Starting a Professional Corporation
If you're thinking about starting a professional corporation, it's important to fulfill the necessary requirements in your state.3 min read
2. Benefits of Starting a Professional Corporation
3. Forming Professional Corporations and PLLCs
4. Naming a Professional Corporation or Professional Limited Liability Company
5. How Are Professional Corporations and PLLCs Taxed
If you're thinking about starting a professional corporation, it's important to fulfill the necessary requirements in your state. There are different rules regarding business licenses and company names from state to state. There are also steps to complete in order to properly meet your state's regulations for governing and operating your business.
What Is a Professional Corporation?
A professional corporation (PC) is an S-corporation or C-corporation that is set up to provide professional services in trades that demand a state license in order to practice. There are a few states that refer to a PC as a service corporation (SC) or a professional association (PA).
The professions that qualify for professional corporation status varies from state to state. However, typically the following professionals are covered:
- Social workers
- Health care providers
In order to determine which professions are required to form a PC, contact your state's corporate filing office. This is typically the corporation commissioner or the secretary of state (SOS). Some states also have a requirement to show proof of good standing in order to obtain a professional license. Remember that the corporate structure of a PC will be affected if any member loses their license by having it suspended or revoked.
Benefits of Starting a Professional Corporation
There are many benefits to starting a PC. For example, this particular type of business structure limits the personal liability of the PC's shareholders for any business obligations or debts. A PC also allows employees and/or shareholders to avoid any personal liability in the event of negligence by another employee.
For example, in the event that a partner in a medical practice becomes involved in a lawsuit, the assets of the other owners would be protected. This makes a PC a very logical choice for dentists, doctors, and other medical professionals.
PCs are also permitted to sell shares of stock to generate capital. However, the shares must be held indirectly or directly by specific individuals, including:
- Retired employees
- Current employees
- Their heirs or estates
Lastly, it is easier for individuals who hold a professional license to obtain a loan. This is because there is an expectation of substantial and consistent cash flow. Additionally, when a few license-holding professionals work together, their creditworthiness significantly increases. This makes any initial financing much easier for a PC.
Forming Professional Corporations and PLLCs
The articles of incorporation and incorporation documents for a PC and the articles of organization for a professional limited liability company (PLLC) are comparable to those of limited liability companies (LLCs) and standard corporations. However, with PLLCs and PCs, state licensing agents typically have to approve the incorporation documents before these documents can be submitted to the SOS.
Often there are certain requirements from the certifying agency that oversees a professional practice. The articles of incorporation for the PC should use any specific language required by the professional's governing board. This is why the filing time for PLLCs and PCs is normally longer than the filing time for LLCs and standard corporations.
Naming a Professional Corporation or Professional Limited Liability Company
There are many important decisions to make when it comes to naming a business. Some professionals decide to use personal names when choosing to name their business. Others may want to incorporate their specialty into the company's name.
However, be sure to research if there are any restricted words that are not permitted for company names in your state. Also, the name that you choose must clearly illustrate that your business is a PLLC or PC.
The majority of states require that an LLC or corporate name be followed by the term "Professional Corporation" or the abbreviation "PC" or "P.C." In some states, the ending required is "Professional Association" or "P.A." or "Service Corporation" or "S.C." The appropriate ending for PLLCs is "Professional Limited Liability" or "PLLC."
How Are Professional Corporations and PLLCs Taxed
Typically, PCs and PLLCs are taxed in the same manner as LLCs and standard corporations, unless they elect to become an S-corporation. On the other hand, PCs are taxed like a C-corporation.
However, many PCs do not have the advantage of graduated corporate federal income tax rates. Those that are "qualified personal service corporations" must pay the highest federal income tax rate of 35 percent of taxable income instead of applying the lower marginal rates to some income.
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