For small businesses, forming a corporation might seem straightforward, but a professional corporation follows a different process. If you’re a doctor, lawyer, or another licensed professional, you might need to establish a professional corporation. Meanwhile, your friend who owns a bakery can form a standard corporation.
What is a Standard Corporation?
A corporation, often called a C Corp, is a legal entity that’s separate from its owners. Corporations can make a profit, be taxed, and be held legally liable. The entity can continue in existence even if you sell your shares or simply walk away. The big advantage is strong personal liability protection. This comes with a higher setup cost, additional paperwork, and stricter rules. Profits are taxed twice, once at the corporate level and when paid as dividends. On the plus side, corporations are good for raising money and offering stock to attract employees and executives. This makes a corporation a perfect fit for companies planning to grow quickly or owners who wish to go public or someday sell the business. SBA.gov
An S Corporation (S Corp) is a corporation designed to avoid the double taxation that C Corps are subject to. S Corps allow profits and some losses to be passed through to the owner’s personal income without being subject to corporate tax rates. “Not all states tax S corps equally, but most recognize them the same way the federal government does and tax the shareholders accordingly. Some states tax S Corps on profits above a specified limit, and other states don’t recognize the S Corp election at all, simply treating the business as a C corp.” SBA.gov.
What Is a Professional Corporation?
A professional corporation, also known as a PC, is a type of corporation established by state statute that permits licensed professionals to own shares in a corporation organized to render services in their profession. Examples include attorneys, architects, engineers, accountants, and dentists. ”An owner of a professional corporation remains liable for their own negligence or malpractice, but will not be personally liable for the negligence or malpractice of other owners. Professional corporations are commonly identified by adding “PC” or “P.C.” to their name. law.Cornell.edu
Requirements for Forming a Professional Corporation (PC)
While the initial steps of forming a PC are similar to a standard corporation, a PC generally needs approval from the state licensing board before filing its formation documents. All owners, directors, and officers must be licensed to practice the designated, specific profession in the state of incorporation. Some states impose restrictions requiring the PC to provide only one type of professional service. So, for example, you could not have attorneys and accountants in the same entity.
Many states require a Certificate of Authority, or similar documentation from the state licensing board. For example, in New York, a Certificate of Good Standing from the appropriate Appellate Division or a Certificate of Authority under seal from the New York State Department of Education must be submitted with the Certificate of Incorporation.
Liability and Malpractice: How Much Protection Do You Get?
Both a standard corporation and a Professional Corporation (PC) provide liability protection, but differ primarily in how they handle professional malpractice.
A corporation shields personal assets from general business debts (loans, leases) and from employees’ negligence, but, in general, does not protect professionals from malpractice claims.
A professional corporation provides professional liability protection to its shareholders
shielding owners from the malpractice of other shareholders, but not their own.
Can You Convert a Standard Corporation to a PC?
Yes, a standard corporation can be converted to a professional corporation. The process depends on state law and licensing requirements. Some key points:
- Amending the name to reflect PC or Professional Corporation
- Ensure all shareholders are licensed in the designated field
- Approval process varies by state; for example, some states allow a Certificate or Statement of Conversion.
- There may also be tax implications that may require additional professional support from an accountant and attorney.
Do Standard and Professional Corporations Need a Registered Agent?
Yes, in states that require a registered agent, both standard corporations and professional corporations must designate and maintain one. A registered agent is an individual or entity that receives service of process, tax notices, and other necessary correspondence.
Ready to form a standard corporation or a professional corporation?
Once you and your dedicated team of accountants and attorneys find the best structure for your business, we’re happy to take care of all the paperwork. You choose the type of entity that aligns with your goals, and we’ll handle making it official, including serving as your registered agent. Feel free to contact one of our success partners to discover more. You’re in good hands!
This blog post is for informational purposes only. Please contact an attorney or accountant for legal and financial advice.
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