How to Form a Professional Corporation (All 50 States)
If you’re a certified professional and you want to start a corporation, chances are you’ve heard the term “professional corporation” or PC.
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A professional corporation (PC) is a specialized business entity designed exclusively for licensed professionals such as attorneys, physicians, engineers, architects, and accountants.
While it shares many traits with traditional corporations, a PC primarily offers limited personal asset protection, which differs from the broader asset protection traditional corporations provide. This guide will help you determine whether a PC or a traditional corporation is the better choice for your business needs.
What Is a Professional Corporation?
A professional corporation is a specialized entity type that’s tailor-made for licensed professionals who want to incorporate together and share their resources.
For example, a team of four doctors (all licensed, of course) decide that they want to form a business together. One option would be a partnership, but a professional corporation also serves their purposes quite nicely. Furthermore, the PC is an entity type that provides far greater protections for its owners than a general partnership does.
When it comes to forming a professional corporation, each state has its own requirements for which licensed professions must incorporate as a PC rather than as a regular corporation.
Most states usually require professionals such as doctors, dentists, accountants, chiropractors, and lawyers to form a professional corporation. Many of these professions are service businesses, which is why the PC is sometimes referred to as a professional service corporation.
So, what makes a professional corporation different from a regular corporation? There’s the difference of who can form one, of course, but there’s a deeper distinction, too: the liability of each shareholder. Let’s dig deeper into liability.
How Does Personal Liability Work in a PC?
On the surface, a professional corporation looks just like a regular corporation. After all, both a corporation and a professional corporation have to write bylaws, hold shareholder meetings, pay corporate income taxes, and more. The only time the business really looks different is when malpractice occurs.
In a professional corporation, each shareholder has some protection from liability, so if the business goes into debt, the shareholders likely won’t be expected to pay up the difference. But unlike a regular corporation, a shareholder in a professional corporation can be sued for malpractice.
For example, if a doctor in a PC messes up a surgery, that doctor can be sued for damages. In any other incorporated entity, the shareholders cannot be individually sued, but in a professional corporation, each shareholder can be sued for their own malpractice.
Thankfully, though, the other shareholders do not have to pay for the malpractice of their coworkers, because each shareholder is only liable for his or her own professional mistakes.
Being liable for malpractice keeps each professional accountable for the standards that apply to their industry. If these professionals could hide behind the corporate veil, then the state regulations for that industry lose their power. But with the possibility to be sued, all shareholders know that they still have to follow those regulations.
Professional Corporation Pros and Cons
Pros
- Personal asset protection: The professional corporation provides limited liability protection for its owners, while still maintaining each owner’s need to adhere to professional standards.
- Insulated from malpractice suits: While all owners of a PC share personal asset protection, they do not share responsibility for malpractice lawsuits. Therefore, if a member of your PC is sued for malpractice, the other owners of the company are not affected at all.
Cons
- Limited advantages for an individual practitioner: The professional corporation is a great business entity for a group of people who operate in the same licensed profession. However, this business entity provides few advantages for a professional who operates a business alone, as the insulation from others’ malpractice suits doesn’t matter.
- Tax benefits have largely been eliminated: The professional corporation used to have an extensive list of tax benefits. Back in the day, a PC gave its owners the opportunity to create corporate retirement plans, allowing them to save large amounts of money in a tax-free environment. Today, there are many other ways to save tax-exempt retirement funds, so this isn’t much of an advantage anymore. In addition, other popular taxation loopholes of the PC have been eliminated over the years by Congress and the IRS.
- Extensive record-keeping requirements: The administrative requirements of a PC are quite high. You’ll need to maintain detailed records of everything a normal corporation tracks — including meeting minutes, financial documents, and much more — along with records about issues specific to your licensed profession.
Professional Corporation vs. Professional LLC
As a formal entity type, the professional corporation has been around since the 1970s. More recently, many states have introduced the professional limited liability company (PLLC), which is a similar business type in some ways. For starters, both entities provide personal asset protection for all owners, while simultaneously limiting each owner’s exposure to the other owners’ malpractice suits.
