A Professional Corporation, or “PC”, is a distinct type of corporate business structure. It is comprised of members who belong to designated professions who desire to incorporate their business activities with other members of the same profession. Depending on the state, members of such professions are sometimes required to incorporate under professional corporation status; other jurisdictions simply allow the organization to declare professional corporation as a matter of choice.
There are some major differences in how professional corporations are regulated as compared to normal corporations. For example, professional corporations are sometimes allowed to exist as a branch of a larger, more complex business entity. On the whole, professional corporations share many of the same features of a normal corporation.
Persons who are members of licensed professions may choose to incorporate their practice into a professional corporation for many reasons. Two of the main reasons for incorporating as a PC include:
- Tax breaks: Incorporations as a PC often results in various tax benefits for members. Professional corporations no longer enjoy a separate tax category (they are taxed like an ordinary corporation). However, many tax breaks are available for members such as those involving group life insurance and health insurance premiums
- Limited liability: Like many other types of corporate structures, professional corporations limit the liability of its members and directors. This means that usually the company, not the individual members, are liable for debts or violations (though there are many exceptions to this general rule)
Generally speaking, professions that require official certification or licensing will be the ones who incorporate under PC status. Some professions that commonly incorporate as professional corporations include:
- Health care professionals (i.e., doctors, nurses, physicians, dentists, etc.)
- Engineers and architects
- Social Workers
- Psychologists and counselors
State laws vary widely as to the requirements for the various professions. You should research your state’s individual laws to learn which professions may incorporate as a PC. Also, requirements for incorporation may vary depending on the nature of the profession.
Limited liability is concept that allows an individual’s liability to be “limited” due to their membership in a corporation such as a PC. This means that any debts incurred or any legal violations committed using the company name are attributed to the corporation, and not the individual members.
Limited liability in a professional corporation usually comes into play when there has been a malpractice claim against the organization. For example, suppose that Dr. A and Dr. B are surgeons who are partners in their unincorporated medical practice. Suppose that Dr. A then performs a surgery while intoxicated, which results in the patient’s death. If a malpractice lawsuit is filed, both Dr. A and Dr. B could be held liable for damages, since they are partners in their practice. Dr. B could be responsible for paying some of the damages, even though Dr. A committed the error.
However, suppose now that Dr. A and Dr. B have incorporated their practice as a professional corporation instead of as partners. Assume that Dr. A committed the same error of rendering surgery while intoxicated. If a jury concludes that damages must be paid, this time the damages might be paid out of the collective funds accumulated by the corporation. Dr. B will not be held liable for Dr. A’s actions, but instead the corporation will liable.
Alternatively, depending on the jurisdiction, Dr. A may be held solely liable for the wrongdoing and may have to pay out of pocket since he committed the malpractice.
This is because members of a professional corporation are assumed to be held to higher standards of care than normal persons. This is the purpose of the licensing or certification requirement. Therefore, members of professional corporations can sometimes be held individually liable due to their professional status.
If you wish to incorporate your practice as a professional corporation, it is to your advantage to consult with a business lawyer for advice on your state’s particular filing requirements. Or, if you are filing a claim against a professional corporation, you should work closely with an attorney to determine which person or parties would be held liable in a lawsuit.