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Professional Corporation : Works, Requirements, & Formation

Last Updated : 11 Jan, 2024
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What is Professional Corporation?

A professional service corporation (PC) is a business organisation in which a group of licenced professionals who specialise in a particular field collaborates to provide services. Professional corporations exist to limit the owners’ liability if other owners commit fraud or negligence. To provide services as a legal entity, physicians, engineers, accountants, lawyers, and architects are most effectively organised as professional corporations. While operating similarly to other corporations, it is different regarding liability, taxation, scope, and other related aspects. In addition, the state of incorporation determines which regulations govern the formation of PCs.

Geeky Takeaways:

  • The main benefit of this sort of business is that one owner’s professional mistake does not make the others personally accountable.
  • Engineers, architects, solicitors, surgeons, accountants, etc. form professional corporations. Such entities must meet certain criteria to become PCs.
  • PCs are taxed like other firms, although medical PCs can claim tax deductions under IRS restrictions.

How Do Professional Corporations Work?

Organisations organised as professional corporations (PCs) represent licenced professionals (e.g., attorneys, physicians). Limited liability protection is provided to shareholders, who are primarily professionals. Articles of incorporation are required for the formation of PCs, which are supervised by a board of directors and must comply by regulations established by professional licencing boards. In addition to the potential for tax treatment to vary among professional services, share transfers frequently face restrictions.

Example:

Let’s say that Dr. Sharma, an Indian dentist with a licence, wants to set up a professional company for his dental clinic. Dr. Sharma chooses to start “Sharma Dental Care Pvt. Ltd.” and files the necessary paperwork with the Indian government. Dr. Sharma is the only shareholder, so he has limited responsibility. This means that his personal assets are not linked to the clinic’s debts. He puts together a board of directors with himself and maybe another dentist to make big choices for the clinic. Dr. Sharma is now the operating director and is in charge of running the day-to-day business. The professional company follows Indian tax rules that are specific to healthcare services, which could give it tax breaks. If Dr. Sharma chooses to retire or hire another dentist, the professional corporation structure makes it easy to change ownership. This means that Sharma Dental Care Pvt. Ltd. can keep providing dental services while still following Indian healthcare rules.

Examples of Professional Corporation

Example 1: Assume Sid and Mark are professionals who have established a professional corporation. It has been discovered that Sid committed some errors that resulted in losses for some clients, who are now suing for compensation. Because Sid carries the loss’s obligation, he is solely responsible for reducing it for the client if the insurance does not cover it, which would have been the responsibility of both Sid and Mark otherwise.

Example 2: Consider MedZoo, a New York-based medical professional firm. It all started with twelve doctors who wanted to provide high-quality health care at a reasonable cost. It now has approximately 80 doctors working to realise its mission. MedZoo eligible for the tax deduction according to IRC Section 170 since it is a medical PC and meets the exemption standards under IRC Section 501 (c)(3). As a result, it was possible to obtain tax deductions, which was a big comfort for the owners.

Requirements of Professional Corporation

  1. Legal entities come in a number of forms, including partnerships, corporations, S corporations, limited liability companies, and so forth. They vary in many different kinds of ways. However, PCs must satisfy specific legal requirements in order to attain the status to which they are qualified. The following requirements relate to the establishment of PCs:
  2. All professionals seeking to establish the PC must possess a valid licence to practise their respective fields.
  3. It is necessary that the professionals hold citizenship in the state in which they intend to establish the PC. Additionally, their places of practice should have been within the same state.
  4. State laws regulate the incorporation process for a PC. Certain states forbid non-professionals from establishing PCs.
  5. Moreover, the IRS states many other requirements for obtaining of tax benefits.

How Do You Create a Professional Corporation?

Similar to any other corporation, in order to start operations, some documents must be prepared. It is important to consider possible state-specific laws. However, the general process consists of the following steps,

1. Intention to Function as a Professional Corporation: The owners of the corporation must expressly declare in the articles of incorporation their intention to function as a professional corporation. Prior to submitting the articles, it is crucial to find out whether the state has any particular requirements they must fulfil.

