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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)


STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6592

July 10, 1989

BUSINESS CORPORATION ACT:

Incorporation to provide learned professional services

COMMERCE, DEPARTMENT OF:

Acceptance of incorporation to provide learned professional services under Business Corporation Act

PROFESSIONAL SERVICE CORPORATIONS:

Application of limited liability and indemnification provisions of Business Corporation Act

Provision of more than one professional service

A domestic corporation formed under the Business Corporation Act may not engage in activities which may only be performed by one of the learned professions.

The Department of Commerce should not have accepted filings under the Business Corporation Act submitted by corporations performing professional service activities which are considered as one of the learned professions, or which must be performed by other professions which are prohibited by statute from incorporating other than under the Professional Service Corporation Act. These corporations should be notified and given an opportunity to comply with the terms, provisions and requirements of the Professional Service Corporation Act within a reasonable time.

A corporation incorporated under the Professional Service Corporation Act to provide one or more professional services may render such services, provided each shareholder of such professional service corporation (other than the personal representative of a deceased or legally incompetent shareholder) is fully qualified to perform all of the professional services rendered by the corporation.

Sections 209, 541, 561-565, and 569 of the Business Corporation Act, which provide for the limitation on the liability of and provide for the indemnification of directors, officers, employees, and agents of business corporations, do not apply to professional service corporations.

Mr. Doug Ross

Director

Department of Commerce

Law Building

Lansing, MI 48913

You have requested my opinion on four questions relating to professional service corporations. Your questions will be separately stated and answered.

Your first question may be stated as:

May a domestic corporation formed under the Business Corporation Act, 1972 PA 284, MCL 450.1101 et seq; MSA 21.200(101) et seq, engage in activities which may only be performed by one of the learned professions if the rendering of the professional service is not the sole purpose of the corporation?

Section 251(1) of the Business Corporation Act, MCL 450.1251(1); MSA 21.200(251)(1), provides in pertinent part:

"A corporation may be formed under this act for any lawful business purpose, except to engage in a business for which a corporation may be formed under any other statute of this state unless that statute permits formation under this act."

The Professional Service Corporation Act, 1962 PA 192, MCL 450.221 et seq; MSA 21.315(1) et seq, permits persons practicing professions to incorporate as professional corporations. Until this legislative enactment, the practice of professions generally recognized as the "learned professions" was not a lawful corporate purpose under Sec. 251(1) of the Business Corporation Act, supra. The "learned professions" have been generally recognized as law, medicine and divinity. See Commonwealth v Fitler, 147 Pa 288; 23 A 568, 569 (1892), Georgia State Bd of Examiners in Optometry v Friedmans' Jewelers, Inc, 183 Ga 669; 189 SE 238, 241 (1936), Commonwealth v Brown, 302 Mass 523; 20 NE2d 478, 481 (1939), Silver v Lansburgh & Bro, 72 US App DC 77; 111 F2d 518, 519 (1940), and Lee Optical Co of Alabama, Inc v State Bd of Optometry, 288 Ala 338; 261 So2d 17, 24 (1972).

Section 2(a) of the Professional Service Corporation Act, MCL 450.222(a); MSA 21.315(2)(a), defines a professional service as "any type of personal service to the public which requires as a condition precedent to the rendering of the service the obtaining of a license or other legal authorization." This section then lists a number of the professional services specifically intended to come within this definition. However, the section, by its express terms, is not limited to the enumerated professions.

Section 2(b) of the Professional Service Corporation Act, MCL 450.222(b); MSA 21.315(2)(b), defines a professional corporation as

"a corporation which is organized under this act for the sole and specific purpose of rendering 1 or more professional services and which has as it shareholders only individuals who themselves are duly licensed or otherwise legally authorized within this state to render the same professional services as the corporation, or the personal representatives or estates of individuals as provided in section 10."

Sections 4, 5 and 8 of the Professional Service Corporation Act relate to the organization and functioning of the professional service corporation. Section 4 permits the formation of a professional service corporation for the purpose of rendering one or more professional services. Section 5 limits the rendering of services by the professional corporation to those officers, employees and agents licensed or otherwise legally authorized to render the services. Section 8 limits the issuance of stock only to persons who are licensed to render the same professional service as is provided by the corporation.

