Explanation of Professional Corporation
A Professional Corporation (PC) is a type of business entity formed by professionals, often in fields such as law, medicine, engineering, or accounting.
PCs are designed to provide professionals with the advantages of limited liability and certain tax benefits, while still allowing them to engage in their licensed professions.
Formation and Structure of a Professional Corporation
Forming a PC typically involves certain legal requirements and procedures that vary across jurisdictions. Here are the general steps involved:
- Choose a business name that meets the regulatory requirements and doesn’t infringe on any trademarks.
- File the necessary documents, such as articles of incorporation and relevant professional certificates, with the appropriate state or provincial authority.
- Appoint directors, officers, and shareholders for the corporation.
- Create bylaws that outline the internal rules and regulations of the corporation.
The structure of a PC is similar to that of a regular corporation, with directors, officers, and shareholders. However, in a PC, the professionals owning and running the corporation must also hold a professional license or certification in the relevant field.
Advantages and Disadvantages of a Professional Corporation
Tax Considerations for Professional Corporations
When it comes to taxes, professional corporations often have specific rules and provisions that differ from regular corporations or sole proprietorships. Some key tax considerations include:
- Income Splitting: PCs may allow professionals to distribute income to family members who are shareholders, potentially reducing the overall tax burden.
- Reasonable Salary: Professionals working for a PC should receive a reasonable salary, which is typically subject to payroll taxes.
- Retained Earnings: PCs can retain earnings within the corporation, potentially deferring taxes until withdrawn.
- Professional Expenses: Deductions for professional fees, licenses, office rent, and other business-related expenses may be available.
Professional Corporations vs. Limited Liability Companies (LLCs)
While professional corporations share similarities with limited liability companies (LLCs), there are several differences to consider:
- Ownership: PCs are generally owned by professionals holding licenses in the relevant field, while LLCs can have more flexibility in terms of ownership.
- Structure: PCs have a more structured and formalized governance structure with directors and officers, while LLCs have a more flexible management structure.
- Tax Treatment: PCs are subject to specific tax rules for professional services, while LLCs can choose their tax treatment as a partnership, corporation, or sole proprietorship.
Dissolution and Conversion of a Professional Corporation
If professionals decide to close or retire their professional corporation, the process generally involves notifying the relevant state or provincial authority, settling any outstanding obligations, and distributing the remaining assets to shareholders.
Conversion to another business structure, such as an LLC or a sole proprietorship, is also possible depending on the chosen jurisdiction’s laws and regulations.
A Professional Corporation offers professionals a way to enjoy the benefits of limited liability and potential tax advantages while continuing to practice within their licensed profession. However, it is important to navigate the legal requirements, understand the tax implications, and weigh the advantages against the associated costs before forming a professional corporation.