What is a professional corporation or professional limited liability company? How is a professional entity formed? What do I name my professional entity?

How is a professional entity taxed? Who can be a shareholder or director in a professional corporation?

Professional corporations (PCs) and professional limited liability companies (PLLCs) are corporations and limited liability companies organized for the purpose of providing professional services. What services constitute professional services are defined by state law, and differ from state to state. Typically, professions that require a license, such as doctors, chiropractors, lawyers, accountants, architects, or engineers are required to form professional corporations or PLLCs. Typically, professional corporations or PLLCs must be organized for the sole purpose of rendering professional services of the licensed practitioners.

How is a professional entity formed?

The formation documents, the articles of incorporation for a professional corporation and articles or organization for a PLLC, are similar to those of standard corporations and LLCs. However, with professional entities, the proper state licensing body must often approve the formation documents before these documents can be filed with the secretary of state. Further, the articles typically must contain the signature of a licensed professional as the incorporator, and that person's license number typically is required. Therefore, the filing time for professional entities is longer than the filing time for standard business entities. Due to the additional requirements for professional entities, Business Pro Net Incorporated charges a fee of $125 in addition to our standard corporation or LLC formation fees.

What do I name my professional entity?

Choose the name carefully. It is very important that you portray the image you want. The name you select must not be "deceptively similar" to any existing corporation or must be "distinguishable on the record" of your state. For example, if a corporation named Smyth Architects P.C. exists in your state, you probably would not be allowed to name your business Smith Architectural Design Professional Corporation. It is possible that the name you select will not be available; therefore, we ask for a second choice on the incorporation order form.

Additionally, the name you choose usually must show your business is a professional corporation or PLLC. Most states require that the corporate name be followed by the ending Professional Corporation or the abbreviations P.C., PC, or in some states P.A. (for Professional Association). For professional LLCs, the appropriate ending is Professional Limited Liability Company or PLLC.

Depending on your state of incorporation, there may be restrictions that require the profession to be listed in the company name (for example, Johnson Chiropractic, PC). Additionally, there may be specific "restricted words" that are not available for use in names. Check the state specific page for your intended state of formation for more details.

How is a professional entity taxed?

Generally, the taxation of professional corporations and PLLCs is the same as standard corporations and LLCs.

Professional corporations are taxed like C corporations (unless they make the S corporation election). However, some professional corporations do not have the advantage of graduated corporate federal income tax rates. Those professional corporations that are "qualified personal service corporations" may be eligible to pay a flat federal income tax rate of 35 percent. "Qualified personal service corporations" typically provide services in the fields of health, law, engineering, architecture, accounting, actuarial science, or consulting. You should seek the advice of an attorney or accountant regarding whether your company meets this classification in your state of formation.

Professional corporations are allowed to file for S corporation status, which allows for the entity to have pass-through tax treatment. With pass-through taxation, the income to the entity is not taxed at the entity level; however, the entity does complete a tax return. The income or loss as shown on this return is "passed through" the business entity to the individual shareholders or interest holders, and is reported on their individual tax returns.

Who can be a shareholder or director in a professional corporation?

Many states restrict who may be a shareholder or a director of a professional corporation. For example, in some states only licensed practitioners of the specific service that the corporation provides may own stock in the corporation and serve on the board of directors. Other states require at least 50% of the shareholders and directors to be licensed professionals.