OAG, 1975-1976, No 4899, p 181, 182-183 (October 23, 1975), considered the term "profession" and its meaning within the terms of Const 1963, art 5, Sec. 5:

"The word 'profession' is most commonly employed in the sense of vocation, business, calling, or occupation, 72 CJS, Profession, pp 1215-1216, and usually connotes an attainment of special knowledge, as distinguished from mere skill. It also requires application of such education or special knowledge for others as distinguished from its pursuit for one's own purposes. The term further implies a practical dealing with affairs as distinguished from mere study or investigation.

"Originally, and historically, the word 'profession' was applied only to law, medicine, and theology and these were known as the three 'learned professions.' Thus, in United States v. Laws, 163 US 258; 16 SCt 998; 41 LEd 151 (1896), the United States Supreme Court defined profession as:

" '... an "employment, especially an employment requiring a learned education, as those of divinity, law and physic." (Worcester's Dictionary, title profession.) In the Century Dictionary the definition of the word "profession" is given, among others, as "A vocation in which a professed knowledge of some department of science or learning is used by its practical application to the affairs of others, their interests or welfare in the practice of an art founded on it. Formerly, theology, law, and medicine were specifically known as the professions; but as the applications of science and learning are extended to other departments of affairs, other vocations also receive the name. The word implies professed attainments in special knowledge as distinguished from mere skill....' "

"In modern usage, therefore, the tendency has been to enlarge and extend the scope and meaning of the term, and this has resulted in the word becoming more elastic and its denotation more liberalized, so that it has ceased to be applied exclusively to the learned professions. Thus, as science, learning and technology are extended to other areas of knowledge, additional vocations are so designated. 72 CJS, Profession, pp 1217-1219." (Emphasis by the Court.)

OAG, 1979-1980, No 5676, p 700, 701 (April 8, 1980), considered the "learned professions doctrine," its rationale and application to domestic corporations in the context of a question relating to the practice of osteopathic medicine. The opinion stated:

"Traditionally, learned professions have not been permitted to practice as corporate entities by virtue of what is sometimes referred to as the 'learned profession doctrine.' A four-point rationale has been generally advanced as the basis for this doctrine:

"1) Laymen should not be permitted, directly or indirectly by virtue of the corporate form, to practice medicine;

"2) Necessary confidential and professional relationships existing between a physician and his patient could be destroyed by lay shareholders interested only in a profit;

"3) The limited liability of the corporate form is not appropriate where the client must place such a high degree of trust and confidence in the physician; and

"4) It is impossible for a corporation to fulfill the licensing and ethical requirements medical practice demands. 47 Journal of Urban Law 674, 685-686 (1969)

"It was an analysis of this doctrine, together with a survey of the doctrine's application in sister states, which led to the conclusion in II OAG, 1955-1956, No. 2451, p 124 (March 7, 1956), that neither the practice of medicine nor the furnishing of osteopathic medical services was a lawful corporate purpose permitting formation of a corporation pursuant to business corporation statutes then in effect. The opinion held that it is not a lawful purpose of a corporation to contract with other persons to provide medical care through the officers, agents or employees of the corporation. See also United States v. American Medical Association, 72 US App DC 12; 110 F2d 703 (1940); cert den, 310 US 644; 60 SCt 1096; 84 LEd 1411 (1940); People by Kerner v United Medical Services, 362 Ill 442; 200 NE 157 (1936); 61 Am Jur 2d, Physicians, Surgeons and Other Healers, Sec. 15, 135.

"Since that opinion, the legislature has enacted the Professional Service Corporations Act, supra. The provisions of this Act address each of the four points of the rationale which underlies the learned profession doctrine prohibiting use of the corporate form by such professions."