For the most part, the differences between these entities are very similar to the differences between a standard corporation and LLC. A PLLC has more flexibility for taxation, as it can elect to pay taxes as a pass-through entity, a C corporation, or an S corporation. In addition, the PLLC has a much lower administrative burden than the PC does, as the PLLC is required to keep far fewer records. Finally, the PC has a rigid management structure with clearly defined roles (directors, officers, board members, shareholders, etc.), while the PLLC is more pliable and you can adjust it to suit your needs.
While the PLLC clearly has plenty of advantages over the PC, the opposite is true as well. For instance, with a PC, you can sell stock to easily transfer ownership, whether to bring in new owners or to redistribute a departing owner’s shares. Additionally, because the PC has been around longer than the PLLC, the legalities are more consistent and predictable, and court systems have more precedent for PCs. Finally, PCs exist in all 50 states, while the PLLC isn’t nearly as established and isn’t recognized in some states.
Best Time to Incorporate a Professional Corporation?
Once you’ve decided that the professional corporation is definitely the best business entity for your organization, you should probably incorporate it as soon as possible. We always recommend incorporating before you start transacting business with your new PC. This is because, if you don’t, every transaction you execute before forming the PC will be as a general partnership.
General partnerships are an informal business entity, and if you operate a business with at least one other person and you haven’t formed a formal entity (like a corporation, LLC, PC, PLLC, etc.), you are automatically categorized as a general partnership. General partnerships have no personal asset protection, so you and your co-owner(s) will be personally liable for any transactions you execute as one.
In our opinion, that alone is reason enough to incorporate as a PC as soon as you’re 100% certain it’s the right entity for you.
Things to Consider Before Forming a Professional Corporation
The first thing you should consider when deciding whether the PC is the right entity for you is whether your business operates in a licensed profession. Keep in mind that different states have different guidelines regarding which business types can form PCs and which must form PCs. Typically, the professional corporation is meant for doctors, lawyers, accountants, and other licensed professions, but you should check with your state before forming one to make sure this is the right entity for you.
Another important question, if your state offers professional limited liability companies, is whether the PC or the PLLC is the better option for your business. As we discussed earlier, each of these entities has some advantages over the other and choosing the right one could save your business time and money.
In addition, you should make sure you’re okay with the drawbacks of PC ownership. Professional corporations must maintain extensive business records and comply with many rules and regulations. Furthermore, it can take quite a bit of time and energy to form and maintain a PC, and the taxation model can sometimes result in the same money being taxed twice (first at the corporate level, then at the individual level).
How Do I Form a Professional Corporation?
Forming a professional corporation looks similar in many ways to forming a regular corporation. That said, there are a few extra steps you’ll need to cover first.
The biggest step is learning the requirements in your state. As we’ve mentioned, each state has its own standards for which professions need to form as a PC, as well as varying requirements for who is allowed to form one. You need to check these requirements before you form your business.
After you learn what your state requires, you’ll also need to ensure that each shareholder involved in your business has the licenses they need. Then, you can start on the same filings required for a standard corporation:
1) Choose a Name & Reserve It
Creating the perfect moniker for your business is the first step to your success. It’s nearly as important as your business concept itself. You’ll need to create a name that is both unique and compliant with legal requirements.
No matter which state you incorporate in, your business name cannot be the same as a name that’s been claimed by another entity, and it also cannot be too similar to any names already in use. There are also some restricted words like “bank” or “insurance” that are only available to businesses operating in those industries.
Once you’ve picked a name, you can either incorporate your business immediately or reserve the name for future use. Reserving your name will protect your name for a fixed period of time while you prepare to get your business set up. Aside from that, getting a domain for your business will be another huge step towards creating a brand for your business.
2) Designate a Registered Agent
Professional corporations should also appoint a registered agent for the business, an important role that ensures the state always has a reliable point of contact for your corporation. This can be an individual or online service. You will need to include the name and address of your registered agent on your Articles of Incorporation document.
