Form a Professional Corporation

Why choose a Professional Corporation (PC)?

Professionals such as Accountants, Architects, Doctors, Engineers, Lawyers, etc, can choose to practice as a corporation just like any other business. Most states limit the stockholders of a professional corporation to individuals properly licensed in the profession. The stockholders of a corporation enjoy the benefit of limited liability. Generally, this means that their personal assets are protected against the claims of creditors of the corporation. However, this is not true with regard to malpractice issues and certain types of taxes. This is why professionals who practice under the corporation veil still carry malpractice insurance.

Corporations are audited less frequently by the IRS than Sole Proprietorships.

What is a Professional Corporation (PC)?

A professional corporation (PC) is a business structure in which properly licensed professionals contribute money and or property in exchange for an ownership interest in the corporation. These individuals are referred to as "Stockholders" of the corporation. Most states limit the stockholders of a professional corporation to individuals properly licensed in the profession. The stockholders percentage of ownership interest is represented by the number of shares of stock held by each stockholder.

Corporation Taxes

The professional corporation, just like any other corporation, is by default a C-Corporation when first incorporated. The profits of a professional corporation are generally taxed as "personal service income" subject to rates that are higher than the corporate rates applicable to most other general business corporations. This can easily be avoided by converting from C-Corporation status to S-Corporation status.

The issue of whether or not to conduct business as an S-Corporation vs. C-Corporation has come up time and time again. The C-Corporation is a separate entity for tax purposes. This means a C-Corporation pays taxes (at the corporate rates) as a business entity, separate and distinct from the individual stockholders. This is what is referred to as being taxed at the corporation level vs. being taxed at the individual stockholder level. In addition, the distribution of income of a C-Corporation can be subjected to double taxation. This can be avoided by electing S- Corporation Status.

The Internal Revenue Service and many states allow the stockholders of a C-Corporation to elect to be taxed as an S-Corporation. The profit or loss of the S-Corporation flows through to the individual stockholders in proportion with their ownership interest in the S-Corporation. This is what is referred to as a "flow through entity". Therefore the S-Corporation generally does not pay its own taxes. The stockholders pay the tax on their proportionate share of the corporate profits at the individual rates as opposed to the corporate rates.

So why bother with an S-Corp? Because you can avoid the double taxation. Plus, if you are a professional corporation, you can avoid the higher rates attributable to personal service income. In addition, not only do the profits flow through to the stockholders, but the losses can also. With limitations, the losses can flow through to the stockholders personal income tax return and be used against other income, i.e. Wages.

How do I form a Professional Corporation (PC)?

Corporation formation requires filing the appropriate "Articles of Incorporation" generally with the Secretary of State (SOS).

The Articles of Incorporation requirements vary from state to state.

Most states require some type of certification from the governing licensing board of the profession to be practiced by those stockholders holding the professional license.

The corporate name must be distinguishable from the name of any other LLC, corporation, limited partnership, or company incorporated, organized or authorized to transact business, in that State. Many states require the designation PC, or PA. Some states require the corporate name include the name of at least one of the individual stockholder licensed to practicing the profession.

The specific state fees must be paid to the state before the corporate filing will be accepted by that state.

Depending upon the state and the type of corporation, there are unique procedures along with accompanying cover letters, and specific documentation to be submitted.

If S-Corp status is desired, the stockholders must complete the appropriate Federal and State forms to make the affirmative election to S - Corporation status. There is a limited window of opportunity to make the election. Otherwise you would be taxed as a C-Corp for that tax year. The window does re-open at the start of the new tax year. Generally an S-Corp. must maintain a calendar year for tax purposes.