Forming a Professional Corporation
Forming a professional corporation, or professional service corporations, involves creating a special corporate structure made up of a group of professionals.3 min read
Forming a professional corporation, or professional service corporations, involves creating a special corporate structure made up of a group of professionals. The professions that fall into this category include accountants, physicians, engineers, and attorneys. With these professions, there are legal requirements and restrictions that only apply to these entities, and they are usually formed as S corporations and C corporations.
Legalities of a Professional Corporation
To establish a professional corporation, the state laws where formation will take place should be reviewed to be in full legal compliance. In most states, the ability to form this type of entity is allowed for the following professions:
- Healthcare Providers (outside of physicians)
- Social workers
Simply, offering professional services must be the main purpose of the corporation. Any business that does not fall under the profession is not allowed. The corporation may invest in real estate, bonds, stocks, mortgages, and other investments with their funds. All professionals that are part of the corporation must hold active licenses in the state where the corporation formation took place.
Creating a Professional Corporation
To form a corporation, the state requirements must be fully complied with to receive approval by the state's Secretary of State. A basic overview of aspects of the process includes:
- Drafting the Articles of Incorporation which will state that the owners will operate as a professional corporation and that all owners fall into the professional requirements of the state. Refer to your specific state for requirements related to the articles of incorporation.
- The purpose of the corporation must be clearly expressed. For example, if the professional corporation is made up of accountants, they will offer accounting services.
- The corporation must be given a name that includes specific language. Examples of this language include:
- Professional Association
- Service Corporation
- Professional Corporation
- Professional Service Corporation
- Check with the appropriate state licensing boards to obtain all required licenses. Often the licenses of all corporation owners must be provided to the state.
Corporation Formation Restrictions
All corporations come with restrictions, but professional corporations have even more. This is just a sample of restrictions that are applied to professional corporations:
- Every owner must be licensed in the state of formation.
- If an owner loses their license, their employment must cease and all financial interests in the corporation must end. If this is not done, the state can dissolve the corporation for noncompliance.
- Two professional services cannot work under one corporation. The corporation can only be for one specific professional service. For example, an accounting group cannot also offer legal services.
- The board of directors must have a specific makeup. All officers and one-half of the board of directors must be licensed in the profession of the corporation. The treasurer and secretary are exempt from this requirement.
- When a stock is issued, it must clearly state that the shares are for professional services. Transfer of the stocks is prohibited.
- The professional service corporation can only merge with another professional service corporation if they perform the same service type.
Advantages of Forming a Professional Corporation
The largest advantage of forming a professional corporation is that the owners cannot be deemed personally liable for obligations and debts of the business. If the corporation is sued or must declare bankruptcy, only the company assets can be seized to fulfill obligations that stem from legal action or issues with creditors. Corporation owners are also protected from the illegal or negligent actions of other owners in the corporation.
Professional corporations can also use tax benefits only available to professional corporations. For example, any salaries and bonuses of both owners and employees are tax-deductible. In addition, any fringe benefits can be written off as business expenses.
The way the corporate structure works allows for profits to be retained and put back into the business as a form of improvement. This requires the profits, up to $150,000, to be taxed and not be distributed as shareholder dividends.
In the event of the death of an owner or if an owner withdraws, the professional corporation can remain active in the business. The professional corporation can also remain in existence in perpetuity and can last if the number of owners decreases.
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