Professional Corporation Basics

Need a state license to operate? A professional corporation might be your best route when choosing which type of business to form.

What is a Professional Corporation?

A professional corporation (PC) is a C-corporation, S-corporation, or LLC that is organized to provide professional services in industries that require a state license in order to practice. The services that are considered professional services and that require a license differ from state to state, however, as a general guide, typical services include doctors, lawyers, dentists, engineers, accountants, architects, and chiropractors.

Professional corporations must be typically organized to solely provide the services of the licensed practitioners. When it comes to choosing a business incorporation type, these types of businesses have very little choice, and must select from a PC, PLLC (Professional Limited Liability Company), or LLP (Limited Liability Partnership).

Before incorporating your business, call the state licensing board to determine if the business qualifies and needs to be incorporated as a PC or PLLC.

Key Benefits of Forming a PC

Forming a professional corporation is often necessary for the specific type of business you’re incorporating, but there are many benefits to forming a PC as well.

Limited Liability

Certain licensed professionals carry higher professional liability as you may imagine, such as doctors and lawyers. A PC will not protect an individual practitioner from professional liability like malpractice lawsuits. They must still have professional liability insurance.

However, a PC does generally provide protection of personal assets from business liabilities and debts of the business. Perhaps more importantly, owners are protected from the personal liability and negligence of other owners in the company.

Professional Corporation Taxation

Because the IRS classifies professional corporations as personal service corporations, the PC’s net income is taxed at a flat rate of 35%. Along with traditional business deductions, professional corporations are also able to deduct the bonuses and salaries of owners, and the owners’ fringe benefits are considered to be business expenses.

Earnings Retention

The tax structure for professional corporations allows them to keep some of their profits for business improvements.

Business Stability

Be aware that PCs can often take longer to incorporate with a state, as a number of states require approval of the professional’s licensing board before the business can be formed. But once formed, professional corporations have perpetual life, meaning they can stay in business even when an owner leaves the company or passes away.

Conversely, there are situations that if a major shakeup in ownership takes place, the state will dissolve the current PC, and the remaining owner(s) must then form a brand new PC.

What is needed to Form a Professional Corporation

Forming a professional corporation is like forming any other corporation with the addition of a couple more steps, including:

Approval of the incorporation by the appropriate state licensing body for the owners’ profession.
Signature on the incorporation documents of a licensed professional as the incorporator or organizer.

As a reminder, here is what is typically needed to register for a PC:

Company name
Business address
Name and address of the company’s registered agent
Names of the company’s directors
List of authorized shares
Type of business activity
Proof of professional license

Review the full Professional Corporation Checklist