What Is a Professional Corporation (PC)?
If you’re a doctor, lawyer, or member of another professional occupation who wants to start your own company, you will likely face more government regulations than many other small businesses. These regulations include ensuring your license is active and that your customers and clients are safe and protected. Some states even have rules around what type of business entity professionals can establish. For example, you may be allowed or required to form a professional corporation (PC).
In this guide, we’ll share what a professional corporation is, how PCs work, and how to form one.
What is a professional corporation?
A professional corporation is an incorporated business whose owners are licensed to provide professional services; these owners are also employees and provide the service they are licensed to perform. Typically, a member of any profession that requires state licensing (such as doctors, lawyers, accountants, architects, engineers, and cosmetologists) is eligible to start a PC. Some states even require licensed professionals to operate as professional corporations when incorporating.
Professional corporations must be incorporated within the state where the professionals practice and hold their licenses. PCs are highly regulated at the state level, so it’s crucial to learn your state’s rules before incorporating your business. For example, some states require each owner to be a licensed professional. Other states, though, allow nonprofessionals to own stock in the company as long as they do not have a controlling interest.
The owner-employees of a PC are protected from personal liability for the company’s debts and obligations and for malpractice committed by other owners of the corporation.
How are PCs different from other types of corporations?
Professional corporations are very similar to other types of corporations, like S corporations, C corporations, and benefit corporations, in many ways. For example, like other corporations, PCs have a three-part ownership and management structure:
- Shareholders own the business.
- Shareholders elect a board of directors to manage strategic decisions.
- The board of directors selects officers to run the corporation on a day-to-day basis.
But there are also some significant differences between professional corporations and other types of corporations.
Other types of corporations
1. Liability
The primary benefit of most corporations is that the owner’s personal assets are generally protected from the company’s debts, obligations, and mistakes. However, the owner-employees of a PC are only covered in certain situations, such as if another shareholder commits malpractice. Because of this, a professional corporation cannot be formed with the goal of protecting its founders from personal responsibility if they personally commit malpractice.
2. Ownership and management
Anyone can form a regular S corporation or C corporation, but only licensed professionals can form a PC. In fact, some states require licensed professionals to start a PC or other type of professional business entity, like a professional limited liability company or professional limited liability partnership. Some states may allow nonprofessionals to own stock in a PC as long as 95% of the business is owned by licensed professionals. The professional corporation’s officers and at least one-half of its board of directors are typically required to be licensed professionals, with the exception of the treasurer and secretary.
There may also be restrictions on what services the business can provide. For example, some states place restrictions against dual practices, which are PCs that offer more than one type of professional service. In other words, a group of licensed architects who are also engineers cannot provide both professional services.
3. Taxation
Like many other types of corporations, professional corporations have to pay the federal corporate income tax, which is currently a flat 21% on any income retained in the business. And because the company’s owners are also employees, they will pay Federal Insurance Contributions Act (FICA) payroll taxes instead of self-employment taxes. They will also report their salaries, bonuses, and fringe benefits on their personal tax returns.
The owners of a PC can choose to be taxed as an S corporation. If they do, the company’s profits and losses will pass through to the owner-employees and be taxed at each owner’s personal income tax rate.
Additionally, the Internal Revenue Service (IRS) may consider some PCs to be personal service corporations. To be regarded as a personal service corporation, the company’s activities must be in the fields of health, law, engineering, accounting, actuarial science, consulting, or performing arts. And at least 95% of the corporation’s stock must be held by the owner-employees or retired owner-employees (including their heirs and estates). Personal service corporations must comply with specific tax laws, such as following a calendar tax year.
Benefits of forming a professional corporation
PCs offer many of the same advantages as other types of corporations, such as limited liability, the ability to issue stock, and tax benefits.
1. Limited liability
One of the primary benefits of forming a corporation is that it provides owners with limited liability. Each owner’s personal liability is usually limited to their investment in the company. They will not be held liable for the business’s debts and obligations.
For PCs, this also means that an owner cannot be held personally liable if another owner commits malpractice. However, if an owner commits malpractice, there is generally no limit to that person’s liability. Because of this caveat, each owner should ensure they carry sufficient malpractice insurance or errors and omissions insurance.
2. Stock
A professional corporation can issue stock, which can help attract new partners to grow the business. If you choose to issue stock, you must specify that the shares are part of a PC. Moreover, make sure that transferring shares is restricted.
3. Taxes
PCs will typically pay a flat 21% corporate tax rate instead of paying taxes on a graduated scale. To qualify for this flat tax rate, 95% of the corporation’s business activities must be within the area of specialization the company declared when registering with the state. Additionally, 95% of the company’s shares must be held by current and former owner-employees who provide professional services for the corporation.
How to form a PC
Forming a professional corporation is similar to forming most other corporations but with a few additional steps, such as obtaining the necessary licenses.
1. Obtain the necessary licenses and permits
Most states will require you and the other owner-employees to show proof that your professional licenses are active and in good standing before you can form the company. You can typically receive this proof from the state agency that initially issued your license. The owners may also have to obtain additional approval from the relevant licensing board before the state approves the company’s application.
You may also have to obtain business permits from your state or city to operate legally. This includes zoning, sales tax, or environmental permits.
2. Choose a business name
As with any other small business, you must choose a name for the company. Ideally, the name should include the exact spelling, punctuation, or abbreviation designating your profession, such as M.D.
Some states may require you to include the words “professional corporation” or the abbreviation “PC” in the business’s name. You should also ensure that the name is unique and distinguishable from other companies in the state.
3. File articles of incorporation
When starting a professional corporation, you must file articles of incorporation with the state where you’ll be conducting business. Articles of incorporation are documentation that includes basic business information and identifies the professional services you will provide. This document must also clearly state your intention to operate as a PC.
Typically, you’ll file articles of incorporation with the Secretary of State’s office, a Business Bureau, or a Business Agency. The Small Business Administration (SBA) can help you determine the correct department for your state. Once you know the right department, it’s crucial to check if the state has any specific requirements before filing your articles of incorporation.
4. Obtain tax identification numbers
Since each owner of a professional corporation is also an employee, you will need to obtain an employer identification number (EIN), even if you do not plan to hire additional employees. An EIN will be the business’s federal tax ID number and ensure that the corporation can pay taxes, including payroll taxes. You can apply for an EIN online using IRS Form SS-4.
The state where you’re incorporating will also typically require you to apply for a tax ID number to ensure you can pay state income and employment taxes. Tax regulations differ by state and locality. So, you will need to check your state’s website to determine how to apply. The SBA provides an easy way to look up your state’s revenue department or tax office.
Requirements for maintaining a professional corporation
To maintain your PC, you will typically have to observe the same formalities and requirements as other corporations. For example, you will need to hold annual shareholders’ meetings and record meeting minutes. You will also need to follow any state-required regulations and filings. Additionally, the IRS requires you to issue a Form K-1 to all owners to report on their individual tax returns. Finally, the corporation will be required to pay taxes on time.
Apart from the maintenance activities that all corporations must perform, professional corporations must also ensure the following. Firstly, each owner-employee regularly renews their professional license. Secondly, the owner complies with any rules and regulations imposed by the licensing board.
Conclusion
A PC may be an excellent choice if you’re a licensed professional who wants legal protection when starting a business with other professionals. And in some states, it might be your only option. Looking to explore other options? Read our articles “What Is an S Corporation?” and “What Is a C Corporation?”