Traditionally, certain personal service professionals, such as doctors and lawyers, were not permitted to form corporations. It was thought that these professionals should not be allowed to shield themselves from the consequences of their mistakes. Over the past few decades, however, certain professionals have been permitted to form professional corporations that are subject to special rules.
Laws governing professional corporations differ from state to state. Entity names also vary from state to state. A professional corporation may simply be called a professional corporation (PC), or it may be called a professional service corporation (PSC), or professional association (PA). Corporate shareholders must be state-licensed professionals in fields such as law, medicine, accounting, or engineering. Shareholders must be actively engaged in the business. They can't be passive investors. In most states, the corporation must be established solely to provide professional services.
PC Shareholders Enjoy Limited Liability
In an ordinary corporation, a shareholder can lose only the amount the shareholder invested in the corporation. Corporate creditors can't come after the shareholder's personal assets. In a general partnership, by contrast, a partnership creditor can reach the personal assets of any partner. If a doctor in a general partnership carelessly injures a patient, for example, the victim may sue any partner for his losses. A shareholder in a professional corporation cannot be sued for the corporation's business debts or for the careless acts of another shareholder. The shareholder can be sued, however, for losses caused by the shareholder's own careless acts.
PCs Are Subject to Special Tax Treatment
Professional corporations are usually taxed at the maximum federal corporate income tax rate of 35 percent, unless they qualify and elect for "S corporation" status. Nevertheless, professional corporations enjoy certain tax benefits. A professional corporation can purchase a certain amount of group term life insurance per employee and deduct the cost of premiums from taxable income on its federal income tax return. It can also purchase health and accident insurance for its employees and deduct the cost of premiums. Employees are not taxed on these benefits.
Special Formation Procedures
To form a professional corporation, you must file articles of incorporation with the secretary of state and pay a filing fee. An ordinary corporation may state its corporate purpose as "any lawful purpose." A professional corporation, by contrast, must limit its corporate purpose to the practice of the profession that its shareholders are licensed to perform. Unlike ordinary corporations, professional corporations must obtain approval from the state professional licensing board that regulates the profession. The state licensing board will ensure that all shareholders are licensed professionals in good standing.
A Lawyer Can Help
The law surrounding creation of a professional corporation is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a business lawyer.