Professional Corporation: Meaning, Examples, Advantages, Disadvantages, Requirements, and Steps to Create

In the realm of business structures, professional corporations (PCs) stand out as a specialised form tailored to certain licensed professions. These entities offer a unique blend of liability protection, tax advantages, and regulatory compliance specific to professionals like doctors, lawyers, accountants, and architects. Delving deeper into what constitutes a professional corporation, it's essential to explore its structure, benefits, and key considerations.

What is a professional corporation?

A Professional Corporation (PC) is a specific type of corporate entity that is designed for professionals who provide licensed services. These professionals include doctors, lawyers, architects, accountants, and engineers, among others. A PC allows these individuals to practice their profession while enjoying certain benefits typically associated with a corporate structure. This type of entity is distinct because it offers liability protection, which means that the personal assets of shareholders are generally protected from the corporation’s debts and liabilities. However, unlike general corporations, PCs must adhere to regulations set forth by their respective professional licensing boards. Additionally, only licensed professionals can be shareholders in a PC, ensuring that control of the corporation remains within the professional community. This structure is beneficial as it combines the tax advantages and operational flexibility of a corporation with the professional integrity and standards required by the licensing authorities.

Legal requirements of a Professional Corporation

The formation of a professional corporation is regulated by the laws of the state where it is established. In some states, there are limitations on the types of professionals who can hold shares in such corporations. Typically, professional corporations are restricted to individuals within the same profession.

For instance, a corporation focused on providing medical services can only be established by licensed doctors who hold the required practising certificates in the state of incorporation. Detailed requirements for setting up a professional corporation can be obtained from the Secretary of State's office.

Which professionals use a Professional Corporation (PC)?

Professionals who commonly utilise Professional Corporations (PCs) include:

1. Doctors and healthcare providers: Physicians, surgeons, dentists, and other healthcare practitioners benefit from liability protection and tax advantages.
2. Lawyers and legal practitioners: Attorneys and law firms establish PCs to shield personal assets from legal liabilities and optimise tax planning.
3. Accountants and financial advisors: CPAs and financial consultants use PCs for liability protection and enhanced credibility with clients.
4. Architects and engineers: Professionals in the design and construction fields choose PCs for liability coverage and regulatory compliance.
5. Consultants and specialists: Various consultants, therapists, and specialists in fields like psychology or nutrition utilise PCs for legal protection and tax benefits.

Overall, licensed professionals across diverse fields opt for PCs to mitigate personal liability, benefit from tax efficiencies, and project professionalism to clients and stakeholders.

Limiting your liability with a professional corporation

Limiting your liability with a Professional Corporation (PC) is crucial for licensed professionals such as doctors, lawyers, accountants, and architects. PC status shields individual members from personal responsibility for business debts and malpractice claims beyond their control, safeguarding personal assets. This legal structure is specifically designed to protect professionals in regulated industries where liability risks are significant. Compliance with state-specific regulations is essential, ensuring the PC's legal standing and maintaining the liability shield. By operating as a PC, professionals not only protect their financial interests but also enhance their credibility by demonstrating a commitment to ethical and responsible business practices.

How are professional corporations taxed?

Professional Corporations (PCs) are subject to specific tax rules that differ from those applied to other corporate entities. In India, PCs are typically taxed as separate legal entities, meaning they must file their own corporate tax returns. The income of a PC is subject to corporate tax rates, which can be advantageous because corporate tax rates are often lower than individual tax rates for high earners. Furthermore, PCs may also benefit from tax deductions for business expenses, such as salaries, rent, and equipment. However, shareholders of a PC must pay taxes on any dividends they receive, leading to the possibility of double taxation—once at the corporate level and again at the individual level. To mitigate this, PCs might distribute income through salaries and bonuses, which are deductible for the corporation and taxable to the recipient, thus avoiding double taxation on those amounts. Additionally, professionals operating within a PC must comply with relevant professional tax obligations, ensuring they meet state-specific requirements regarding the tax on professional services.

Requirements of a professional corporation

Establishing a Professional Corporation involves several specific requirements:

• Licencing: Only licensed professionals can form and be shareholders of a PC.
• Name: The corporation’s name must comply with professional regulations and include terms like “Professional Corporation” or appropriate abbreviations.
• Registration: PCs must register with both the corporate regulatory body and the relevant professional licensing board.
• Compliance: They must adhere to professional standards and practices mandated by the licensing authorities.
• Shareholders: Only individuals licensed to provide professional services can hold shares in the corporation.
  

How to create a professional corporation?

The process of incorporating a professional corporation involves providing specific documents to the relevant authorities. Here are the key steps involved:

1. Prepare the articles of association: The first step in forming a professional corporation is drafting the articles of association. This document is submitted to the state as part of the registration process. It must clearly state the intent to establish a professional corporation, including the specific service or product the corporation will offer
   For instance, if the corporation is made up of Certified Public Accountants (CPAs), the purpose would be to provide accountancy services. All founding members must possess valid practising certificates in the state where the corporation will operate.
2. Naming the corporation: The proposed name of the corporation must be unique and distinguishable from other registered businesses. Ideally, it should include "professional corporation" and a designation related to the profession, such as M.D. or P.C., ensuring proper spelling and punctuation.
3. Seek local approval: Before the state can approve incorporation, additional approval from relevant licensing boards may be required. For example, doctors establishing a corporation may need to obtain permission from the State Medical Board. Copies of practising licences for all members must also be provided during this stage.

