In many states, people in certain occupations (for example, doctors, lawyers, or accountants) who want to incorporate their practice can do so only through "professional corporations" (PC) or "professional service corporations." In other states, some professionals have a choice of incorporating as either a professional corporation or a regular corporation. And in some states, certain professionals are allowed to form professional corporations or professional service corporations.
The list of professionals required to incorporate as a professional corporation is different in each state. Usually, though, mandatory professional incorporation requirements apply to these professionals:
You'll need to check with your state's corporate filing office (usually the Secretary of State or Corporation Commissioner) to see which professions are required to form professional corporations in your own state.
Professional corporations provide a limit on the owners' personal liability for business debts and claims. Incorporating can't protect a professional against liability for his or her negligence or malpractice, but it can protect against liability for the negligence or malpractice of an associate.
Dr. Anton and Dr. Bartolo are surgeons who practice as partners. Dr. Bartolo leaves an instrument inside a patient, who bleeds to death. The jury returns a $2 million verdict against Dr. Bartolo and the partnership. There is only $1 million in malpractice insurance to cover the judgment. Dr. Anton (along with Dr. Bartolo) would be personally liable for the $1 million not covered by insurance.
Drs. Anton and Bartolo create a professional corporation. Dr. Bartolo commits the malpractice described in Example 1. Dr. Anton, a corporate employee, would not be personally liable for the portion of the verdict not covered by insurance. Dr. Bartolo, however, would still be personally responsible for the $1 million excess, because he was the one guilty of malpractice. (In some states, Dr. Anton would be free from personal liability only if the professional corporation carried at least the minimum amount of insurance mandated by state law.)
Most professional corporations are classified as "personal service corporations" by the IRS and must file a professional corporation tax return. As of 2018, all professional corporations pay a flat tax rate of 21%. Unlike sole proprietorships, partnerships, and LLCs, professional corporations do not enjoy pass-through taxation, which means the professional corporation pays tax on its profits, and the owners pay tax a second time on the same income on their personal tax returns.
However, you can avoid double taxation by electing S Corporation tax status. Click here to learn more about the requirements and the application process.
As an alternative to incorporating, professionals wishing to limit their personal liability can also consider forming a limited liability company (LLC). States laws vary on what type of entity professionals can form though so be sure to check the rules for your state. For example, professionals are not allowed to form an LLC or professional limited liability company in California and instead must form either a professional corporation or a registered limited liability partnership.
In some states, you have the option to form a professional limited liability company (PLLC). The structure is similar to a professional corporation, but with the tax benefits of an LLC and a more flexible management structure. As with professional corporations, a PLLC can limit your liability for business debts, but you remain personally liable for claims relating to your own negligence or malpractice. To learn more about PLLCs, click here.