In some states, professionals who wish to incorporate are required to form a professional corporation (PC). This business structure is disappearing, because the tax advantages have been replaced by the LLC. They still exist in States that require this type for certain occupations.
Starting a Professional Corporation
The Secretary of State will maintain a list of occupations that can form a PC. Generally, these are jobs with required licensing and deal directly with the public. The most common are:
- Health care workers – doctors, dentists and others.
- Accountants – CPAs, financial advisors, others.
Once it is decided that a PC is the right structure, most of the corporate filings are similar. A name search must be done and incorporation documents filed. A unique aspect is how the PC will be affected if a member loses their license. Professional licenses can be suspended or revoked under many circumstances that would impact the corporate structure.
Professional Corporation Taxes
In the 1980s, Federal tax law changed to make PCs equivalent to personal service corporations. These are taxed at the higher corporate rates. Before this, professional corporations were taxed at a lower rate than partnerships or sole proprietorships.
Because of this change, when it is possible, most companies avoid this structure. Instead, an LLC is formed.
Professional Corporation Liability
This is an advantage kept by a PC. Liability insurance is common and usual for professionals. Doctors, lawyers and other professions carry malpractice and other policies. The corporate shield doesn’t protect from errors. However, a major lawsuit might attack partners not directly involved. A PC is meant to protect personal assets.
This protection becomes more important for professionals because they make a higher income and have more personal wealth. License holders also have responsibilities with higher risks. These are two important elements that encourage lawsuits – serious consequences for mistakes and money available.
Professional Corporation Credit and Financing
Holding a professional license makes it easier to obtain loans. There is an expectation of regular (and high) cash flow. When multiple license holders join together, credit-worthiness increases. For this reason, initial financing is easier for a PC. Depending on the type of PC, corporate assets might not be attractive to lenders – many PCs are service based and do not keep much inventory or goods other than property. This would limit collateral in the corporation name and affect the ability to obtain a loan.
Transfer of ownership may require another licensed professional as buyer. This depends on State law and how the incorporation agreement is drawn up.