Texas professional associations are unique among Texas business entities. Their ownership is restricted, their governance is based on Texas corporate law but they are not “corporations,” and while they may issue shares of stock, the people who hold those shares are called “members” rather than “shareholders.” In summary, they can be confusing. Professional associations can confuse both the professionals organizing the entity and the attorneys in charge of that organization, particularly if those attorneys lack experience in dealing with professional entity structures and licensed professionals. This article reviews the general characteristics of Texas professional associations from the perspective of ownership, corporate governance, and operation.
General Characteristics and Background
A professional association is an association (as distinguished from a partnership or corporation) formed for the purpose of providing a professional service and governed by the Texas Business Organizations Code (the “BOC”). Only certain professionals may organize a professional association, including:
- doctors of medicine;
- doctors of osteopathy;
- doctors of podiatry;
- therapeutic optometrists;
- veterinarians; or
- licensed medical health professionals.
The list above is exclusive. No licensed professionals other than those listed above may organize a professional association, and the rules regarding the professional services provided through a professional association are similarly restricted.
A professional association, while analogous to a corporation, is specifically distinguished from a corporation under the BOC. This distinction is due to the prohibition against the corporate practice of medicine in Texas. The prohibition against the corporate practice of medicine is founded on the belief that the inherent relationship between doctor and patient should not be practiced through a pure corporate entity. This prohibition is reinforced through a number of licensing statutes contained in the Texas Occupations Code (an excellent discussion of this doctrine is available at the Texas Medical Association’s website). Texas legislators created the professional association as a vehicle to allow doctors of medicine to form an association that would enjoy limited liability protection while not being a true corporation.
Ownership and Equity Interests; “Authorized Persons”
Professional associations have an ownership structure similar to a corporation, but with somewhat different terminology. For example, while the owner of a corporation is called a shareholder, the owner of a professional association is called a member.
An individual may be an owner of a professional association if that individual is licensed in Texas or another jurisdiction to provide the same professional service as is rendered by the professional association. In BOC terminology, each member is required to be both an “authorized person” and a “professional individual.” Pursuant to these statutory definitions, business entities may not be members in a professional association. This distinction is important, as the “individual-only” ownership restrictions in a professional association do not apply to other professional entities, such as the professional corporation or professional limited liability company.
If a member of a professional association fails to meet the definition of an “authorized person” under the BOC, that member must promptly relinquish his or her ownership interest in the association. Additionally, a person who succeeds to the ownership interest of a member must promptly relinquish the member’s financial interest in the professional association if the successor fails to meet the “authorized person” definition.
The BOC contains mandatory buyout provisions for non-authorized persons in professional associations. The professional association is required to purchase the ownership interest of any non-authorized person. In the event that there is only one member remaining in the professional association and that member is required to relinquish his or her financial interest, the BOC permits that member to act as the managerial official or owner of the entity for the limited purpose of winding up the entity’s affairs, selling the assets, and disposing of ownership interests.
Governing Authority – the Board of Directors or Executive Committee
Professional associations are governed either by a board of directors of an executive committee. Regardless of which name is given to the governing authority, its function is similar and the governing authority is referred to in this article as the “Board.” The BOC makes no functional distinction between a board of directors or executive committee in a professional association.
Members of the professional association elect the members of the Board. By default, each member of the professional association is entitled to cast one vote as provided in its certificate of formation. The BOC, however, restricts who may be a member of the Board. First, only a member of the professional association is eligible to become a Board member. Second, only individuals licensed to provide the same professional service as is provided by the professional association may become a board member. Any Board member that fails to meet these two qualifications is required to promptly resign from his or her Board position.
The BOC requires a professional association to elect officers. Officers are elected by the members of the Board. Similar to the restrictions on who may be a Board member, the BOC restricts who may be elected an officer of a professional association. First, only a member of the professional association may be elected as an officer. Second, the president of a professional association must be a member of the Board. Finally, the BCO requires that officers be licensed to provide the same professional service as is provided by the professional association. Officers who fail to meet these qualifications must promptly resign.
Laws governing the ownership and governance of a professional association are far more restrictive than those governing non-professional entities, professional limited liability companies, and professional corporations. Organizing professional associations (particularly joint-practice professional associations) should be undertaken with care and a view towards the long-term goals of the owners. Failing to consider the professional licenses of the owners, joint-practitioner ownership, and many other factors can lead to unnecessarily expensive “fixes” down the road.