Restrictions on professional corporation formation

While restrictions apply to most corporations, professional corporations face unique limitations. It's important to check specific regulations in your state, as these may vary. Key restrictions generally include:

• Licensing requirements: Only licensed professionals in the specific service area are allowed to form the corporation. For example, if the corporation is for medical services, all members must be licensed physicians in the state.
• Board composition: Except for the treasurer and secretary, at least half of the board and officers must be licensed in the profession. For example, in a veterinary corporation, non-licensed members like pet groomers or administrative staff may only make up less than half of the board.
• Single-service focus: Professionals may hold multiple licenses, but a corporation designated for one service cannot offer another. For instance, if a corporation is established for legal services, its members cannot also provide accounting services under the same entity.
• Stock share handling: Stocks issued must clearly indicate they belong to a professional corporation, with a notation that restricts share transfer.
• Ownership by partnerships: Ownership is not limited to individuals; partnerships are allowed as long as all partners share the same professional license. For instance, a law corporation cannot have physician partners, but it can accept partnerships or other law corporations as owners.

Advantages of a professional corporation

A Professional Corporation offers numerous advantages for licensed professionals:

• Liability protection: Shareholders are typically protected from personal liability for the corporation’s debts and malpractice claims, although individual professional liability remains.
• Tax benefits: PCs can benefit from corporate tax rates, which are often lower than individual rates. They can also deduct business expenses such as salaries, rent, and supplies.
• Continuity: The corporation continues to exist independently of its shareholders, providing stability and continuity for the business.
• Income splitting: PCs can split income among family members who are shareholders, potentially reducing the overall tax burden.
• Retirement plans: PCs can establish and contribute to retirement plans for employees, offering additional financial security and benefits.
• Credibility: Operating as a corporation can enhance the professional credibility and reputation of the business.
  

Disadvantages of a professional corporation

Despite its benefits, a Professional Corporation also has several disadvantages:

• Complexity: Establishing and maintaining a PC involves more complex administrative and regulatory requirements compared to other business structures.
• Double taxation: PCs may face double taxation, where income is taxed at both the corporate and individual levels.
• Professional liability: While PCs protect against business liabilities, they do not shield professionals from personal liability for malpractice.
• Limited ownership: Only licensed professionals can be shareholders, limiting the ability to raise capital from outside investors.
• Costs: The costs of forming and maintaining a PC, including registration fees, compliance costs, and legal and accounting fees, can be higher than other business structures.
• Regulatory scrutiny: PCs are subject to strict oversight by professional licensing boards, requiring strict adherence to professional standards and practices.
  

Professional corporation examples

A professional corporation focuses on offering services that require a state-issued licence. Various professions can operate within this structure, including:

• Dentistry
• Architecture
• Medical services
• Accounting
• Legal services
• Engineering
• Chiropractic care
• Financial planning

In certain cases, you may be permitted to provide more than one type of professional service through your corporation, provided these services are related. For example, depending on your state’s regulations, you might be able to combine accounting and financial planning services within the same professional corporation.

Alternatives to a professional corporation: LLCs and PLLCs

Professionals looking to limit their personal liability may consider forming a limited liability company (LLC) as an alternative to incorporating. However, the regulations regarding which type of entity can be formed vary by state, so it’s essential to review your state’s specific rules. For instance, in California, professionals are not permitted to form an LLC or a professional limited liability company (PLLC). Instead, they must opt for either a professional corporation or a registered limited liability partnership.

In certain states, professionals can form a PLLC, which offers a structure similar to a professional corporation but with the tax advantages of an LLC and greater management flexibility. Like a professional corporation, a PLLC helps limit your liability for business debts. However, you remain personally responsible for any claims arising from your own negligence or malpractice. For further details on PLLCs, you can explore additional resources.

Reasons to choose a professional corporation

When two or more individuals engage in business together, they effectively create a partnership. In such a structure, each partner can be held responsible not only for the partnership's debts but also for the actions or professional misconduct of the other partners. Forming a professional corporation can offer liability protection similar to that of a regular corporation. However, it’s essential to understand the specific protections available in your state, as some states (as noted below) do not provide liability waivers among owners.

How do professional corporations work?

Professional corporations (PCs) are entities formed by licensed professionals, such as lawyers and doctors, to offer their services. PCs provide shareholders—primarily these professionals—with limited liability protection. Establishing a PC requires filing articles of incorporation, adhering to oversight from a board of directors, and following regulations set by professional licensing boards. Tax treatment may vary depending on the professional service, and share transfers within PCs are often restricted.

What are the differences between PC and LLC

Each entity type offers distinct advantages depending on professional needs, liability considerations, and desired flexibility in management and taxation.

Conclusion

Forming a Professional Corporation can offer significant advantages for licensed professionals, including liability protection, tax benefits, and enhanced credibility. However, it also comes with certain complexities and potential drawbacks, such as double taxation and regulatory scrutiny. For professionals considering this structure, it is crucial to weigh these factors carefully and seek appropriate advice. Additionally, securing a professional loan can provide the necessary financial support to cover the costs associated with establishing and maintaining a PC. By understanding the requirements, advantages, and disadvantages, professionals can make informed decisions that best align with their career goals and business needs.