action in the event of a shareholder’s death, incapacity, divorce, or desire to exit the corporation.

Without a buy-sell agreement, you risk navigating through a tumultuous scenario should unforeseen circumstances arise.

For instance, shares could transfer to non-psychologist heirs, contrary to your intentions.

Engaging a seasoned business attorney who is well-versed in California corporation law is prudent.

They can tailor a buy-sell agreement to your corporation’s specific needs, outlining the protocols for transferring or selling shares among remaining stakeholders following trigger events.

This proactive measure mitigates potential chaos and costly disputes in the future while ensuring compliance with legal requirements.

Therefore, prioritizing the establishment of this vital governance document is paramount for the longevity and stability of your professional corporation.

Step 03: C Corp vs. S Corp: Which Tax Status is Better for a CA Psychology Corporation?

In establishing your professional psychological corporation in California, a crucial decision revolves around tax classification – opting for subchapter C or subchapter S under the federal tax code.

By default, your corporation is treated as a C corporation if you don’t file anything with the IRS. Under this status, your corporation is subject to taxation on its net income.

Additionally, profits distributed to you are taxed personally, leading to potential “double taxation.”

On the other hand, selecting S corporation status allows for pass-through taxation. Income, losses, deductions, and credits flow directly to your tax return. While providing liability protection, S corp status eliminates the risk of double taxation.

To elect S corp status, you must submit IRS Form 2553 within 2 months and 15 days from your incorporation date in California.

While S corporation status often proves advantageous for psychology corporations due to its flow-through taxation, each situation is unique. Therefore, engaging in thorough discussions with your tax professional is imperative to determine the most suitable tax classification for your professional corporation.

Step 04: Name Requirements for California Professional

Selecting the right name for your California psychology corporation is not just a matter of personal preference; it’s legally regulated.

According to Cal. Bus. & Prof. Code § 2998, the name must incorporate at least one psychology-related term specified in Cal. Bus. & Prof. Code § 2902(c).

These terms include

  • Psychology
  • Psychological
  • Psychologist
  • Psychology consultation
  • Psychology consultant
  • Psychometry
  • Psychometrics
  • Psychometrist
  • Psychotherapy
  • Psychotherapist
  • Psychoanalysis
  • Psychoanalyst.

Moreover, your chosen name should include a corporate designator such as “Corp.,” “Incorporated,” “Inc.,” or “Professional Corporation.”

It’s imperative to avoid names that are misleading or too similar to existing businesses. Approval is required for restricted terms like “bank.”

Your corporation’s name should accurately portray your psychology services while complying with all California naming laws.

Engaging with a business formation professional can ensure that your chosen psychology corporation name meets all legal requirements, safeguarding your brand identity effectively.

Step 05: Selecting a Registered Agent for Your California Psychology Corporation

In compliance with California law, every corporation must appoint a registered agent responsible for accepting crucial legal documents such as lawsuits or subpoenas. This agent must be accessible at a physical address within California during standard business hours.

While it’s possible to designate an internal individual like a director or officer for this role, the repercussions of their absence during legal proceedings could be dire, potentially resulting in a default loss.

To avoid such complications, many owners of psychology corporations opt to enlist the services of a professional registered agent.

This choice offers both convenience and enhanced privacy, as these agents manage all legal correspondence without linking you directly to the office. Additionally, it helps keep your residential address off public records.

As you begin forming your corporation, ensure you or your designated agent can reliably receive legal documents at a California business address during regular business hours. If not, it’s advisable to consider engaging a registered agent service provider.

Step 06: File Articles of Incorporation

Establishing a California Accountancy Corporation entails submitting the Articles of Incorporation of a Professional Corporation to the California Secretary of State. This pivotal document formally registers your corporation with the state, marking the commencement of its legal existence.

The contents of the Articles of Incorporation are numerous yet indispensable for legal adherence.

Commence with the name of the Accountancy Corporation, ensuring its compliance with the naming regulations specified for accountancy corporations in California.

Subsequently, delineate the principal business address where your corporation will operate.

Specify the name and address of the individual or entity designated as the Agent for Service of Process to handle legal documents on behalf of your corporation.

Also, stipulate the number of shares your corporation is authorized to issue, symbolizing ownership portions.

Most notably, it unambiguously states the corporation’s purpose, emphasizing the provision of accountancy services by California law to prevent any misinterpretations.

Accurate completion and submission of the Articles of Incorporation are imperative to establish a robust legal groundwork for your accountancy corporation.

Thus, seeking guidance from an attorney who is well-versed in California business formation regulations is prudent to ensure meticulous handling of all details from the outset.

