If you are a business professional such as an attorney, doctor, chiropractor, engineer, architect, accountant, and in some states, actors or other entertainment service providers, a professional corporation (PC) might be the best business entity for you. PC’s are variations of the traditional C or S corporate structure and are only available to professional service providers. The types of professions included in this category vary from state to state and are usually professions that require state licensing. Some states do not allow these professionals to organize as C or S corporations or a traditional LLC, and a PC might be your only choice if you want a formal business structure that may insulate you from certain business debts.
Professional corporations that meet certain requirements may qualify as personal service corporations (PSC) for federal tax purposes. In order to qualify as a PSC, a professional corporation must pass a two-prong federal test, “the Function Test and the Ownership Test”. The Function Test requires that substantially all of the business activities of the PC involve services within specific occupations as set forth by state law. The Ownership Test requires that substantially all the PC’s ownership be held directly or indirectly by qualified people, who are either current employees performing professional services for the corporation; retired employees who performed professional services prior to their retirement; or the heirs or estates of such employees. If a PC does not qualify as a PSC, then it is treated as a general partnership for federal tax purposes.
Advantages of a Professional Corporation:
· The owners of the PC are considered employees of the corporation.
· PSC’s are taxed like regular C corporations, but with a flat corporate tax rate.
· The PSC files a corporate tax return and all shareholders are required to pay tax on the personal income received.
· A PC can create retirement plans for its employees with higher contribution limits.
· A PC can provide life and health insurance as a tax-free benefit by establishing a Voluntary Employees' Beneficiary Association (VEBA).
· A PC is allotted many other corporate tax deductions for employee benefits that are also not taxable to the employee such as dependent care.
· A PC can continue operations without interruption if a shareholder/employee dies or withdraws.
Disadvantages of a Professional Corporation:
Like any other corporation, a PC must fulfill all of the recordkeeping requirements of a traditional corporation, such as regular shareholder and directors’ meetings, updated minutes and resolutions, and maintaining separate personal and corporate accounts.
· There are passive loss limitations that may affect non-active shareholders.
· The application of the flat corporate tax can be a disadvantage to some entities.
· Only members of the same profession can be shareholders in a PC.
· A PC does not protect against negligence/malpractice liability.
A professional corporation is in the most basic terms, a corporation of professionals practicing in the same business or trade. Unlike a traditional corporation, in a professional corporation, its shareholders, officers and directors although protected from some debts and obligations of the business, cannot be absolved of liability stemming from their professional actions, or malpractice. Certain professional corporations may qualify as personal service corporations which afford additional benefits to its owners and employees.