How to Form a Professional Corporation?
Are you an accountant, engineer, lawyer, social worker, or health care professional? Is so, you will want to learn about structuring your company as a professional corporation. You will also want to find the fastest and most affordable way to do so.
Depending on which state you reside or do business in, you may be required to incorporate in this manner. In this entity, owners act as employees for the business.
Like any other corporation, the purpose is to separate personal assets from the assets of the corporation. This is especially important in licensed professions, where the corporation may be targeted by lawsuits due to negligence or malpractice by a business owner. While the professional corporation does not protect an individual practitioner’s personal liability due to their own negligence, it does protect the corporation and other members as a whole.
A professional corporation can be set up as an LLC, C-Corporation, or S-Corporation, with a subcategorization of professional corporation (PC) or Professional Services Corporation (PSC). A PC is formed at the state level while a PSC is a designation at the federal level for tax purposes. A PSC must qualify as a PC.
Forming a Professional Corporation
There are specific considerations a professional corporation must include:
- Corporate Name – Instead of Inc or LLC after the corporation name, the abbreviation “PC” will often follow the principle owner’s name. For example, John Doe, MD, PC. Otherwise, the name must contain one of the following terms: “professional corporation,” “professional association,” “service corporation,” or “professional service corporation.”
- Articles of Incorporation – some states require that the intention to operate as a professional corporation be clearly stated in the legal documents. In addition, the specific purpose of the corporation must be outlined.
- State Requirements – the owner of the professional corporation must have all licenses, along with required educational and legal paperwork.
- Internal Documents and Management – A professional corporation must file bylaws which include corporate officers, shareholder information, policies regarding dividends, financial records, and procedural policies.
- Have a Bank Account – a professional corporation needs an EIN (Employer Identification Number) and a dedicated bank account.
There are specific legal requirements members must meet in order to incorporate as a professional corporation:
- Licensed – All members who practice under the professional corporation must have proper licenses.
- No Dual Practices – the members of the corporation must only practice the intended purpose stated in the articles of incorporation. For example, an attorney may be licensed to perform legal services and accounting services. If the articles of incorporation state that the intended purpose is to provide legal services, then they must stick with that.
- Board and Officers – At least half of the board members and all of the officers must be licensed to practice the intended purpose of the corporation. The treasurer and secretary do not need to be licensed.
How to: Shareholders and Directors
Check with the rules in your particular state regarding who can be a director or shareholder in the professional corporation, as some states require the corporation to have a certain number of members licensed in the profession.
How to: Tax implication
Professional corporations are called Professional Service Corporations (PSC) are taxed as C Corporations by the IRS. Taxes are paid at the corporate level at a flat 35% rate. Any income kept in the Corporation is taxed at the corporate rate, while any salaries paid to employees are tax-deductible business expenses.
If you choose, you may elect to be taxed as an S Corporation to avoid double taxation.
The professional corporation must pass two federal “tests” to be recognized as this entity by the IRS:
- The Function Test requires that 95% of the business activities performed by the owners are in the fields of health, accounting, law, insurance, engineering, consulting, or performing arts.
- The Ownership Test requires that that most of the stock of the professional corporation be held by owners performing professional services for the corporation, retired owners who performed the service before their retirement, or heirs and estates of the owners in these two scenarios.
Advantages of Professional Corporations
- Limited Liability – the biggest advantage of filing as a professional corporation is protection of personal assets from creditors and lawsuits. If the corporation or one of its members is sued or files bankruptcy, only the assets of the corporation are at risk. If an owner is sued for malpractice and the result is their own negligent or criminal action, the corporation is not liable for this judgement either.
- Taxes – Professional corporations have tax-free benefits such as health and life insurance for employees through a Voluntary Employees’ Beneficiary Association. Retirement and 401(k) plans have higher contribution limits. Taxes for disability insurance, dependent care and other benefits are deductible as well.
- Perpetual Existence – If a shareholder or owner dies, the corporation continues as usual.
Disadvantages of a Professional Corporation
In the event of business losses, there are limitations on deductions for nonactive shareholders. As most shareholders are active, this is not usually a concern.
Taxes – the flat corporate tax rate can reduce the flexibility in distributing income to shareholders or employees.
How to form a professional corporation online
You have two options:
- Do it yourself
- Use an online professional service
When using one of our recommended professional services, you will want to choose the C-Corp entity in order to incorporate as a professional corporation.
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Ready to Incorporate?
Check with your tax advisors and discuss the advantages of a professional corporation versus another entity such as a limited liability corporation (LLC) or limited liability partnership (LLP). How many owners and the nature of your business will be deciding factors. As mentioned, some states require licensed professionals to take on this designation and some states give you more choices.