Step 07: Creating Organizational Minutes for California Psychology Corporations

Crafting organizational corporate minutes is advisable once your psychology corporation is officially registered in California.

These internal documents identify your initial officers and directors, documenting essential information from your Articles of Incorporation.

While essentially procedural, maintaining these records illustrates your commitment to observing corporate formalities in California. This documentation can be invaluable should legal matters arise.

Additionally, it’s essential to prepare annual minutes summarizing significant corporate decisions as per CA Corporation Code §1500.

Consistent record-keeping serves as evidence of your compliance with legal requirements.

Thoughtfully drafting and securely preserving your psychology corporation’s minutes is crucial for upholding legal validity and safeguarding against scrutiny.

Step 08: Crafting Robust Bylaws for California Psychological Corporations

When establishing a psychology corporation in California, developing comprehensive bylaws is imperative to ensure seamless operations and adherence to legal requirements.

These governing documents should encompass various aspects, including shareholder meeting schedules, voting protocols, powers of directors and officers, record-keeping guidelines, stock issuance procedures, and details of the registered agent.

The bylaws, being legally binding, should address the following:

  • Meetings: Specify details such as the timing of shareholder meetings, requirements for meeting notices, voting procedures, and rules regarding quorum.
  • Officers: Define the powers, roles, and procedures for electing corporate directors and officers.
  • Records: Establish policies for the maintenance and accessibility of crucial records like meeting minutes, stock ledgers, licenses, and contracts.
  • Stock: Outline procedures for the issuance and transfer of corporate stock.
  • Agent: Provide information about the registered office and agent.
  • Accounting: Set forth fiscal year dates and accounting methods to be followed.
  • Amendments: Include procedures for amending the bylaws to allow for necessary modifications.

In addition, bylaws must include the following provision mandated by Business & Professions Code §2999:

“The capital stock of that corporation owned by a disqualified person, as defined in Section 13401 of the Corporations Code, or a deceased person, shall be sold to the corporation or to the remaining shareholders of that corporation within any time as those regulations may provide.”

Comprehensive bylaws facilitate efficient operations and serve as evidence to regulators and courts that your corporation complies with California’s legal governance standards.

Step 09: Issuing Stock to Shareholders of California Psychology Corporations

When establishing your psychology corporation, accurately documenting share ownership is paramount. Stock certificates serve as formal indicators of each shareholder’s ownership percentage.

These records should encompass essential details such as the corporation’s name, shareholder names, number of shares issued, total authorized shares, issuance dates, and signatures of the president and secretary.

Also, stock certificates must address any relevant restrictions on ownership and transfer, per CA Corporation Code §300-313.

Accurate documentation and appropriate share ownership limitation are imperative for regulatory compliance and legal safeguarding.

Step 10: Maintaining a Stock Ledger for Your California Psychology Corporation

Apart from stock certificates, it’s crucial to maintain a corporate stock ledger to document all initial issuances and subsequent share transfers.

This ledger serves as a historical record, detailing:


  • Names of shareholders
  • Number of shares issued
  • Dates shares were acquired

Regular updates to the ledger ensure accurate ownership documentation in case of permitted share transfers according to the law.

Step 11: Obtaining an EIN for Your California Psychology Corporation

Following the registration of your psychology corporation, it’s essential to apply for a federal Employer Identification Number (EIN) from the IRS.

This distinctive tax ID number serves as the business’s equivalent of a Social Security Number, facilitating tax filings and enabling the opening of business bank accounts.

You can either submit IRS Form SS-4 or conveniently request an EIN online.

Refer to the IRS instructions for Form SS-4 if you encounter any queries during the completion process.

Securing an EIN is crucial for ensuring federal tax compliance and facilitating the establishment of business bank accounts.

Step 12: Filing for S Corporation Status with the IRS

If you wish to have your California psychology corporation taxed as an S corporation, submit IRS Form 2553 within 2 months and 15 days from your incorporation date.

This federal tax election enables business income, losses, deductions, and credits to “pass through” your tax return.

The form necessitates information such as your corporation’s name, address, EIN, shareholders’ details, and particulars regarding individuals holding community property interests.

For assistance in accurately completing the form, refer to the instructions on Form 2553 provided by the IRS.

Step 13: Filing a Statement of Information with the CA Secretary of State

Within 90 days of incorporating your psychology corporation, submitting an initial Statement of Information form to the California Secretary of State is imperative.

This document divulges essential details, including your entity number, business address, mailing address, officers, directors, registered agent, and business type.