2. Determining the Term “Purpose”: The goal of the corporation must be expressly stated in the articles of incorporation. As an example, in the case where the professional corporation consists of solicitors, its mission would be to render legal services.

3. Naming the Professional Corporation: In addition to the typical complexities associated with naming a business, a professional corporation is required to use specific terminology. It is mandatory to include the terms ‘professional service corporation,’ ‘professional association,’ or ‘service corporation’ into the name. Additionally, the abbreviations S.C., P.C., and P.A. are acceptable.

4. Getting Local Approval: It is not uncommon for certain states to mandate that the involved parties acquire extra approvals from the relevant licencing boards. This will probably imply presenting duplicates of licences to all individuals participating as owners of the corporation.

Restrictions on the Formation of Professional Corporation

Although most corporations are subject to certain regulations, professional corporations are subject to specific limits.

1. Licensing: Those who are authorised to provide the specific service in question may only incorporate a PC. Physicians comprising the professional corporation, for instance, are all required to possess valid licences to practice medicine in the state where the corporation is incorporated.

2. Absence of Dual Practices: On occasion, a group of individuals may possess multiple licences. An instance of this would be a group of lawyers holding a licence for providing accounting services. A professional corporation formed with the primary objective of rendering legal services is forbidden from offering accounting services.

3. Board and Officer: Although the treasurer and secretary remain exempt, all officers, including one-half of the board of directors, are required to possess a valid licence in the particular profession of the corporation. A veterinarian professional corporation might, for instance, offer board positions to office personnel, proprietors of lodging services, or pet groomers. This is acceptable provided that their involvement does not exceed 50% of the board.

4. Acknowledging Collaborations: Ownership is not solely limited to individuals. Corporations may also incorporate partnerships, provided that all participants are engaged in the same line of work. Similar principles apply to additional professional corporations. A professional corporation of physicians may not be owned by a partnership or professional corporation of solicitors.

5. Managing Shares of Stock: It must be noted on issued shares of stock that the shares are owned by a professional corporation. Additionally, the stock shares must clearly indicate a restriction on the transfer of said shares.

Limits on Liability of Professional Corporations

Like in a regular corporation, professional corporations protect their shareholders from being responsible for the debts of the company. The partners are also not responsible if another owner does something wrong. In the case of negligence, on the other hand, if the plaintiff can show that the professional company as a whole was careless, then the corporation may be responsible. Limits on liability are another way that liability rules don’t work the same way they do in a normal company. If it turns out that one of the owners did something that could be considered malpractice, they are personally responsible for everything they did, but not for what other people did. The business should make sure it has the right amount of insurance. It is also important for each owner to have the right insurance, like malpractice or mistakes and omissions insurance.

Taxation of a Professional Corporation

PCs are taxed at the rate of 21%, just like other businesses. But for PCs to get this tax rate, 95% of their business efforts must be in the area where they specialise. Additionally, at least 95% of the PC shares should be owned by people who work in the same field or have worked in the past. However, a medical professional company can get some exemptions as long as it meets certain conditions, which are, Tax exemption under Section 501(c)(3) of the Internal Revenue Code (IRC),

1. Medical PCs shouldn’t be connected to any parent company, because that would mean that the PC’s business operations would help the parent company.

2. It should not be for their own personal gain.

3. It is not able to pay dividends to its owners. There are, however, a lot of partners who are also the business owners and the people who provide the service.

4. PCs are not allowed to take part in any political actions or campaigns. They shouldn’t try to have any power in politics.

IRC Section 170 states that these kinds of groups can get tax assumptions. Also, PC owners have to pay their own income tax because PCs are limited liability companies.

Advantages of a Professional Corporation

1. Limited Liability: Shareholders have limited liability, which means that business bills and malpractice claims against other members can’t reach their personal assets.

2. Better Tax Scenario: PCs may let employees put more money into 401(k) plans which provide a better tax scenario.

3. Tax-Free Health Benefits for Employees: PCs can give their workers benefits like health and life insurance without having to pay taxes on them.

4. Tax Benefits for Shareholders: Shareholders may get tax breaks, even though the professional company tax rate for 2017 is set at 35%.

