By Jade Yeban, J.D. | Legally reviewed by Aviana Cooper, Esq. | Last reviewed October 30, 2023
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Starting a small business is an exciting adventure, but it comes with many decisions. One important choice is your business structure. You may be familiar with entity types, like the general partnership or nonprofit organization. Professional corporations are also a type of entity that is best for certain types of professionals.
Some states require certain professionals to register as a professional corporation. In other states, these professionals have the option of choosing how to organize. They can register as professional corporations or regular corporations. In all states, people in certain professions can form professional corporations or professional service corporations.
This guide will provide an overview of professional corporations. It discusses important topics like formation, corporate tax rates, and the pros and cons of PCs.
A professional corporation, often referred to as a PC, is a type of business structure. PCs can also be professional limited liability companies (PLLCs). Professional corporations are organizations of professionals in the same field or trade. These professionals include doctors, lawyers, accountants, and others.
Unlike a general partnership or limited liability partnership, a PC offers both business owners and corporation owners liability protection. This means personal assets, like your home or car, can be safeguarded from business debts or lawsuits.
A professional corporation's ownership is a bit different than other business structures. PCs are owned by shareholders. These shareholders are professionals. The board of directors typically makes significant business decisions. Meanwhile, the company's officers manage the day-to-day operations.
Not all professionals need to form a PC. State law dictates which professions must use this business formation type. Often, professionals have the choice between a PC, PLLC, or C corporation. It's essential to check with state licensing regulations. You can also consult a legal expert for more information.
Depending on the state that you are in, the list of professionals that must be incorporated as a professional corporation may vary. However, in most states, the list of professionals that are required to incorporate as a professional corporation includes:
If you are in doubt about whether you have to incorporate as a PC, you should call your state's corporate filing office. This is generally part of the secretary of state's office or the corporation commissioner. These officials will have the information you need to see whether you will have to form a professional corporation.
Professional corporations have become less popular than they used to be. Before 1986, the main reason for professionals to incorporate was to gain the favorable tax benefits that a corporation provided. At that time, professionals who incorporated could shelter their money inside of the corporation, while those operating in sole proprietorships or partnerships could not.
The IRS now classifies most professional corporations as personal service corporations. This means that the corporate income is taxed at a flat 35 percent. Therefore, there is no tax advantage for professionals to incorporate. They no longer benefit from the two-tiered tax system.
However, this is not to say that there are no reasons left for professionals to incorporate as a professional corporation. For instance, professional corporations allow their owners to benefit from limited personal liability for business debts. They are also safe against claims against the corporation. In addition, although incorporation cannot protect an owner against liability from their own personal malpractice, it can provide limited liability for the malpractice of an associate.
Professional corporations offer several benefits, but they also have certain disadvantages. One of the primary drawbacks is the potential for double taxation. This can lead to a heavier tax burden compared to other business structures.
Additionally, the setup and maintenance of a PC can be complex. It can require adherence to strict regulatory and administrative guidelines. This often results in higher legal and accounting fees. Furthermore, the flexibility in ownership is limited for a PC. Shares can usually only be owned by members of the same profession. This restricts the potential investment opportunities and growth strategies of the PC.
Starting a professional corporation involves several steps:
Every professional corporation requires a business license to operate legally. Ensure you're in good standing with the state's requirements. Specific professions may have more state licensing requirements, so always check to ensure your PRC meets all regulatory standards.
If business owners decide to change their business structure later on or end operations, they must follow state procedures. Conversion might involve transitioning from a PC to another entity, like a C corporation. Dissolution means officially ending the business. In both cases, proper documentation and adherence to state requirements is essential.
PCs offer liability protection, but even so, professional liability insurance is crucial. This insurance provides an added layer of protection. It helps safeguard business owners from potential lawsuits related to their business services.
Unlike general liability insurance, professional liability specifically covers claims of negligence. In other words, it can safeguard against mistakes made in a professional capacity. For professionals like doctors or lawyers, this can be invaluable. Always consult with an insurance expert to determine the right coverage for your profession.
Taxes for professional corporations can be tricky. PCs often face double taxation. This means the corporation pays corporate tax on its profits, and then owners pay income tax on their personal tax returns. Some choose to operate as C corporations due to specific benefits and federal tax considerations. Understanding the nuances between corporate tax rates and personal income is vital. Consult with a tax expert to navigate these waters.
Suppose that Dr. D and Dr. E are brain surgeons who are partners in their medical practice. One day, Dr. D performs surgery while drunk and accidentally nicks an artery that runs to the brain. The patient unfortunately dies on the table. A jury hearing the malpractice suit that follows awards the family of the patient $6 million in damages against Dr. D and the partnership, but the malpractice insurance only covers $2 million. Dr. D and Dr. E would be personally liable for the remaining $4 million.
Now suppose that Dr. D and Dr. E, instead of practicing as partners, instead incorporated as a professional corporation. Dr. D performs the same surgery as described above and the jury again awards a $6 million judgment in damages. The malpractice insurance covers $2 million, leaving $4 million still to be paid, but only Dr. D will be personally liable for the remaining $4 million because he was the one who committed the malpractice.
Today, many people who would have once incorporated as a PC are instead choosing to incorporate as a limited liability company (LLC) or as LLPs. This is something that you may want to consider.
If you're not sure whether to incorporate your business as a professional corporation, form a partnership, or organize as some other type of business entity, you may want to meet with an attorney.
A business organization lawyer will help you match your needs and goals to the right legal structure.
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