What is a Professional Corporation?
A Professional Corporation (often called a PC) is a type of corporate entity whereby the owners (a group of licensed professionals called shareholders) are authorized to act as a single entity (legally a person) and are recognized as such in law. Professional Corporations are popular among professionals, even with the increase in the popularity of LLC’s, because of the prestige, flexibility, liability protection and tax treatment that corporations provide.
Professional Corporation, C-Corp, S-Corp–What’s the Difference?
A Professional Corporation (or PC) may either may be taxed either under Subchapter S or Subchapter C of the US Tax Code. Therefore, a PC can be either an S-Corp or a C-Corp. The distinction between professional corporations and standard corporations is that professional corporations are recognized by the state to be composed of licensed professionals. These corporations are unable to be publicly traded due to the aforementioned licensing requirements.
C-Corps are their own taxable entity, and therefore pay income tax themselves without passing the profits and losses to the owners. Owners, otherwise called shareholders, can pay themselves in the form of dividends. This gives rise to “double taxation” (the company is taxed, then the shareholders are taxed on the dividends). C-Corps, however, can have different classes or levels of ownership, with no limitations on ownership — which contrasts with S-Corps.
S-Corps are considered “pass-through” entities, where the profits and losses pass through to the owners, on a pro-rata basis according to ownership. There are limitations on the number of shareholders, who can own an S-Corp and S-Corps cannot have different classes or levels of ownership. It is possible to save from paying self-employment tax with an S-Corp, although the IRS does require the business to pay the owner-employees a “reasonable salary” before distributing profits (or losses). Tax savings generally occurs for larger corporate incomes.
Benefits of Incorporating Your Business
There are many reasons businesses choose to incorporate.
Formally incorporating your business may help it “look more professional and establish credibility.” As a PC, this becomes even more prestigious, as your business is recognized by the state as being composed specifically of licensed professionals.
- Tax-Deductible Business Expenses
PCs taxed either as C-Corporations or S-Corporations generally permit greater flexibility in tax deductions, than operating as a partnership or sole proprietorship.
PCs act as a single entity, and the entity itself is what is liable to third-parties for disputes. This acts as a shield to protect the shareholders from the liabilities of the corporation.
PCs outlast the shareholders, which means a PC is an excellent way to create a legacy for your family.
In some states, certain professions are required to form PCs rather than LLCs or standard corporations. Incorporating as a PC ensures compliance with the law.
Professional Corporation Requirements
Articles of Incorporation
A PC requires that the Articles of Incorporation be submitted to the state where formed and indicate many aspects of the PC, including the registered agent; number, class and par value of shares; physical mailing address; incorporator; and initial board of directors. Once the State approves the Articles, the corporation is said to exist.
Authorization of Shares
In order to form a PC, the PC must authorize shares. Authorized shares simply defines how many shares of the PC exist. A PC then issues those shares to shareholders. Shares held by shareholders are called “Issued Shares.”
Board of Directors
Every PC requires a board of directors, which is authorized and empowered by the Bylaws. The board of directors is responsible for important decisions, such as hiring officers, defining salaries and more.
Proof of Licensure
A PC must be composed of professionals who have been licensed by a state-recognized regulatory body (such as the state bar for lawyers). While requirements vary by state, most states require a license number for each shareholder, while others require prior approval from the relevant licensing board in order to form a PC. California, New York, Florida, Illinois, Louisiana, West Virginia, Texas, and North Carolina all require approval from your respective licensing board.
Stated Business Purpose
A PC must have a stated business purpose, and most states require more than simply “any lawful purpose.”
Registered Agent and Physical Mailing Address
A “registered agent” is someone located in the state where the PC is formed and/or registered, and is responsible for forwarding on legal notices to the board of directors. A “physical mailing address” is the primary location where the PC is located and may be located outside the state where the PC is formed.
Structure
PCs have a board of directors that consists of at least two people. The board of directors hires officers who run the day-to-day activities of the PC. These directors must hold professional licenses.
What You Need to Start
All you need to do is fill out our easy “Corporate Formation Questionnaire” to get started. Our questionnaire is easy to fill out and helps us understand your specific requirements. Licensed business attorneys are available to help you and answer questions.
The Law 4 Small Business service/ filing fee is $249 + state fees and additional options.
Additional Options include Registered Agent & Virtual Mailbox services, Attorney Consults, various templates and documents to better assert ownership, and more.
