Professional Corporations

Overview

Every state has laws that permit or require certain licensed professionals to form a professional corporation. The legal structure is the same as a business corporation: shareholders, directors and officers. Unlike a business corporation, the officers, directors, and shareholders are generally all required to be licensed professionals. Licensing board regulations specify the requirements for corporate names, use of fictitious business names, and any requirement to register as a professional corporation with the licensing agency.

Apart from these special requirements, a professional corporation is usually regulated under a state’s general corporation law just like a regular business corporation. In other words, most of a professional corporation’s affairs including holding of meetings, voting, shareholders’ rights, dissolving the corporation, etc. are the same for both professional and business corporations. All states allow one person to form a professional corporation and be the only shareholder, director and fill all required office positions.

Just as in a regular business corporation, a professional corporation may choose to be taxed either as a C Corporation or an S Corporation.

Advantages

In many states, there is no option for a licensed professional to form a professional limited liability company (PLLC) or operate through a regular LLC. For a single professional business, the only limited liability entity may be a professional corporation. With two or more licensed professionals, a limited liability partnership (LLP) may be an option.

The choice of a professional corporation is often one imposed by a professional’s licensing board regulations or professional corporations act. Where an option exists to form a PLLC, the choice may involve several factors that would also apply in a regular business. The PLLC is often less regulated by a state’s statutes with more responsibility placed on the PLLC members to have a detailed and customized operating agreement prepared as the governing document. This enables the PLLC members to more specifically define the respective duties, responsibilities, rights, and powers of the members than would be possible with a professional corporation.

Management

Shareholders

The rights and responsibilities of shareholders in a professional corporation are the same as in a business corporation. However, shareholders have restrictions on transferring their shares to anyone who is not a licensed professional practicing the same profession as the corporation. Requirements are usually imposed on a shareholder who becomes disqualified to practice, or dies, to sell the shares back to the corporation.

Directors

The duties and responsibilities of directors in a professional corporation are the same as in a business corporation. All directors are usually required to be licensed professionals, though some states permit certain related licensed professionals in the healing arts to become directors and shareholders in the same corporation.

Officers

Every state requires at least a president and secretary and most every state requires a treasurer or chief financial officer as well. One person may fill more than one, or even every, office position. Where there are two or more licensed professionals in a corporation, they are usually required to fill all office positions. In a single shareholder professional corporation, some states permit a corporate secretary to be a non-licensed person.

How It’s Taxed

Just as in a business corporation, a professional corporation may choose between two tax classifications, C or S. When it is formed at the state level, it is automatically a C Corporation. To change to an S Corporation, it must meet specific requirements of a small business. These include a maximum of 100 shareholders, only one class of stock, and, in the case of a professional corporation, only individual shareholders because every shareholder must be a licensed professional.

The impact of the C or S tax classification is the same with a professional as it is in a regular business corporation.

The Personal Service Corporation Issue

Many licensed professionals may desire to elect S Corporation tax treatment for the pass-through of corporate profits to avoid being classified as Personal Service Corporations (PSC) and having the corporation income taxed at a flat federal tax rate of 35%.

The essential requirements for a corporation to be classified as to be a PSC are:

• It provides personal services in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts
• The services amount of more than 20% of the corporation’s compensation income, and
• Employee-owners own more than 10% of the corporation’s stock.

FAQ’S

See the Regular Business Corporation FAQs for topics and questions that are identical for professional corporations including forming a corporation, Articles of Incorporation, bylaws, registered agents, using a DBA, authorized shares and par value.

How is a professional corporation different from a business corporation?

A professional corporation is a type of corporation that must be formed by certain specified licensed professionals in a state. A state’s professional corporations act will have certain requirements not imposed on a business corporation, such as requiring that all shareholders, directors and officers be licensed professionals.

What professionals are required to form professional corporations?

The list of professions is unique to each state. Some states have a broad requirement that any person who is required by the state to be licensed to engage in a profession or occupation form a professional corporation. In other states, the decision is left to each licensing board to determine the type of entity that its licensees may or must form. That said, the professions generally include attorneys, accountants, veterinarians, medical doctors and most other health or healing arts professionals. Other common professionals include psychologists, court reporters, engineers, architects, sometimes real estate licensees, and insurance agents.

Does a professional corporation provide limited liability protection like a business corporation?

For general business obligations, there is no difference in the limited liability protection of a regular business corporation and a professional corporation. However, liability in a professional corporation often arises from the negligence, or malpractice, of the professional in providing personal services. As a matter of public policy, neither a professional providing licensed services nor any principal of a regular business corporation is protected from liability from their own negligence by operating through a corporation or other limited liability entity. Additionally, most licensing agencies require a licensee operating through a professional corporation to provide malpractice insurance or other adequate security.

Are there special requirements for Articles of Incorporation of a professional corporation?

Most of the provisions of professional corporation Articles and those of a business corporation are the same. The main differences are that the name of a professional corporation must meet any specific requirements imposed by the licensing agency in that state. These often require that the name include the surname of at least one licensed shareholder. Another requirement is that the Articles must indicate that a professional corporation is being formed. Many states require that approval or written consent be obtained from the licensing board and submitted with the Articles of Incorporation.

Are there any registration requirements for a professional corporation?

As stated in the previous question, some states require written consent from the licensing board to be submitted with the Articles of Incorporation. Other states or licensing agencies require that a registration form be submitted to the agency after the Articles are filed. Still other licensing agencies have no registration requirements at all.

May a professional corporation have different licensed professionals or engage in other business activities?

With rare exceptions, states and licensing agencies restrict a professional corporation to engaging in a single profession. They also are generally restricted to providing only licensed activities and not combining any other business operations with the professional corporation services. Some states allow certain types of licensed health providers to be part of the same professional corporation or to form affiliated groups.

Can a professional corporation operate under a DBA rather than its corporation name?

Most licensing agencies that restrict corporation names have a procedure to obtain authorization to use a fictitious business name, or DBA. This is a separate procedure from a DBA that is filed by a regular business corporation or other person or entity. The DBA name must still meet certain requirements. For example, the name cannot be misleading, it cannot indicate or suggest that the licensee has any qualifications or provides any services not included or permitted by the license.

Can a licensed professional sell or transfer shares in the corporation?

The sale or transfer of shares in a professional corporation is restricted. They may only be sold or transferred to another licensed professional in the same profession. Also, if a shareholder becomes disqualified, dies, or becomes mentally incapacitated, it is usually required that the corporation repurchases or retire the shares.