The Corporation and Securities Bureau advises that it has considered attorneys, physicians, osteopaths, ophthalmologists, and psychiatrists to be professions covered by the learned professions doctrine. These professions have been permitted to incorporate only under the provisions of the Professional Service Corporation Act. It further advises that certified public accountants, because of the provisions of Sec. 705 of 1980 PA 299, MCL 339.705; MSA 18.425(705), dentists, because of the provisions of 1978 PA 368, Sec. 1, MCL 333.16601; MSA 14.15(16601), and psychologists, based upon the informal advice of my office, have been permitted to incorporate only under the provisions of the Professional Service Corporation Act. All remaining professional services may incorporate under either the Business Corporation Act or the Professional Service Corporation Act.

Based upon the historical prohibition against the incorporation of the "learned professions," the legislative intent in enacting the Professional Service Corporation Act, which addresses and satisfies each of the traditional reasons against such incorporation, and the previously cited requirements of incorporating under the Professional Service Corporation Act, it must be concluded that corporations formed under the Business Corporation Act may not engage in the practice of the learned professions.

It is my opinion, in answer to your first question, that a corporation formed under the Business Corporation Act may not engage in activities that may only be performed by one of the learned professions.

Your second question is:

If the answer to the first question is in the negative, may existing corporations formed under the Business Corporation Act continue to provide professional services in one of the learned professions?

Section 3 of the Professional Service Corporation Act, MCL 450.223; MSA 21.315(3), provides:

"This act shall not apply to any corporation organized within this state prior to the passage of this act to perform professional services to the public. Any such corporation may bring itself within the provisions of this act by amending the articles of incorporation in such a manner so as to be consistent with all the provisions of this act and by affirmatively stating in the amended articles of incorporation that the shareholders have elected to bring the corporation within the provisions of this act."

Although the Professional Service Corporation Act was passed by the Legislature in 1962, it did not become effective until March 28, 1963. Section 3 permits corporations formed under the provisions of the Business Corporation Act prior to March 28, 1963, and performing professional services to retain their corporate authority as provided by the Business Corporation Act. This section also gives such corporations if lawfully formed before March 28, 1963, the opportunity to come within the terms of the Professional Service Corporation Act by amending their articles so as to be consistent with the requirements of the Professional Service Corporation Act. This change of corporate authority requires shareholder approval.

However, prior to March 28, 1963, professions considered to be one of the "learned professions" or professions prohibited by statute from incorporating were precluded from incorporating under the Business Corporation Act, since the services provided by the "learned professions" were not considered to be a legitimate corporate purpose. Once the Professional Service Corporation Act was enacted, all of these professional services previously excluded from incorporation were able to incorporate but only under the terms and conditions as set forth in the Professional Service Corporation Act.

It is significant that Sec. 4 of the Professional Service Corporation Act, as originally enacted, permitted incorporation of professional corporations under the provisions of both the Professional Service Corporation Act and the Business Corporation Act. However, some confusion apparently arose as to the proper statute to be used for incorporating professional service corporations. This issue was discussed in OAG, 1979-1980, No 5676, supra at 701, which concluded that the Legislature intended that a professional service corporation must be organized under the Professional Service Corporation Act and, in addition, may be organized under the Business Corporation Act, but not solely under the Business Corporation Act. 1980 PA 216 amended Sec. 4 of the Professional Service Act to delete all reference to the Business Corporation Act from this section. Left intact, however, was Sec. 13 of the Professional Service Corporation Act, which does recognize that the Business Corporation Act provisions apply to a professional service corporation where not inconsistent with the Professional Service Corporation Act.

The Corporation and Securities Bureau further advises that it has accepted filings from corporations formed under the Business Corporation Act, which are performing, as one of its corporate activities, professional services which may only be performed by one of the learned professions.

It is my opinion, in answer to your second question, that the filings submitted by corporations formed under the Business Corporation Act and performing professional service activities which are considered as one of the learned professions, or which must be performed by other professions which are prohibited by statute from incorporating other than under the Professional Service Corporation Act should not have been accepted by the Department of Commerce. These corporations should be notified and given an opportunity to comply with the terms, provisions and requirements of the Professional Service Corporation Act within a reasonable period of time.

The third question is:

May a professional corporation be formed to render more than one service? If answered in the affirmative, may the professional service corporation have as its shareholders individuals who are licensed or authorized to perform less than all of the services to be rendered by the corporation?

