Professional Entity: Everything You Need to Know
A professional entity is a legally organized body of professionals that are licensed to operate within the jurisdiction of its state of formation.4 min read
2. Business Name
A professional entity is a legally organized body of professionals that are licensed to operate within the jurisdiction of its state of formation. Such an entity can be a professional LLC, corporation, or association.
Usually, entrepreneurs who are looking to form a new business organization are free to consider several potential tax advantages and determine what model is best for their business goals. Professionals, on the other hand, have only a few options. Each state has its own rules governing the creation of professional organizations. Apart from West Virginia, every state in the U.S. permits the creation of some kind of professional organization.
States generally permit the creation of professional LLCs. However, some don't. Some states permit the formation of professional limited liability partnerships, and a few states allow the creation of professional associations. In some states, the expressions “professional association” and “professional corporation” are used interchangeably.
You have to choose a business name that satisfies the name requirements of your state for your professional entity according to the kind of entity you're looking to form. Abbreviations can be part of the name of your professional entity. Some examples of such abbreviations are the following:
- PC (for professional corporations)
- PA (for professional associations)
- PLLC (for professional limited liability companies)
In some cases, the name of your professional entity may be required to hint at your profession. For instance, a professional organization formed by a group of lawyers can be called something like “Simon and Goldberg, Attorneys at Law, PLLC” to satisfy the naming requirements of the bar association of their state. On the other hand, there may be words you're not permitted to use in naming your professional entity. Bear in mind that such restrictions depend on your chosen state of formation.
You have to get the approval of your state licensing board, as professional entities are exclusively for licensed professionals. A single professional can form a professional LLC, corporation, or association. Professionals who are all licensed in the same profession can also do the same. Many states won't let you form a professional organization if you're not a licensed professional such as a lawyer, an engineer, a doctor, and an accountant.
In some states, professional services cover a wide range. They include any job that requires a license. Most states require professionals to provide evidence of licensure and get the approval of the professional licensing board for their articles of organization, incorporation, or association before they can file their formation documents with the secretary of state.
One of the main reasons for creating business entities is to protect their owner from liabilities such as lawsuits and business debts. Professional LLCs and corporations serve that purpose with a major exception. A professional LLC or corporation protects each of its members from the malpractices of other members. However, it doesn't protect a professional member from the liability of his or her own malpractice.
For instance, if a surgeon sews up a patient after surgery with a forgotten pair of forceps in the patient's belly, other surgeons who are members of that surgeon's professional entity will be protected from any lawsuits, claims of damage, or any other form of liability that may result from that surgeon's mistake. However, the surgeon who made the mistake will not be protected from the consequences of his or her mistake.
Members of a professional entity are mostly protected from the actions of their peers, but there's always a possibility of getting sued for gross negligence. For instance, if a copilot knew that the other pilot (the captain) came in tipsy but did nothing to stop him from getting in the cockpit, the copilot could certainly be sued for gross negligence if a flight mishap occurs and they survive the mishap.
By default, a professional corporation is a C corporation for reasons of taxation. However, it can file to become an S corporation liable to tax on the basis of a flow-through like a partnership. Before settling for either an S or a C status, various factors must be considered. An S corporation isn't subject to double taxation of income.
However, an S corporation can't provide employee benefits for its employees/shareholders as generously as a C corporation. Furthermore, there's a difference between how employees/shareholders are taxed under the two statuses. It would be to the advantage of a C corporation to describe payments to its shareholders as salaries instead of dividends because dividends are taxed at both the corporate and shareholder levels.
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