Key Takeaways

  • A professional service corporation (PSC) provides services that require a state license, such as medical, legal, or engineering services.
  • PSCs offer liability protection for shareholders and corporate continuity, but they do not shield professionals from personal malpractice claims.
  • State law may require ownership and decision-making in a PSC to be restricted to licensed professionals in the same field.
  • In addition to federal tax treatment similar to C corporations, PSCs must comply with specific state licensing and naming regulations.
  • Businesses providing non-licensed consulting or project-based expertise (like IT or marketing) are considered professional services but may not qualify as a PSC.

A professional service corporation, also called a professional corporation, is an incorporated business under state law that provides some kind of service that requires the work of licensed professionals.

What Is a Professional Service Corporation?

Professional service corporations can provide many different kinds of services. The most common examples include:

  • Physicians
  • Registered professional nurses
  • Licensed practical nurses
  • Chiropractors
  • Dentists
  • Veterinarians
  • Optometrists
  • Physical therapists
  • Pharmacists
  • Mental health practitioners
  • Respiratory therapists
  • Public accountants
  • Licensed practical nurses
  • Licensed midwives
  • Podiatrists
  • Massage therapists
  • Occupational therapists
  • Opticians
  • Engineering and land surveyors
  • Architects
  • Landscape architects
  • Athletic trainers
  • Shorthand reporters
  • Psychologists
  • Social workers
  • Interior designers
  • Dietitians and nutritionists
  • Speech language pathologists
  • Audiologists
  • Acupuncturists.

Professional corporations allow licensed professionals to benefit from the liability protection and income potential of the corporate structure. This liability protection doesn't protect professionals from malpractice. The professionals within the professional corporation will be at risk for malpractice lawsuits as any other professional would be. However, their shareholders, officers, and employees enjoy liability protection.

Other workers in the professional corporation would all be protected in a malpractice suit because they are not the individuals providing the professional service. This includes people in roles such as secretary, technician, bookkeeper, and others.

Depending on how and where a professional service corporation is incorporated, it might only allow for stock sales and transfers to go to:

  • Other licensed professionals
  • LLCs
  • Corporations.

If this isn't a requirement of the state, it could be made a requirement in the corporation's bylaws.

What Qualifies as a Professional Service?

A professional service is a specialized service provided by individuals with certified expertise, often requiring state licensure. While many associate professional service corporations (PSCs) with traditional fields such as law and medicine, the definition can extend to architecture, engineering, accounting, and other fields governed by regulatory bodies.

However, it's important to distinguish between licensed professions and broader "professional services" in the business world. For instance, non-licensed services like IT consulting, marketing strategy, or project management are also considered professional services—but these would not qualify for PSC formation unless they require licensure in the given state.

Characteristics of a Professional Corporation

Some states actually require businesses offering professional services to form professional service corporations. Most states, however, simply make it an option. It may be in the best interest of the business owners to form a professional service corporation. Potential clients, customers, and patients will appreciate the reassurance that comes with the title of professional corporation. Lawyers, medical professionals, and others who want to assure the people they serve that they are, in fact, licensed professionals, will choose this business structure.

When choosing a name for your professional corporation, keep in mind that you are required to include some form of the words "professional corporation" in the name. This could be abbreviated to PC or P.C. at the end of the corporation's name. For example, you could name a professional corporation, Three Brothers Veterinary Clinic P.C.

All the owners of a professional corporation have to be licensed professionals in the same field as the corporation. In some states, a professional corporation is required to obtain licensure from the state licensing board.

Who Can Form a Professional Service Corporation?

To form a PSC, you generally must be a licensed professional in a qualifying field. Common eligibility requirements include:

  • Holding an active professional license in the corporation’s service area.
  • Ensuring all shareholders are licensed in the same profession.
  • Compliance with state-specific rules on naming conventions (e.g., using “P.C.” or “Professional Corporation” in the business name).
  • In some states, corporations must register with the appropriate licensing board before offering services.

Notably, non-professionals (such as investors or administrative staff) cannot own shares in a PSC if the state requires professional ownership.

Pros and Cons of a Professional Corporation

Some of the advantages of forming a professional corporation include:

  • Liability protection
  • Perpetual existence.

Professional corporations protect the shareholders and other non-licensed professionals involved with the company through liability protection. If one of the doctors in a medical corporation is sued for malpractice, the shareholders of that corporation don't need to worry about their assets being taken.

Not all business types allow for perpetual existence. Some require you to declare a dissolution date in your state registration. Professional corporations don't require a dissolution date, so the company can continue doing business as long as it remains in good standing with the state.

A possible downside to professional corporations is that all the company's owners have to be in the same profession as licensed professionals. Another disadvantage is the taxation side of professional corporations.

When to Choose a Professional Service Corporation Structure

Choosing a PSC structure may be advantageous in the following scenarios:

  • You work in a profession regulated by a state licensing board.
  • Your state mandates PSC formation for licensed professionals.
  • You seek to protect non-owner employees from liability.
  • You plan to operate indefinitely and benefit from perpetual existence.

However, a limited liability company (LLC) or sole proprietorship may be more suitable if the profession doesn’t require licensure, or if operational simplicity and pass-through taxation are priorities.

Professional Service Corporation Taxation

Professional service corporations are taxed like C corporations. This does mean they can face the double taxation that corporations are known for. The corporation itself is taxed on its income, and the shareholders are taxed on the profits they take home as well. There are some upsides to a professional service corporation, however, that are not offered to C corporations.

When a business registers as a professional corporation, it can deduct the costs of certain types of insurance plans and other expenses for its employees, including:

  • Accident and health insurance
  • Reimbursements for medical expenses
  • Life insurance
  • Disability insurance.

Permit and License Requirements

All professional service corporations require permits and licenses from the state. Before forming your business, be sure you understand exactly which certifications you will need. Some licensure can take a while to be processed, so give yourself plenty of time to get things in order before incorporating.

Common Challenges Faced by Professional Service Corporations

Despite the benefits of forming a PSC, there are challenges to consider:

  • Malpractice Liability: Unlike general business liabilities, professional malpractice is not shielded by the PSC structure.
  • Ownership Restrictions: Only licensed individuals in the specific profession may hold ownership or voting rights, limiting business flexibility.
  • State Variations: Rules for forming and operating PSCs vary significantly by state. Some require approval from the relevant licensing board, while others impose detailed documentation requirements.
  • Double Taxation: Unless the PSC elects S corporation status (if eligible), it may be subject to both corporate income tax and shareholder dividend taxes.

To navigate these issues, professionals should consult both a business attorney and a CPA familiar with their state’s requirements.

Frequently Asked Questions

1. What is the difference between a professional service and a regular business service? A professional service is typically regulated and provided by someone with a state-issued license, such as a doctor or lawyer, while regular business services may include unregulated services like IT support or digital marketing.

2. Can a professional service corporation have non-professional shareholders? Generally, no. Most states restrict ownership in a PSC to licensed professionals in the same field to preserve the integrity and liability structure of the corporation.

3. Do I need a license to form a professional service corporation? Yes, you and any co-owners must hold active licenses in the profession you intend to provide services in. This is a legal prerequisite in most jurisdictions.

4. Are professional service corporations taxed differently from other corporations? PSCs are taxed as C corporations by default but may elect S corporation status if they meet eligibility requirements. They can deduct certain employee benefits, but face potential double taxation if not an S corp.

5. Is forming a professional service corporation mandatory? Some states require certain professionals—like physicians or lawyers—to form a PSC rather than a general corporation. In other states, it may be optional but beneficial depending on your goals.

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