Section 2(b) of the Professional Service Corporation Act, defines a "professional corporation" as meaning

"a corporation which is organized under this act for the sole and specific purpose of rendering 1 or more professional services and which has as its shareholders only individuals who themselves are duly licensed or otherwise legally authorized within this state to render the same professional services as the corporation, or the personal representatives or estates of individuals as provided in section 10."

Section 4 of the Professional Service Corporation Act provides:

"An individual or group of individuals licensed or otherwise legally authorized to render professional services within this state may organize and become a shareholder or shareholders of a professional corporation for pecuniary profit under this act for the purpose of rendering 1 or more professional services."

These sections were amended by 1980 PA 216 by inserting the words "1 or more professional services" for the words "professional service" and "professional service or services" in Secs. 2b and 4, respectively. This act was passed in response to OAG, 1979-1980, No 5497, p 203 (June 25, 1979), which concluded that a professional service corporation could not become a partner in a partnership. 1980 PA 216 also amended Sec. 7 of the Professional Service Corporation Act to permit professional service corporations to become an incorporator or shareholder in other professional corporations if both corporations performed the same professional service. 1980 PA 216 was enacted as 1980 HB 5380. The House Legislative Analysis, HB 5380 (H-1), April 1, 1980, stated in pertinent part:

"The bill would clarify certain other provisions in the act. A professional corporation would specifically be allowed to perform more than one professional service. Professional corporations could be incorporated only under the provisions of the Professional Service Corporation Act, and no longer also under the provisions of the Business Corporation Act, as is currently allowed."

"The bill would clarify the provisions of the Professional Corporation Act in light of recent attorney general interpretations of the statute, by removing reference to incorporation of a professional corporation under the Business Corporation Act. Since incorporation of professional corporations is provided for under the Professional Service Corporation Act, reference to the Business Corporation Act is not needed, and in fact is confusing. The bill would clarify the definition of a professional corporation to provide that such a corporation could provide more than one professional service; an authorization which is implicit in other provisions of the current professional corporations statute."

The manifest legislative intent is that a professional service corporation may incorporate under the Professional Service Corporation Act for the purpose of rendering more than one professional service.

Section 5 of the Professional Service Corporation Act provides:

"No corporation organized and incorporated under this act may render professional services except through its officers, employees and agents who are duly licensed or otherwise legally authorized to render such professional services within this state. This provision shall not be interpreted to include in the term employee, secretaries, bookkeepers, technicians and other assistants who are not usually and ordinarily considered by custom and practice to be rendering professional services to the public for which a license or other legal authorization is required."

In addition, Sec. 8 of the Professional Service Corporation Act provides in pertinent part:

"No corporation organized under the provisions of this act may issue any of its capital stock to anyone other than an individual who is duly licensed or otherwise legally authorized to render the same specific professional services as those for which the corporation was incorporated."

Furthermore, Sec. 10 of the Professional Service Corporation Act prohibits shares of a professional service corporation from being sold or transferred to anyone other than those individuals who are eligible to be shareholders. The only exceptions are transfers to a personal representative or estate of a deceased or legally incompetent shareholder of the professional service corporation, but only for a reasonable time and with the stipulation that such person shall not participate in any decision concerning the rendering of professional services.

Moreover, it is significant that when the Legislature amended Sec. 2(b) and Sec. 4 of the Professional Service Corporation Act by means of 1980 PA 216, no change was made to Sec. 8 of the Act.

It is my opinion, in answer to your third question, that a corporation incorporated under the Professional Service Corporation Act may render one or more professional services, provided that each shareholder (other than the personal representative of a deceased or legally incompetent shareholder) of the professional service corporation is fully qualified to perform all of the professional services rendered by the corporation.

Your final question asks:

Do the provisions of 1987 PA 1 apply to professional service corporations?

1987 PA 1 amended Secs. 209, 541, 561, 562, 563, 564, 565 and 569 of the Business Corporation Act. The amendments in general involve limitations on the liability of and provide for the indemnification of directors, officers, employees and agents of business corporations.

For example, Sec. 209 of the Business Corporation Act provides:

"The articles of incorporation may contain any provision not inconsistent with any of the following:

"(a) A provision of this act or another statute of this state, for management of the business and conduct of the affairs of the corporation, or creating, defining, limiting, or regulating the powers of the corporation, its directors and shareholders, or a class of shareholders.

