There are many forms that any new small business can take, like a partnership or limited liability company (LLC). But, if you're licensed in a certain profession, like law or medicine, there's a special business form or business entity just for you: a professional corporation (PC).

PCs are governed entirely by state law, and they can go by different names, such as professional association (PA) or professional service corporation (PSC). In addition, the requirements for and restrictions on who can form a PC (and how) vary from state to state. So, if you're thinking of forming your new small business as a PC, you need to carefully research the laws in your area, or seek the advice of an experienced business law attorney.

What Exactly is a Professional Corporation?

A PC is a corporation made up exclusively of licensed professionals, that is, persons who are authorized by a state government to provide a professional service. The types of professionals who can form a PC vary from state to state, but in general, you can form a PC if you have a license to practice law, accounting, medicine, architecture or engineering.

There are two primary reasons why professionals form PCs:

  • Favorable tax treatment
  • Limited liability for the PCs members or "shareholders"

For the most part, PCs are taxed like any other corporation: The corporation pays taxes on its income or profits, and an individual shareholder or employee pays taxes on his or her income or salary, as well as taxes on dividends that the corporation pays to him or her. In addition, the PC's corporate income is generally taxed at the highest corporate rate of 35 percent.

So, where's the tax benefit? The two primary tax benefits for PCs that generally are not available in other business forms like partnerships or sole-proprietorships are:

Limited liability is the other key benefit to forming a PC. In general, the employees or shareholders of a PC are not personally liable for the PC's debts and obligations and not personally liable for the negligence or malpractice of a co-member or co-shareholder. But, an individual employee remains personally liable for his or her own negligence or malpractice.

So, for example:
  • If the PC defaults on a business loan and doesn't have enough money or assets to repay it, the bank can't sue you and take your house or car for repayment
  • If a co-member commits malpractice, like legal malpractice, you can't be held liable if the PC doesn't have enough malpractice insurance to pay the victim in full, but if you commit malpractice, you'll be personally liable for the difference between the victim's damages the amount paid by the insurance company

Forming a PC

As with most any corporation, to create a PC you'll have to draft a lot of paperwork and file some of it with the appropriate state agency, which is usually the secretary of state for the state where you incorporate. The paperwork includes:

  • Articles of incorporation, which includes information like the name of the PC, the persons forming the PC (the "incorporators"), the name of the PC's registered agent;the person who'll accept delivery of important documents, like legal and tax documents - ;and what types and how much stock the PC will issue
  • Corporate by-laws, which outline how the corporation will be run

Restrictions and limitations on forming PCs vary greatly from state to state. For example, in some states, certain professionals who want to incorporate can use only the PC form, as opposed to the limited liability company (LLC) form, while in other states such professionals have the option of using the PC form. Some things that are common in most states include:

  • The PC members must be in the same profession and the PC must practice a single profession, so a PC can't have doctors and lawyers as members and provide medical and legal services at the same time
  • The state agency or board that is responsible for licensing the professionals has to approve the PC's articles of incorporation
  • The PC can't issue its stock to anyone who is not duly licensed in the PC's profession
  • The PC's name must contain such words as "professional association," "chartered," "incorporated," "professional corporation," or the abbreviations of such words, and contain the last name of one or more of its shareholders
  • Clerks, secretaries, and other assistants do not give "professional services," so they can work for the PC without having to be licensed in the PC's profession

Questions for Your Attorney

  • How long will it take to form a PC?
  • How much does it cost to form a PC if I want to do the work myself?
  • What's the difference between a PC and a limited liability company (LLC)?