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What is a Professional Corporation?

The Professional Corporation, or PC, is an excellent business structure for licensed professionals such as accountants, engineers, lawyers, social workers, veterinarians, and health care professionals (physicians, dentists, nurses, opticians, optometrists, pharmacists, physical therapists). There are obvious benefits to forming a PC, but the main goal of a PC is to separate your personal assets from the corporation’s assets. Without this legal separation, you might be personally liable for business debts or be targeted by lawsuits aimed at the practice, including lawsuits arising from the negligence or malpractice of one of your business partners.

How to Form a Professional Corporation?

Forming a PC is really the same process as forming a corporation, with a few wrinkles thrown in. You should be aware, however, that there will most likely be some state-specific requirements.

  1. Corporate Name: A PC’s name must include certain language. The terms “professional corporation,” “service corporation,” “professional association,” or “professional service corporation” must be included in the name. Many professional corporations use the abbreviations PC, SC., or PA. For example, a doctor might choose to name her professional corporation “Molly Smith, MD, PC.”
  2. Articles of Incorporation: You must clearly state that the the corporation you are forming intends to operate as a professional corporation. Doing this will allow you to navigate your state’s specific requirements, if any, for PCs. Your Articles of Incorporation need to state the purpose of your corporation. For example, if the professional corporation is comprised of lawyers, the purpose of your PC will be to provide legal services.
  3. Meet State Requirements: States can’t have unlicensed doctors or lawyers running around practicing on people, so you’ll have to prove that you and any other owners of the PC meet legal and educational requirements in order to safely practice. Individual states often require the parties involved to obtain additional approvals from the appropriate licensing boards. Most likely you’ll have to provide certified copies of licenses for anyone involved as an owner of the corporation. In short, make sure that you and anyone involved with your PC stays up to date on all professional requirements, and definitely make sure that all legal and educational paperwork is certified when necessary, and filed with the appropriate authorities.
  4. Internal Documents and Management: A PC will need to keep organized and accessible internal documents, as well as elect a board of directors. Your PC’s corporate bylaws are its constitution. The bylaws generally lay out the responsibilities of each corporate officer, voting rights for shareholders, and policies regarding dividends, tenure, financial records, and how the PC will address any changes or emergencies that may arise.
  5. Open a Bank Account: Your PC will need an EIN (Employer Identification Number) for all federal tax filings and in order to open a bank account. You’ll also need an EIN to apply for state licenses and any business permits your corporation might need.

What are the Legal Requirements for a Professional Corporation?

While most corporations do have some restrictions placed on them, there are specific restrictions that apply to PCs.

Licensing: Only those who are licensed to practice the specific service may incorporate. For example, if your Houston-based PC is made up of engineers, they must all be licensed to practice engineering in the state of Texas.

No Dual Practices: In some cases, a group of people may hold more than one license. For example, a group of attorneys may also be licensed to provide accounting services. If the PC is set up for the purposes of providing legal services, they may not provide accounting services.

Board and Officers: Officers and at least 50% of the board of directors of your PC must be licensed to practice the specific profession of the corporation. However, the treasurer and secretary of the corporation are exempt from this rule. For example, a dental PC may offer board positions to staff members who are not dentists, so long as they don’t make up more than half of the board of directors.

Who can be a Shareholder or Director in a Professional Corporation? 

Many states restrict who may be a shareholder or a director of a professional corporation. For example, in some states only licensed practitioners of the specific service that the corporation provides may own stock and serve on the board of directors. Other states require at least 50% of the shareholders and directors to be licensed professionals.

How Will my Professional Corporation be Taxed? 

The IRS categorizes PCs as C corporations, which means they must pay income taxes at the corporate rate. PCs can also elect to be taxed as S corporations, which, if your PC meets the qualifications of an S corp, could allow you to avoid double taxation, which could mean more money in your pocket.

Learn more about the how electing to be taxed as an S corp could help your business.

What are the Advantages of a Professional Corporation?

  • Limited Liability
    Owners of PCs are not held personally liable for business obligations. This means if the company is being sued or goes bankrupt, only the assets of the company are seized to pay creditors and lawsuits. This protection also shields corporate owners from liability of the actions of other owners that are criminal or negligent. However, corporate owners are not protected from their own negligent and criminal actions. For example, if Dr. Nick is engaged in a malpractice case, the resulting ruling and any financial considerations would not be applied to any of the other doctors who are partners in the PC.
  • Taxes
    PCs can create retirement plans and 401(k) plans for their employees that have higher contribution limits than plans available to individuals. Professional corporations can also provide health and life insurance as a tax-free benefit to their employees by establishing a Voluntary Employees’ Beneficiary Association. They can also take tax deductions for disability insurance, dependent care, and other employee fringe benefits. Generally, these benefits are tax-deductible for the corporation, and are not considered taxable income for the employees.
  • Perpetual Existence
    Just like a corporation, PCs can continue operations without interruption if a shareholder or partner dies or withdraws from the corporation.

Are There Any Disadvantages to Forming a Professional Corporation?

While the formation of a PC does offer liability protection, it does not protect one from personal liability for individual misconduct or malpractice. Additionally, because of tax laws, a professional corporation is likely to be subjected to double taxation like other corporations. Finally, not every profession is able to form a professional corporation. PCs are nearly always limited to specific groups such as physicians, veterinarians, attorneys, and other select groups. It should be noted that not every state allows every type of PC.

It should be noted that while a PC will insulate you from lawsuits regarding your business, it will not protect a doctor, lawyer, or other professional from legal action should they harm a client. For example, if an employee or patient slips and falls in the office, a PC will protect your assets. If you remove a patient’s kidney when he needed his tonsils looked at, you’re not shielded from a malpractice lawsuit.

There are many benefits to setting up a professional corporation, but be sure to check the regulations in the state where you plan to incorporate before deciding which structure best works for you.

Hire Active Filings to form your Professional Corporation today!