Key Takeaways

  • A "personal corporation" often refers to a professional corporation (PC), which is limited to certain licensed professions, while an LLC is available to most business types.
  • LLCs offer flexible management, fewer formalities, and pass-through taxation; PCs may face stricter rules, higher formalities, and possible double taxation.
  • Both structures provide liability protection, but a PC won’t shield against personal malpractice claims—only those against other shareholders.
  • Choosing between a personal corp vs LLC involves factors like taxation, ownership restrictions, and state licensing rules.
  • S corporations can be formed by either PCs or standard corporations to gain pass-through tax benefits, but they have IRS eligibility limits.

Personal Corporation vs LLC

A personal corporation vs LLC: which is the better option for you? It can be confusing on which to opt for when setting up your business unless you have all the information about both options.

Key Differences Between a Personal Corporation and LLC

When weighing a personal corporation vs LLC, it helps to understand their fundamental differences:

  • Ownership Eligibility – A personal corporation (professional corporation) is generally restricted to licensed professionals in fields like law, medicine, and accounting. All shareholders must usually hold the same professional license. LLCs can be owned by individuals, other LLCs, corporations, or even foreign entities, unless state law provides specific restrictions.
  • Formation Requirements – PCs require state agency approval tied to the profession and may need proof of licensing for each shareholder. LLCs file articles of organization with the state and usually do not require professional licensing for all members.
  • Management Structure – A PC has a board of directors, corporate officers, and annual meeting requirements. LLCs offer flexibility—members can manage directly (member-managed) or appoint managers (manager-managed).
  • Liability Protection – Both protect owners from business debts, but a PC does not protect a professional from their own malpractice; it only shields them from liability for other owners’ malpractice.
  • Tax Treatment – PCs are taxed like C corporations by default and may face double taxation, although electing S corporation status can change this. LLCs default to pass-through taxation, with the option to elect C or S corporation tax status.
  • Formalities – PCs must observe more corporate formalities (bylaws, annual reports, director meetings) than LLCs, which have fewer ongoing compliance requirements.

S Corp vs. Professional Corp vs. LLC

A professional corporation, an S corporation, and an LLC have many similarities as well as differences. Although S corporations and LLCs are some options to choose no matter what industry or products you sell, a professional corporation is restricted to specific licensed professions. This is why that choice may not be available to you.

No matter if you are just starting out as a business or if you are considering changing your business model, a typical first step is comparing an S corp with an LLC. While a limited liability company and S corporations have some of the same qualities, they also have many differences. You should be familiar with all of these before moving forward.

Choosing the Right Entity for Your Profession

The decision between an LLC, professional corporation, or S corporation often hinges on your profession, tax preferences, and growth goals:

  • Licensed Professions – If your profession requires a professional license and your state mandates incorporation as a PC, you may not have the option of forming an LLC.
  • Tax Goals – An S corporation election can help avoid self-employment taxes on some income, but it comes with ownership limits (e.g., no more than 100 shareholders, all of whom must be U.S. citizens or residents).
  • Flexibility Needs – LLCs are generally easier to run with fewer governance requirements, making them appealing for smaller practices or businesses without complex investor needs.
  • State Rules – Some states allow professionals to choose between forming a PC or an LLC, while others require a PC. Reviewing state-specific regulations is essential before deciding.

What is Incorporation

When you decide to incorporate your business, you are emerging from a sole proprietorship or partnership into a company that will be formally recognized by the state in which it was incorporated. It will become a legal business entity all on its own and separate from those who founded it.

A new company structure will typically fall into two categories:

·  A limited liability company

·  A corporation

Not all incorporation choices are the same. When you are deciding between a corporation and a limited liability company, you need to consider the best choice for your type of business so that you begin on the right foot. It will also act as the foundation for the ongoing success and growth of your company.

