All you need to know about Professional Corporations

A professional corporation, also referred to as a professional service corporation, allows specified professionals to practice their profession through a corporation. It operates like a corporation and is generally subject to the general business corporation law of its state of incorporation, as well as the state’s specific professional service corporation statutes. Unlike a business corporation, a PC cannot engage in any business other than rendering the professional service for which it was formed. If properly formed and operated, the PC shields its shareholders from liability for most of the debts, liabilities, and obligations of the PC. However, each individual who renders professional services is liable for his or her own negligence or wrongful acts as a service provider.

In California, professionals are barred from forming most other types of business entities, such as limited liability companies; the only options are to incorporate as a professional corporation or a registered limited liability partnership. A registered limited liability partnership can also provide professional services in California in several fields in which licensed professionals generally operate as well, including public accountancy, law, or architecture (until 2026).

All shareholders, directors, and officers of a professional corporation must be licensed professionals. For all PCs (with the exception of allied health professions), the corporation’s members may represent only a single profession, such as law, accounting, or engineering. Not all professions are authorized to form PCs. Prior to forming a professional corporation, counsel must call the applicable profession’s state board or regulatory agency to confirm the ability to form a professional corporation for that particular profession.

Advantages

The benefit of forming a professional corporation is that the corporate form offers limited liability to its members for acts unrelated to the members’ professional practice and in some circumstances, for the negligence of other shareholder members. However, each professional member remains bound by the ethical standards and guidelines established for his/her profession and cannot be given limited liability for any acts of his/her own malpractice. Therefore, the limitations on liability are somewhat less than the corporate shield offered for a standard California corporation.

In addition to limited liability, a professional corporation may be able to take advantage of some favorable tax treatment that is afforded to PCs under certain circumstances. Thus, if it is likely to have employees, a professional corporation will generally benefit from the deductibility of payments to fringe benefit plans, such as group term insurance, medical, health and accident plans, and disability income plans. Counsel advising a professional regarding the desirability of incorporating should review these benefits and determine whether they have any specific application to the client’s own situation.

Disadvantages

The primary disadvantage of forming a California professional corporation is that it does not always produce favorable or advantageous tax outcomes. Additionally, PCs incorporating in California must pay an annual franchise tax to the state of California for the privilege of doing business in California.

Share Ownership Restrictions

Under California law, a professional corporation cannot issue shares, and shareholders may not transfer capital stock, to anyone other than the professional corporation or an individual who is duly licensed or otherwise legally authorized to render the specific professional services for which the corporation was organized

For more information on Professional Corporations, please contact us at info@labranchelaw.com

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