"(b) A provision that under this act is required or permitted to be set forth in the bylaws.

"(c) A provision providing that a director is not personally liable to the corporation or its shareholders for monetary damages for a breach of the director's fiduciary duty. However, the provision does not eliminate or limit the liability of a director for any of the following:

(i) A breach of the director's duty of loyalty to the corporation or its shareholders.

(ii) Acts or omissions not in good faith or that involve intentional misconduct or knowing violation of law.

(iii) A violation of section 551(1).

(iv) A transaction from which the director derived an improper personal benefit.

(v) An act or omission occurring before March 1, 1987."

However, Sec. 6 of the Professional Service Corporation Act provides:

"Nothing contained in this act shall be interpreted to abolish, repeal, modify, restrict or limit the law now in effect in this state applicable to the professional relationship and liabilities between the person furnishing the professional services and the person receiving such professional service and to the standards for professional conduct. Any officer, shareholder, agent or employee of a corporation organized under this act shall remain personally and fully liable and accountable for any negligent or wrongful acts or misconduct committed by him, or by any person under his direct supervision and control, while rendering professional service on behalf of the corporation to the person for whom such professional services were being rendered. The corporation shall be liable up to the full value of its property for any negligent or wrongful acts or misconduct committed by any of its officers, shareholders, agents or employees while they are engaged on behalf of the corporation in the rendering of professional services."

Although there is an apparent conflict between these two sections, it is unnecessary to address this issue until a determination is made on whether the provisions of 1987 PA 1 apply to professional service corporations.

Section 13 of the Professional Service Corporation Act, as amended by 1980 PA 216, provides in pertinent part:

"Act No. 284 of the Public Acts of 1972, as amended, being sections 450.1101 to 450.2099 of the Michigan Compiled Laws [Business Corporation Act], shall be applicable to a corporation organized pursuant to this act except to the extent that any of the provisions of this act are interpreted to be in conflict with the provisions of that act. In the event of conflict the provisions and sections of this act shall take precedence with respect to a corporation organized pursuant to the provisions of this act."

The answer to your question thus depends on whether amendments to the Business Corporation Act subsequent to its adoption in Sec. 13 of the Professional Service Corporation Act are incorporated in the latter statute.

In Public Schools of the City of Battle Creek v. Kennedy, 245 Mich 585, 591-592; 223 NW 359 (1929), the Supreme Court quoted with approval from Culver v People, 161 Ill 89; 43 NE 812, 814 (1896):

" 'The general rule is, that an act, which adopts by reference the whole or a portion of another statute, means the law as existing at the time of the adoption, and does not include subsequent additions or modifications of the statute so adopted, unless it does so by express or strongly implied intent. ... This rule seems to be strictly adhered to, where the prior act is particularly referred to in the adopting statute by its title. ... Where, however, the adopting statute makes no reference to any particular act by its title or otherwise, but refers to the general law regulating the subject in hand, the reference will be regarded as including, not only the law in force at the date of the adopting act, but also the law in force when action is taken, or proceedings are resorted to.' "

Section 13 of the Professional Service Corporation Act adopted by reference the whole of the Business Corporation Act, except to the extent that there may be conflicts between the two acts, in which case the former is controlling. There is no indication that the Legislature intended that subsequent additions to or modifications of the Business Corporation Act would be included in the Professional Service Corporation Act.

Moreover, Sec. 13 of the Professional Service Corporation Act does not refer to the general law regulating corporations, but rather, refers specifically to the Business Corporation Act by public act number and citation. It can thus be concluded that the Professional Service Corporation Act adopted the Business Corporation Act as it existed on July 18, 1980, the effective date of the last amendment to Sec. 13 of the Professional Service Corporation Act making specific reference to the Business Corporation Act.

It is my opinion, therefore, that the provisions of Secs. 209, 541, 561, 562, 563, 564, 565 and 569 of the Business Corporation Act, as amended by 1987 PA 1, do not apply to professional service corporations.

Frank J. Kelley

Attorney General

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