For example, in many states, only those who are of the same profession may be owners of a professional corporation. This would mean, for example, that only lawyers would be allowed to own shares in a professional corporation if the main focus of the business is legal services. Some states have loosened these requirements, so it is important to find out what the state rules are. In most cases, information may be available from the Secretary of State. As with any corporation, there are certain documents that must be drafted to get started.
Keep in mind that there may be some state-specific requirements; however, the general process is as follows:. While most corporations do have some restrictions placed on them, there are specific restrictions that apply to professional corporations. Since this is not a comprehensive list, it is a good idea to determine which restrictions exist in your state.
In nearly all cases, a professional corporation's taxes are the same as a C corporation. There is, however, a flat tax rate rather than a graduated tax rate. There is an exception for heirs of current and former employees as well as estates of former employees. Professional service corporations must also use a calendar year as their tax year.
There are exceptions to this, provided the corporation requests and receives approval from the tax commissioner. There are other exceptions, but this is important to remember when forming a professional corporation. As with a typical corporation, shareholders in professional corporations are offered protection from liability for debt of the corporation. The shareholders also have no liability if another owner is guilty of malpractice.
However, in the case of malpractice, if a plaintiff can point to the overall corporation's malfeasance in the malpractice, then the professional corporation may be liable. Another way that liability rules apply differently than they do in a traditional corporation is limits on liability.
In the event that one owner is found to have engaged in any practice that could fall under malpractice statutes, then they have unlimited personal liability for their own acts; they do not have liability for the acts of others.
The corporation should ensure that it has the proper levels of insurance. Each individual owner should also carry the appropriate insurance policies, such as malpractice or errors and omissions policies.
As previously discussed, one of the main advantages is the limit on liability for the misconduct or malpractice of others who are part of the corporation.
The benefits do not end there, however. There are some tax benefits, including the ability to contribute higher amounts to k plans. These types of corporations may also be able to provide certain benefits to employees on a tax-free basis, including life and health insurance. Unlike a corporation where the tax rate is graduated, this applies to all earnings. When compared to partnerships, there are other advantages that must be taken into consideration. For example, ownership is easier to transfer, even though it is restricted.
Typically, restrictions may be explained in the shareholder agreement. In addition, while a partnership may have to dissolve when an owner dies or leaves the partnership, a professional corporation is able to move on in perpetuity. This is a significant advantage over other types of ownership.
In addition, the fact that members may leave or new members may be added over time is often seen as a benefit. Keep in mind that adding or removing members may require you to file updated articles of incorporation with the state. While the formation of a professional corporation does offer liability protection, it does not protect one from personal liability for individual misconduct or malpractice.
However, a professional corporation may be able to opt for S corp status. Most states allow professionals to opt for an S corporation, professional corporation PC , or limited liability company LLC. The best choice for your entity depends on the individual circumstances of your business. State laws govern the formation of a professional corporation. Depending on the individual state, shareholders in this type of corporation must be licensed in law, medicine, architecture, or another professional service.
They are also governed by special liability laws. The IRS categorizes professional corporations as C corporations. They are considered taxpayers and must pay income taxes at the corporate rate. In some states, physicians are not allowed to form professional corporations and must instead establish professional associations. If a C corporation qualifies as a small business corporation, it can elect to be taxed as an S corporation by the IRS.
This prevents double taxation profits by taxing income only at the individual level, not the corporation level. Each shareholder reports profits and losses on his or her individual tax return. By Christine Mathias , Attorney. In many states, people in certain occupations for example, doctors, lawyers, or accountants who want to incorporate their practice can do so only through "professional corporations" PC or "professional service corporations.
And in some states, certain professionals are allowed to form professional corporations or professional service corporations. The list of professionals required to incorporate as a professional corporation is different in each state. Usually, though, mandatory professional incorporation requirements apply to these professionals:. You'll need to check with your state's corporate filing office usually the Secretary of State or Corporation Commissioner to see which professions are required to form professional corporations in your own state.
Professional corporations provide a limit on the owners' personal liability for business debts and claims. Incorporating can't protect a professional against liability for his or her negligence or malpractice, but it can protect against liability for the negligence or malpractice of an associate. Anton and Dr. Bartolo are surgeons who practice as partners. Bartolo leaves an instrument inside a patient, who bleeds to death. Bartolo and the partnership.
Anton along with Dr. Anton and Bartolo create a professional corporation. Bartolo commits the malpractice described in Example 1. Anton, a corporate employee, would not be personally liable for the portion of the verdict not covered by insurance.
In some states, Dr. Anton would be free from personal liability only if the professional corporation carried at least the minimum amount of insurance mandated by state law. Most professional corporations are classified as "personal service corporations" by the IRS and must file a professional corporation tax return. Unlike sole proprietorships, partnerships, and LLCs, professional corporations do not enjoy pass-through taxation , which means the professional corporation pays tax on its profits, and the owners pay tax a second time on the same income on their personal tax returns.
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