Professional Corporation vs S Corp: Key Tax & Legal Differences

Key Takeaways

• A professional corporation (PC) can elect S corp status if it meets IRS requirements, offering pass-through taxation.
• PCs are required for licensed professions in many states and offer limited liability protections.
• PCs with S corp status still follow corporate formalities like board meetings and shareholder resolutions.
• Not all states allow professional corporations to elect S status—check your state’s specific laws.
• Choosing between a professional corporation vs S corp depends on liability needs, tax goals, and business type.
• S corp status can help avoid double taxation but comes with restrictions on shareholders and stock structure.
• Both entities differ from LLCs in terms of ownership, formalities, and liability exposure.

S Corp Status for Professional Corporations

Can a professional corporation be an S corp? Small businesses often must minimize their tax burden to become profitable. If you have a professional corporation, you may qualify for pass-through taxation by electing to be treated as an S corporation by the IRS. If your business meets the qualifications, S corporation status allows you to avoid double taxation, thus increasing your net profits.

In many states, licensed professionals are not permitted to operate as regular corporations. However, a professional corporation is an alternative that provides limited liability. Depending on the state, this is the required business entity for physicians, attorneys, engineers, and other professionals. However, a professional corporation may be able to opt for S corp status.

Most states allow professionals to opt for an S corporation, professional corporation (PC), or limited liability company (LLC). The best choice for your entity depends on the individual circumstances of your business.

State-Specific Restrictions on S Corp Elections for Professional Corporations

While the IRS permits a professional corporation to elect S corporation status, individual state laws may impose restrictions. For example, California allows professional corporations to elect S corp status, but only if all shareholders are licensed professionals in the same field. In some jurisdictions, restrictions on professional ownership or entity structure may prevent qualification as an S corp.

Additionally, professional corporations must comply with both corporate formalities and licensing board regulations. These overlapping compliance areas can affect whether the entity remains eligible for S corp taxation and can influence your decision when comparing a professional corporation vs S corp.

Classification of Professional Corporations

State laws govern the formation of a professional corporation. Depending on the individual state, shareholders in this type of corporation must be licensed in law, medicine, architecture, or another professional service. They are also governed by special liability laws.

The IRS categorizes professional corporations as C corporations. They are considered taxpayers and must pay income taxes at the corporate rate. In some states, physicians are not allowed to form professional corporations and must instead establish professional associations.

Key Differences: Professional Corporation vs S Corp

The main distinction lies in how the entities are taxed and regulated. A professional corporation is a state-recognized structure for licensed professionals that can be taxed either as a C corp or, with IRS approval, as an S corp. An S corporation, on the other hand, is strictly a tax classification—not a separate legal entity. Therefore, when discussing professional corporation vs S corp, it's important to recognize that one is a type of legal structure and the other is a tax election.

Comparison at a glance:

When comparing the professional corporation vs S corp options, professionals often choose a PC taxed as an S corp to maximize tax efficiency while complying with state licensing requirements.

Subchapter S Election Eligibility

If a C corporation qualifies as a small business corporation, it can elect to be taxed as an S corporation by the IRS. This prevents double taxation profits by taxing income only at the individual level, not the corporation level. Each shareholder reports profits and losses on his or her individual tax return.

Qualifying for S Status

Requirements for your professional corporation to qualify for S taxation status are as follows:

• The corporation must have fewer than 100 shareholders
• Shareholders can only be individuals or certain estates and trusts that benefit individuals.
• Only U.S. citizens or permanent residents can be shareholders.
• Only one class of stock can be offered.
• The corporation must establish a tax year based on the calendar or get IRS approval of an alternate calendar.

Electing S Corporation Status

Individuals in high tax brackets who run high-profit professional corporations are subject to a flat 35 percent corporate tax, a savings over the individual tax rate. To minimize their personal taxes, corporate owners can disburse dividends. When a practice runs at a loss, owners who have substantial income can offset this income with the losses of the corporation.

When a professional corporation is close to breaking even and is owned by individuals with moderate income, taxation at the lower individual tax rate is often more beneficial, which is when S corp election makes sense.

To elect S status, all shareholders must be in agreement. The corporation must complete IRS Form 2553 and have it signed by all shareholders. When this form is submitted, the IRS will review your qualifications and if you are eligible, it will notify you in writing of the date of your successful S corp election. 

After successful S corporation election, the corporation will still be required to file Form 1120S every year to report profits and losses, even though these are not taxed at the corporate level. Profits and losses are allocated to shareholders by filing a Schedule K-1. Each shareholder then reports these profits and losses on Form 1040. 

Except for pass-through taxation, S corporations operate like other types of corporations. They are subject to the same requirements, including regular management meetings, even if they only have one shareholder.

Deadlines and Considerations for Electing S Status

To elect S corp status, a professional corporation must file IRS Form 2553 within:

• 2 months and 15 days after the beginning of the tax year the election is to take effect, or
• Any time during the tax year before the intended effective date.

Missing this deadline could result in the corporation remaining taxed as a C corp for the year, potentially subjecting profits to double taxation. If you miss the deadline, the IRS may grant late election relief if the corporation can show reasonable cause.

Before electing S corp status, consider:

• The administrative burden of S corp compliance
• Whether all shareholders are eligible (U.S. citizens/residents, individuals)
• How your state's rules treat professional corporations under S tax treatment
• Your anticipated revenue and tax bracket

Always consult a legal or tax advisor to ensure you're making the best choice between a professional corporation vs S corp, particularly if your practice operates across multiple states.

Limited Liability Considerations

While both corporations and LLCs protect the owners' personal assets from business debts and obligations, some situations put this limited liability in jeopardy. This includes situations where an owner provides a personal guarantee for a loan or lease, injures someone, or does something illegal.

Owners of professional corporations are responsible for damages caused by the services they provide, even though liability for other business obligations is limited. For example, a physician found guilty of malpractice is personally responsible for damages awarded by the court.

Liability and Insurance Considerations for Professional S Corps

Professional corporations that elect S corp status do not gain immunity from malpractice claims. Each licensed professional is personally responsible for their own acts of negligence or malpractice. The S corp election only impacts tax status—it does not alter liability rules.

To protect against professional liability:

• Maintain robust professional liability insurance (malpractice insurance).
• Consider Errors and Omissions (E&O) coverage.
• Ensure the corporation follows all state and board licensing compliance requirements.

Understanding liability exposure is essential when weighing the benefits of a professional corporation vs S corp election. While the S corp status can reduce tax burdens, it doesn’t offer extra legal protection beyond that of a standard professional corporation.

Frequently Asked Questions

• Can a professional corporation be an S corp in all states?
  No. While the IRS allows S corp election, some states limit or prohibit professional corporations from making this election. Always check your state laws.
• Is a professional corporation a type of S corp?
  No. A professional corporation is a legal business structure, while an S corp is a tax classification. A PC can elect to be taxed as an S corp if it qualifies.
• What are the tax benefits of an S corp for professionals?
  S corps offer pass-through taxation, avoiding double taxation on corporate profits. Owners may also save on self-employment taxes if compensation is structured properly.
• Do I still need malpractice insurance with a professional S corp?
  Yes. S corp status does not shield licensed professionals from personal liability for professional negligence or malpractice.
• How do I choose between a professional corporation and an LLC?
  It depends on your profession and state laws. Some professions are required to form PCs, while others may choose LLCs for more flexible management and fewer formalities.

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