Depending on the state that they are in, professionals who want to come together and form a corporation may have to form a professional corporation. Professional corporations are organizations of professionals in the same field or trade. There are many states where people in certain professions (like lawyers, doctors or accountants) who want to incorporate their professional practice can do so only by incorporating as a professional corporation or a "professional service corporation."
In other states, these professionals have the option of choosing between organizing as professional corporations or regular corporations. And in all states, people in certain professions are allowed to form professional corporations or professional service corporations.
Incorporating as a Professional Corporation: Is it Required?
Groups of professionals working together as a business entity often organize as limited limited partnerships (LLPs) instead of as corporations, but incorporating provides certain advantages. Depending on the state that you are in, the list of professionals that are required to incorporate as a professional corporation may vary. However, in most states, the list of professionals that are required to incorporate as a professional corporation includes:
- Health care professionals (e.g. dentists, nurses, pharmacists, physical therapists, physicians, audiologists, speech pathologistsetc)
- Social workers
If you are in doubt as to whether you have to incorporate as a professional corporation, 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 as a professional corporation.
Advantages of Organizing as 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. Prior to 1986, professionals that incorporated could shelter their money inside of the corporation whereas those professionals operating in sole proprietorships or partnerships could not. However, the IRS now classifies most professional corporations as "personal service corporations," which means that the corporate income is taxed at a flat 35 percent. This means that there is no tax advantage for professionals to incorporate because 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 as well as claims against the corporation. In addition, although incorporation cannot protect an owner against liability from his or her own personal malpractice, it can provided limited liability for the malpractice of an associate.
Professional Corporations: Examples
Suppose that Dr. D and Dr. E are brain surgeons that 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. However, 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 left to be paid. However, now only Dr. D will be personally liable for the remaining $4 million because he was the one that committed the malpractice.
Today, many people that would have once incorporated as a professional corporation are instead choosing to incorporate as a limited liability company (LLC) or as LLPs. This is something that you may want to consider.
Incorporate with Peace of Mind: Contact a Lawyer Today
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 organizations lawyer will help you match your needs and goals to the right legal structure.