Incorporation vs. LLC Formation

While “incorporation” refers specifically to creating a corporation, forming an LLC is a separate process. The distinctions include:

  • Legal Structure – Incorporation creates a corporation (C corp or S corp), while LLC formation creates a limited liability company.
  • Regulatory Oversight – Corporations must follow statutory corporate governance rules. LLCs have more freedom to define internal rules in their operating agreement.
  • Paperwork – Incorporation typically requires articles of incorporation, bylaws, and an initial board meeting; LLCs file articles of organization and adopt an operating agreement.
  • Capital Raising – Corporations can issue shares, which can make attracting investors easier. LLCs can add members or restructure ownership, but the process is less standardized.

Professional Corporation

A professional corporation is an option for specific occupations. This type of structure is for accountants, lawyers, engineers, architects, and those in the medical profession. While professional corporations do not provide the same amount of personal liability protection of S corporations or limited liability companies, they do offer protection for suits filed against other associates.

The professional corporation has to be approved by the state agency that licenses the specific profession. Professional corporations do not protect you against a malpractice suit, but do reduce your liability for any claims that are directed at your associates. A professional corporation is only one type of corporation. It is a streamlined type of corporate organization. It allows professionals in that particular industry more control over the operations of the corporation.

A licensed professional that wants to incorporate a practice may form a professional corporation, while the shareholders, directors, and the officers have to be in the same type of profession.

A professional corporation is not as popular as it used to be. This is due in part to the tax law changes. An LLC is also easier to run.  All states will vary with regard to the type of professions that are required to incorporate as a professional corporation. Most states include the following:

· Lawyers

· Accountants

· Doctors

· Engineers

· Veterinarians

However, there are some exceptions. Many states will provide professionals a choice. They may incorporate as a professional corporation or as a regular corporation. In every state, certain professions have the option to form a professional corporation.

There are some advantages and disadvantages of a professional corporation. If a professional decides to retire or leave the business, the ownership can be transferred to the others. The professionals may also share all management responsibility and any profit without the concern of being liable for the malpractice of the others actions. However, the flat corporate tax rate for professional corporations can limit the growth of a business.

Advantages and Disadvantages of a Personal Corporation

Advantages:

  • Professional credibility and compliance with licensing regulations.
  • Liability protection from the malpractice of other owners.
  • Perpetual existence, even if an owner leaves.
  • Potential tax planning opportunities if electing S corporation status.

Disadvantages:

  • No protection from your own malpractice claims.
  • More complex administrative and recordkeeping requirements.
  • Potential for double taxation if taxed as a C corporation.
  • Shareholder restrictions based on professional licensing.

When to Consider an S Corporation Election

Electing S corporation status can be beneficial for both PCs and LLCs that meet IRS criteria. Advantages include:

  • Pass-through taxation, avoiding double taxation.
  • Potential self-employment tax savings for owner-employees.
  • Ability to retain the corporate liability shield.

However, S corps have strict limits:

  • Maximum of 100 shareholders/members.
  • Only U.S. citizens or residents as owners.
  • One class of stock allowed.

S Corporation

An S corporation is very similar to an LLC. The profits in an S corporation are distributed to the stockholders. They will then add these profits to their own personal income tax returns. S corporations are similar to the other types of corporations with the exception of taxation.

There are some other corporate requirements. They must hold regular management meetings for example. This has to happen whether the business is a single stockholder company or a large company.

Frequently Asked Questions

  1. What is the main difference between a personal corporation and an LLC?
    A personal corporation (professional corporation) is restricted to licensed professionals and has stricter governance requirements, while an LLC is more flexible and widely available.
  2. Can a professional form an LLC instead of a personal corporation?
    It depends on state law—some states require certain professionals to form PCs, while others allow LLCs with professional licensing compliance.
  3. Does a personal corporation protect against malpractice claims?
    No. It protects you from liability for other owners’ malpractice, but you remain personally liable for your own professional negligence.
  4. Which has fewer administrative requirements: PC or LLC?
    An LLC typically has fewer formalities and simpler compliance requirements than a PC.
  5. Can both a PC and an LLC elect S corporation status?
    Yes, if they meet IRS eligibility rules, both can choose S corp taxation to gain pass-through tax treatment.

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