5. Ownership Transfer: Ownership can be transferred, but there may be limitations that are spelt out in a shareholder agreement.

6. Maintaining Continuity and Perpetuity: Unlike partnerships, which can end when an owner leaves, a professional company can go on forever, making sure that the business keeps running.

7. Flexibility in Membership: Over time, members can be added or taken away, giving you options. Keep in mind that if things change, you may need to file new articles of organisation.

Professional corporations are an excellent option for licenced professionals who want to protect their assets from liability, get tax breaks, and run their businesses in a way that is more open and long-lasting than partnerships.

Disadvantages of a Professional Corporation

Professional corporations (PCs) have some benefits, but people should also think about the following problems before picking this type of business structure,

1. Limited Flexibility: PCs may have more rules and formalities than other business models, which can make it harder to make decisions and run the business.

2. Tax Rates: Regarding taxes, the fixed 35% tax rate for professional corporations in 2017 might be seen as a disadvantage, even though there are some tax benefits. This is especially true if the business could benefit from graduated tax rates that are offered to some other structures.

3. Legal Compliances: The third disadvatange is regulatory compliance. This means that professional businesses have to follow certain rules set by professional licencing boards. This can mean more paperwork and rules to follow.

4. Ownership Restrictions: Share trades may be limited by rules spelt out in the shareholder agreement, making it harder to change who owns the shares.

5. Administrative Requirements: PCs may have more administrative needs, like filing new articles of organisation when there are changes in membership or ownership.

6. Costs: Setting up and running a professional corporation may cost more at first and over time compared to simpler business structures like partnerships or single proprietorships.

7. Limited Use: Professional corporations are usually made for licenced professionals in certain areas, which means they can’t be used by a lot of different kinds of businesses.

8. Complexity: A professional company may have more complicated rules and structures than other types of businesses, so it’s important to get professional help and advice.

Why Choose a Professional Corporation?

A partnership is when two or more people work together to do business. If there are two or more people in a partnership, however, each person may be responsible for the debts and bad actions of the other partners. The protections for a professional business are the same as those for a regular corporation. But before you start a business, you should check to see what laws are in place in your state. Some states don’t let owners get out of being responsible for each other.

Difference Between PC and LLC

Basis

Professional Corporation (PC)

Limited Liability Company (LLC)

Ownership Owned by licensed professionals, often in specific fields. Owned by members, can include individuals, corporations, or other entities. Members need not be licensed professionals.
Liability Protection Provides limited liability protection to shareholders, separating personal assets from business liabilities. Offers limited liability protection to members, shielding personal assets from business debts and legal claims.
Management Structure Managed by a board of directors elected by shareholders, with officers handling day-to-day operations. Can be handled by members, so all members have a say in decisions, or by managers, who are in charge of running the business.
Formation Formalities Usually includes more paperwork, like filing articles of incorporation and following certain rules. Usually has fewer rules and more freedom in how the organisation is set up and how it runs.
Taxation May have specific tax rules for professional services, and the tax rate can be fixed. Offers flexibility in taxation, allowing members to choose between pass-through taxation or corporate taxation.
Transferability of Ownership There may be limits on transferring ownership that are written in the partnership agreement. There are fewer limits on transferring of membership interests compared to the transfer of ownership.

Frequently Asked Questions (FAQs)

1. What is a Domestic Proefessional Corporation?

Answer:

A domestic professional corporation is an organisational structure established by industry experts. Physicians, attorneys, accountants, and other professionals typically form a corporation. This type of entity restricts the proprietors’ personal liability.

2. Can a professional corporation may qualify as a S corporation?

Answer:

Professional-founded organisations are initially incorporated as PCs. Nonetheless, if the PCs satisfy the criteria for a S corp, they have the option to be classified as such by the IRS. They will subsequently be eligible for pass-through taxation by default.

3. How does one establish a professional corporation?

Answer:

The structure of a PC is similar to that of any other business. A small group of professionals join for the purpose of providing services. They create the articles of association, submit an application for registration, stick to government regulations, and seek legal approval. As a result, the PC is incorporated. Professionals constitute the proprietors and owners of PCs.



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