A filing fee of $25 is applicable, with an additional $5 if you opt for an official certified copy. Remember to submit an updated Statement annually to evade penalties and ensure ongoing compliance.

Missing the initial 90-day deadline may result in a suspended corporate status and a substantial $250 penalty imposed by the state.

Hence, mark this crucial requirement on your calendar to maintain your corporation’s favorable legal standing.

Step 14: Importance of Filing a Limited Offering Exemption in California

Within 15 calendar days of issuing any stock, California corporations must submit a Notice of Transaction Pursuant to a Limited Offering Exemption to the Department of Financial Protection and Innovation (DFPI).

This critical filing informs the State of California about your corporation’s exemption from full securities regulation, as shares are not being offered to the general public.

To complete this process, you must submit a duly filled Form 25102(f) and the requisite fee to the DFPI.

The standard filing fees are as follows:


  • $350 for stock valued at $1 million or more
  • $275 for stock valued between $500K – $999K
  • $150 for stock valued between $100K – $499K
  • $25 for stock valued less than $25K

Submitting this mandatory notice alleviates your corporation from the complexities associated with more rigorous securities filings and regulations linked with public stock offerings.

Step 15: Setting up a Dedicated California Corporation Bank Account

Soon after obtaining your Entity Number, it’s imperative to establish a distinct business bank account in the name of your psychology corporation, using its tax ID number (EIN).

This dedicated account should be reserved exclusively for depositing client income and covering business expenditures.

Maintaining a strict distinction between corporate and personal finances is paramount to safeguarding your liability shield.

Mixing funds or utilizing a single account for both purposes could lead courts to “pierce the corporate veil” in case of lawsuits or audits, thereby holding owners personally liable for company debts and obligations.

Furthermore, the initial deposits into the corporate account should precisely align with the equity stock purchase amounts documented in your company’s Stock Ledger.

This is evidence of accurately tracking shareholder contributions and avoiding the mingling of capital with earned revenue.

By allocating business bank accounts exclusively for your practice’s corporate financial transactions, you reinforce the limited liability protections embedded in state law.

It’s also crucial to inform payment processors utilized by your corporation, such as billing systems and merchant services, to ensure that invoices are settled from protected accounts rather than personal funds.

Step 16: Navigating the Local Licensing Landscape for California Corporations

Upon fulfilling the state-level formation prerequisites, shifting your attention towards the county and city jurisdictions where your psychology corporation intends to operate facilities or cater to clients is essential.

The California CalGOLD website is valuable for consolidating information on local licensing authorities and delineating the specific documentation and renewal procedures mandated by various political subdivisions.

Requisite licenses include municipal business operation permits, county health screenings, certifications for local fire and safety compliance, city-specific revenue licenses, California BOE sales permits, and professional clearances at the state or county level.

Neglecting to obtain the necessary licenses can disrupt your practice’s operations, leading to denied facility access, revocation of contractor status, ineligibility for enrollment with insurance providers, or potential imposition of civil penalties.

Hence, accurately identifying and upholding the requisite permits across diverse government levels is indispensable for ensuring seamless adherence to legal requirements and uninterrupted service provision.

Step 17: Complying with the Federal Corporate Transparency Act (CTA)

A significant regulatory shift looms on the horizon, set to effect on January 1, 2024, impacting every California professional corporation – the federal Corporate Transparency Act (CTA).

Enacted in 2021, this legislation mandates nearly all state-registered corporations and LLCs to divulge details of their current “beneficial owners” and “company applicants” to the federal Financial Crimes Enforcement Network (FinCEN) database.

“Beneficial owners” are individuals exerting substantial control over a company or receiving significant economic benefits from ownership stakes.

On the other hand, “company applicants” are those responsible for filing formal registration papers, regardless of ownership status.

CTA disclosures aim to thwart various financial crimes, such as money laundering, tax evasion, terrorism financing, trafficking, and more, by shedding light on clandestine company ownership arrangements.

Failure to accurately report beneficial ownership information, deliberately or negligently, carries severe civil and criminal consequences.

Penalties include daily fines of up to $500 (capped at $10,000) for tardy submissions, alongside potential imprisonment for a maximum of 2 years.

Hence, it is imperative for all California psychology corporations to proactively ensure compliance with federal transparency regulations when the provisions of the CTA come into force in 2024.

Last Words

Given the numerous steps required, establishing a psychology corporation can become intricate, especially for practitioners with busy schedules.

This is precisely why Sam has assisted thousands of individuals seamlessly and efficiently in incorporating their businesses.

Looking to form your Professional Psychological Corporation? Email me at or talk to me directly at 818-925-0002

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