What Is the Purpose of a Professional Corporation?
The primary purpose of a professional corporation is to provide limited liability protection to the professional individuals involved. This means that, in many cases, professionals are not personally liable for the corporation’s debts or liabilities.
It should be noted, however, that this does not absolve a professional from liability for their own negligence or malpractice.
If a professional makes a mistake or does not meet the standard of care in their profession, they can be personally sued for malpractice.
Here are some examples to illustrate this.
- Medical Malpractice: Suppose a surgeon in a professional medical corporation makes a mistake during surgery that causes harm to a patient. The patient could sue the surgeon for medical malpractice. Despite the surgeon being part of a professional corporation, the surgeon could be personally liable for the damages resulting from their negligence.
- Legal Malpractice: Consider a lawyer who is part of a professional legal corporation. If the lawyer fails to file a lawsuit before the statute of limitations expires, causing harm to a client, the client could sue the lawyer for malpractice. Despite the lawyer being part of a professional corporation, the lawyer can be held personally liable for their professional negligence.
- Accounting Malpractice: An accountant may be in a professional accounting corporation who makes significant errors on a client’s tax return that results in the client owing substantial penalties and interest to the IRS. If so, the client may sue the accountant for malpractice. Despite being part of a professional corporation, the accountant can be held personally liable for the mistakes they made on the tax return.
In all of these examples, even though the professionals are part of a professional corporation, they can be held personally liable for their own professional negligence or malpractice. This is why professionals often carry malpractice insurance, to provide protection in the event of such lawsuits. However, the other assets of the corporation or the personal assets of other professionals in the corporation are generally not at risk from such claims.
What Types of Professions Usually File Under Professional Corporation Laws?
Typically, the professions that form professional corporations are those that require a state professional license. These can include physicians, dentists, certified public accountants (CPAs), lawyers, architects, engineers, psychologists, and other similar professions.
Each profession opts to form professional corporations for a variety of reasons related to their specific practice areas. However, the reasons generally center around liability protection, tax advantages, and professional image. Here’s a more detailed look at some of these professions.
Physicians and Dentists
Healthcare providers like physicians and dentists often form professional corporations to protect personal assets from lawsuits related to the corporation’s debts or liabilities not directly related to their personal medical practice. For instance, in cases of employment disputes or property damage claims tied to the corporate-owned clinic. They can also benefit from certain tax advantages, such as the ability to deduct business expenses.
Certified Public Accountants (CPAs)
CPAs may form professional corporations for similar reasons. Liability protection is crucial, especially when dealing with financial matters where errors could lead to significant damages. Forming a professional corporation also allows CPAs to present a more formal, established image to clients, which can be beneficial in their industry.
Lawyers often form professional corporations to limit their personal liability for the actions of their associates. If a lawyer in a professional corporation is found to be professionally negligent, the claim is generally limited to that individual, not the corporation or the other lawyers within it. Professional corporations also allow lawyers to enjoy certain tax benefits, such as income splitting.
Architects and Engineers
These professionals typically deal with large-scale projects where the risks can be high. Forming a professional corporation can protect personal assets from claims not related to their personal negligence or malpractice, such as those related to contractual disputes or general liabilities of the corporation.
Similar to the professions above, psychologists may form a professional corporation for liability protection, tax advantages, and to present a more professional image to their clients.
How Are Professional Corporations Different From Other Types of Corporations?
The main difference between a professional corporation and other types of corporations, such as a C Corporation or an S Corporation, is that professional corporations are specifically designed for licensed professionals. These entities must comply with the specific regulations of their profession in addition to standard corporation laws.
Additionally, other corporations can have anyone as a shareholder. However, professional corporations often require that shareholders be licensed professionals in the same profession.
In a standard C Corporation or S Corporation, virtually anyone (including non-U.S. citizens or other business entities) can be a shareholder. For example, a software development C Corporation can have shareholders who are not software developers or even individuals who have no technical expertise whatsoever. They could also have another corporation or a foreign investor as a shareholder.
However, a professional corporation, such as a law firm or medical practice, requires shareholders to be licensed professionals in the same field. For instance, only licensed attorneys can be shareholders in a law firm professional corporation, and only licensed doctors in a medical practice professional corporation.
A professional corporation and a standard corporation both provide limited liability protection, but there are some differences in scope. For instance, a shareholder in a C Corporation or an S Corporation generally has limited liability protection for all corporate obligations. In contrast, a professional in a professional corporation may still be personally liable for their own professional negligence or malpractice.
An S Corporation has pass-through taxation, where corporate profits and losses pass through to the shareholders and are reported on their individual tax returns. A C Corporation is taxed separately at the corporate level, and shareholders also pay taxes on dividends received, resulting in what’s known as “double taxation.”
A professional corporation can choose to be taxed as a C Corporation or an S Corporation. However, it may also be subject to additional tax rules and requirements based on state laws and the profession’s regulations.
A professional corporation must comply with standard corporate laws and also adhere to the rules and regulations of the professional licensing board in its state. For example, a professional corporation formed by lawyers must follow the rules of the state bar association, while the state’s medical board would govern a medical professional corporation. In contrast, C or S corporations do not need to comply with these professional regulations.
How Does Limited Liability Work With Professional Corporations?
In a professional corporation, limited liability protects the personal assets of the shareholders from the corporation’s general debts or liabilities. For instance, if the corporation is sued or owes money, the shareholder’s personal assets are generally not at risk.
However, as noted, limited liability does not protect professionals from their own malpractice or negligence. For example, if a doctor incorporated as a professional corporation makes a medical error, they are personally responsible for that error.
Do I Need a Lawyer for Help With Professional Corporation Issues?
Creating and managing a professional corporation can be a complex process due to the interplay of corporation laws and the rules of professional conduct. Hiring a corporate lawyer experienced with professional corporations can be incredibly valuable. They can guide you through the process of incorporation, ensure you’re in compliance with all applicable laws and regulations, and help you understand your rights and responsibilities.
Through LegalMatch, you can find a highly skilled corporate lawyer who understands your professional needs and can provide assistance. Don’t leave your professional corporation’s future to chance – connect with a LegalMatch attorney for professional corporations today to ensure a smooth and legally sound process.