3) File Your Articles of Incorporation
Your professional corporation is not officially formed until you file your incorporation documents with the Secretary of State. In most states, the necessary document is called the articles of incorporation.
The information included in this document varies from state to state, but there are several elements that are required by all states. First, you’ll need to choose a registered agent to receive important legal documents on behalf of your business. You’ll be asked to list the name and address of your agent on the form.
Next, you must appoint directors to serve on your initial board. Most states require you to have at least one to three initial directors, but you can appoint more if you wish. You will also need to indicate what profession your company’s owners practice, and you might be required to provide proof of each owner’s certifications.
4) Draft Your Corporate Bylaws
A professional corporation’s bylaws may be the most important document your business will have. Bylaws are legally required, and they outline many organizational policies of your corporation. The information you’ll need for this document includes some basic info about your business, including its statement of purpose, directors and officers, fiscal year schedule, meeting schedules, the process for adding or subtracting board members, dissolution process, and more.
5) Obtain an EIN
The next step is to acquire a federal tax ID number (often referred to as an EIN or employer identification number) from the Internal Revenue Service. This is similar to a Social Security number for an individual, as the EIN is a nine-digit number that’s used to identify your professional corporation for taxation purposes. An EIN can help your business accomplish many important tasks, including opening bank accounts, hiring employees, and more.
6) Hold an Initial Meeting With Your Board of Directors
The first meeting of your new board of directors will set the tone for all future business endeavors. You’ll need to discuss key features of your business, such as bylaws, setting up your stock and shareholder agreements, and appointing officers to manage the daily business affairs.
7) Register for Taxes
Taxes are a vital part of operating a compliant business, and you’ll need to register for taxes on both the state and federal levels. For example, most professional corporations will need to pay federal and state corporate income taxes — Wyoming and South Dakota are the only states without that type of tax.
Other taxes, such as employment taxes or industry-specific taxes, may also be required. Taxation can be complicated, so you may want to consult with a tax professional or an accountant if you have any questions.
8) Obtain Business Licenses
In addition to your professional licenses, most businesses will need to acquire at least one additional license to operate properly. For example, businesses involved in agriculture need to obtain a license from the U.S. Department of Agriculture, and many other industries also require licenses. In addition, some states have a general business license that’s required to operate any company. The Small Business Administration offers a helpful resource that you can consult for more information on licensing.
9) Get a Business Bank Account
The last thing you want is for your business expenses to get tied up with someone’s personal finances. That would defeat the purpose of forming a professional corporation, and could even see your owners lose their personal asset protection. To avoid the intersection of personal finances and your professional corporation’s, you’ll want to get a business bank account. In addition, this is a great time to set up your accounting system. The easiest option is to get accounting software like QuickBooks, but if your professional corporation has complicated financials, it might be a better idea to hire an accountant.
10) Maintaining Your Professional Corporation
Once you’ve completed the formation process, you’re ready to operate your business. There are a few more important issues to address that can help keep your business running smoothly and legally.
First, you must pay your taxes every year, and since corporate taxes can be complicated, it might be a good idea to enlist the help of an accountant. In addition to taxes, most states also require you to file an annual report for your business, which gives the state a snapshot of your corporation’s activities for the year. You will also need to make sure that all of your co-owners keep their professional certifications active and up-to-date. Finally, it’s vital that every professional corporation keeps detailed records of all its business activities, including meeting minutes, your business ledger, financial reports, and more.
Hiring an Incorporation Service for a PC
If forming your own professional corporation sounds too daunting, there are other options. You could hire a lawyer to form your business, although this option is typically quite expensive, and the costs can be somewhat unmanageable for startups on tight budgets.
If you can’t afford a lawyer, or simply don’t want to spend that much money on incorporating your business, we recommend hiring an online incorporation service. For example, MyCorporation provides incorporation services for professional corporations for $99 plus the state fee. In addition to incorporating your business, MyCorporation will also provide you with a customizable corporate bylaws form, meeting minutes, and sample stock certificates.
