Basics of a Professional Corporation

Posted: Sep 3, 2009 4:43 PM
Updated: Sep 3, 2009 4:43 PM

Real Small Business: Building Your Business

Basics of a Professional Corporation

From the Editors of Real Small Business

Groups of certain professionals can form corporations knows as professional corporations or professional service corporations. The list of professionals covered by professional corporation status differs from state to state; it typically covers accountants, engineers, physicians and other health care professionals, lawyers, psychologists, social workers, and veterinarians. Typically, these professionals must be organized for the sole purpose of providing a professional service - for example, a law corporation must be made up of licensed attorneys.

In certain states, this is the only incorporation option available for certain professionals, whereas in others, they are given the choice of being either a professional corporation or S or C corporation. Contact your states filing office to see what options are available in your state.

According to tax and legal experts, there is no longer a significant tax benefit to professional corporation status over sole proprietorship or partnership. The IRS treats most professional corporations as "personal service corporations", taxing corporate income at a flat rate of 35%.

Professional corporations can shield owners from liability. While it can't protect a professional from his/her own malpractice liability, it can protect against liability from negligence of an associate. Malpractice insurance is still the way to go for most professionals, however. Still, you might want to consider this corporate status as a back-up against rising rates or inadequate coverage.

Benefits

Owners not liable for negligence of other owners

Disadvantages

Higher cost and more paperwork than a sole proprietorship or partnership Ownership restricted to members of a certain profession