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Understanding Professional Corporations: A Guide for Professionals

You're a professional and you own a corporation, are you a professional corporation? A professional corporation (PC or APC) is a specific type of corporation designed for licensed professionals, like healthcare providers, architects, lawyers, and accountants. It has unique legal requirements tailored to the specific professionals who offer those specialized services as well as the public who uses those services.

In many states of the U.S., professional regulatory bodies require the use of these professional corporations to comply with industry standards and operate their business. Understanding and setting up a professional corp is a crucial step for these professionals in safeguarding their practice and optimizing their businesses.

What is a Professional Corporation?

A Professional Corporation is a distinct type of business entity reserved for licensed professionals like doctors, lawyers, accountants, and architects. Unlike traditional corporations or LLCs, a Professional Corporation is specifically tailored to individuals who provide professional services. Like traditional corporations and LLCs, members receive limited liability benefits with a professional corp, however, they might still be personally liable for professional malpractice claims.

One of the biggest differences between a professional corp and other business structures is the requirements for shareholders, directors, and officers must typically be licensed professionals themselves.

For a more in-depth exploration of the advantages and disadvantages of different business structures and how a professional corporation compares to each, check out my detailed article here.

Key Characteristics of Professional Corporations

Licensure Requirements for Shareholders and Directors

A key defining characteristic of professional corporations is that their shareholders and directors must be licensed professionals in the field related to the business’s services. This requirement is in place to protect the end users and helps make sure that the management and ownership of the business are in the hands of qualified professionals who understand the professional standards and ethics of the industry.

Can you imagine going to a healthcare provider, lawyer, or accountant who was not subject to these requirements? There would be no guarantee of the integrity and credibility of the services provided. Generally, the frameworks of the governing body of these professions exist to protect the public interest (Certified Public Accountants for CPAs). Professional corporations are subject to oversight not just from business regulatory entities but also from their respective licensing boards.

Limited Liability with a Caveat

Professional corporations offer limited liability protection just like other limited liability structures. However, this protection does not extend to individual malpractice.

Said differently, while a professional corp can shield its members from certain financial liabilities and obligations incurred by the corporation as a whole, each member remains personally liable for their professional negligence or malpractice. This is especially true for professionals with high malpractice risks, such as healthcare, law, and accounting. So, while a professional corp provides a layer of financial security, it does not absolve professionals from maintaining their responsibility and adherence to their professional standards.

Registration and Naming Requirements

State Registration Requirements

Professional corps are required to register with relevant state agencies and adhere to specific guidelines that vary from state to state and the profession. For a law firm in California looking to establish itself as a professional corporation, this firm must register with the CA Secretary of State and also meet the requirements set by the California State Bar.

The registration process involves submitting specific documentation that verifies the professional licensure of the shareholders or directors. Additionally, the corporation must follow naming guidelines, which usually require designations like “Professional Corporation” or abbreviations like “P.C.” at the end of your business name to clearly indicate its status.

For a law firm or similar entities, compliance with these state-specific rules is critical for remaining in good standing for your business. The California Secretary of State’s office provides detailed guidelines and resources for registration, while the California State Bar offers specific regulations related to legal professional corporations.

For more information on state-specific requirements and resources, visit the California Secretary of State's website and the California State Bar's website.

Naming Conventions for Professional Corporations

Professional corps are subject to specific name rules that differ from a regular business entity. One of the key requirements is that the name must typically include a reference to its professional nature. This could be something like adding “Professional Corporations”, “P.C.”, or “Ltd.” to the end of your business name. Sometimes, different states require the inclusion of the names of one or more of the licensed professionals who are part of the corporation.

For example, a law firm operating as a professional corporation might need to include the last name of one or more of the founding lawyers in its name, along with a clear indication that it’s a professional corporation. These naming requirements are designed to provide transparency to the public, indicating that the services offered are provided within a professional and regulated framework.

Tax Considerations: Opting for S Corp Taxation

Even as a professional corp, you can still elect to have S corp status for tax purposes. By choosing S corp status, a professional corporation can avoid the double taxation typically experienced by C corps because in a C corp, both the corporation’s profits and the owner’s draw are taxed.

Under S corp status, the corporation’s income, deductions, and tax credits flow through to the owner’s individual tax returns. This means profits are only taxed once at the individual level (there may be additional state taxes at the business level), potentially leading to significant tax savings, especially for high-earners who like to take money out of the business (who doesn’t?).

There are still specific eligibility requirements to qualify for S corp status, including limitations on the number and type of shareholders. Professional corporations considering electing S corp status should consult with a CPA to understand the full implications and ensure compliance with IRS regulations.

Seeking Professional Advice

When considering the formation of a professional corporation, you should strongly consider seeking professional advice (from one professional to another!). Consulting with a business attorney is essential to determine if the professional corporation structure aligns with your goals and legal requirements. Business attorneys and CPAs can guide on the intricacies of setting up a professional corp, including tax implications, compliance with state laws, and financial management.

For tailored advice and help in setting yourself up for success, explore my services here. I’m dedicated to providing comprehensive support to help you establish and manage your professional corp effectively.

Understanding the intricacies of professional corporations is key for licensed professionals looking to optimize their practice. Professionals should think about registration requirements, naming conventions, tax considerations, and consulting with an experienced professional.

Let me know your thoughts or experiences in the comments! I also would love to hear your suggestions for future topics that you would like to learn more about.

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