Costs of Incorporating a PC
One of the most common questions we hear from entrepreneurs is how much it actually costs to incorporate a PC. There are often additional expenses involved with the incorporation process, other than the fee you pay the state for your formation document filing. It’s important to note that, much like each state charges its own rates for incorporations, the additional costs can vary from state to state (and industry to industry, in some cases) as well.
Let’s quickly break down some of the other potential costs. One that isn’t usually required is a name reservation fee, which is required by law in Alabama but is optional elsewhere. In most states, a name reservation only has a nominal fee — in many, this will only cost you $10-20.
Another variable that can add expenses is whether you choose to use an incorporation service or not, as most of these companies charge their own service fees in addition to the state’s formation fee. Similarly, whether you want a registered agent service will also affect your new corporation’s bottom line. If you opt for assistance from an attorney instead, your expenses will obviously grow.
Then, there’s the issue of initial and annual reports. Initial reports aren’t required in very many states, but they’re a highly important part of the formation process in states that do require them. As for annual reports, most states require them from corporations, and the costs can vary widely, from as little as $10 in Colorado all the way up to a minimum of $300 in Maryland.
Taxes are another variable for corporations. Different states have different corporate tax rates, and some also assess other fees, like franchise taxes. The cost of operating your PC will also vary based on whether it’s classified as a C corporation or S corporation.
Conclusion
A professional corporation is a unique entity type that helps licensed professionals gain the advantage of incorporating a business.
Essentially, the professional corporation keeps each shareholder in the corporation liable for their own malpractice, but it still gives them most of the advantages of an incorporated business. In addition, all of the PC’s owners share personal asset protection regarding common general business functions.
Before you start incorporating your own professional corporation, we would simply like to remind you that the rules and regulations for this entity type do vary somewhat from state to state, so if you have any state-specific questions, you should direct them to your state’s Secretary of State office.
FAQs
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The list of certified professions that should form PCs varies by state. That said, the list generally includes professionals like doctors, lawyers, accountants, architects, engineers, and more.
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The answer to this question varies considerably based on your state of formation. There are some states that have online incorporation portals where you can form a professional corporation immediately. Meanwhile, some states require you to mail in paper forms that can take a matter of weeks. There are also states where you need to submit your incorporation documents to your profession’s state regulatory board before filing them. Additionally, many states offer some sort of expedited service that can dramatically speed up your formation process. For more details, ask your incorporation service or your state’s Secretary of State office.
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All three of these options have their own advantages and disadvantages, depending on your priorities. Forming your own professional corporation will always be the cheapest option, although it doesn’t involve any professional assistance. On the other end of the spectrum, hiring an attorney can be prohibitively expensive for many startups, although the expert advice you’ll get can make it worthwhile. Finally, an online incorporation service splits the difference, providing professional help while charging a fraction of an attorney’s fees.
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This all depends on which company you choose to form your professional corporation, and which of its formation packages you opt for. In general, it’s common to see these companies include perks and features like registered agent service, bylaws templates, annual report service, binders embossed with your company’s name, and more.
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Yes, when you incorporate your business, you will have the option to designate a perpetual lifespan or a specified dissolution date.
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Although the vast majority of corporations have multiple owners or shareholders, you are welcome to form a one-person professional corporation in some states if you’d like to. That said, there aren’t many advantages of a PC for a one-person business, so we’re not sure why you would want to do this.
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Professional corporations have strict requirements to hold shareholder and board of directors’ meetings on a regular basis, and also to take detailed minutes from those meetings.
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When we’re discussing LLCs or standard corporations, there is at least an interesting debate about whether you should form your business in your home state or in another state. States like Delaware and Wyoming have some distinct advantages for entrepreneurs that can make these states appealing options. However, PCs should typically be formed in their home states because the legalities of trying to cross state lines with the certifications and permits required for a PC is a hurdle that simply isn’t worth jumping over.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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