The PSCA provides that all shareholders, directors, officers, agents (except the registered agent), and employees (except ancillary personnel, corporate secretary, and incorporator) must be licensed in the State of Illinois to render the same professional service or related professional services for which the corporation is formed. Accordingly, no person who is not licensed in that category of professional service or related professional services may have any part in the ownership, management, or control of the corporation. Non-licensed individuals may, however, serve as shareholders, directors, officers, employees, and agents for purposes of dissolution.
The heirs of a deceased professional licensed under the PSCA are often required to open a probate estate in order to sell the assets of the practice. Typical estate planning techniques such as trusts cannot be used to avoid probate because of the prohibition against non-licensed individuals owning stock in a professional corporation.
There is a way, however, to avoid probate. The Uniform Transfer on Death Security Registration Act (“TOD”) allows a practitioner to register securities in a “beneficiary form,” which indicates the present owner of the security and the intention of the owner regarding the person who will become the owner of the security upon the owner’s death. The securities are automatically transferred to the named beneficiary upon the owner’s death. Because a TOD beneficiary has no ownership interest, the requirements of the PSCA are satisfied during the life of the owner. While the unlicensed successor could not continue the professional practice unless he or she possessed the same professional license, the unlicensed successor would be able to sell the assets of the practice without probate. Registration is accomplished by designating a “pay on death” or “POD” beneficiary. The owner may cancel or change the beneficiary designation at any time.
A professional corporation must provide for the purchase or redemption of the shares of any shareholder upon his or her death or disqualification in its articles of incorporation, bylaws, or by separate agreement. If the shareholders fail to determine a price for the purchase or redemption, the PSCA provides for a default purchase price equal to the book value as of the end of the month immediately preceding the death or disqualification of the shareholder in accordance with the accounting methods used by the corporation. Book value is rarely a good measure of share value, as it may not reflect goodwill or the true fair market value of the hard assets. For cash basis taxpayers, for example, book value would not reflect the accounts receivable of the corporation. Accordingly, to avoid unfairness it is important in a professional corporation to have a buy-sell agreement in place with an agreed-on method for calculating share value.
Please do not hesitate to contact us if you are a professional and have any questions about your ownership interest in your professional corporation and its treatment in your estate plan.