Under certain business circumstances, multiple professionals may decide to form a corporation. These particular professional corporations typically consist of professionals in the same field or industry. In some states, people in specific professions (accountants, therapists, physicians, etc.) choose to incorporate their professional practice by incorporating as a professional corporation. If you have ever considered forming or joining a professional corporation, the following article will give you details regarding the structure and rules associated with these organizations.
Who Can Incorporate?
In every state, there are certain professions that allow its practitioners to form professional corporations or service corporations. This list of professionals may vary from state to state, but in most states the following professionals are allowed to incorporate as professional corporations.
- Healthcare Professionals
- Social Workers
As mentioned above, this list is applicable in most situations, but you should contact your state’s corporate filing office for more definite information. In recent years, the popularity of professional corporations has been in decline. Prior to 1986, most professionals chose to incorporate in order to gain the tax benefits associated with these organizations. Professional corporations often sheltered the practitioners’ income in a way that sole proprietorships or partnerships could not. As time progressed, the IRS decided to classify the majority of professional corporations as “personal service corporations,” meaning that these organizations would all be taxed at a flat rate of 35 percent. This removed the original advantages associated with professional corporations and led to their swift and sharp decline in popularity.
Limited Liability Protection
Despite this decline, there are still many legitimate reasons for a professional to incorporate as a professional corporation. For example, professional corporations provide their owners with the benefit of limited liability. This means that business debts and personal claims against the corporation will not usually impact a single individual. On the other hand, the limited liability does not extend to cases where the professional is sued for malpractice, but it can protect the individuals in the corporation who are not being sued. For instance, if a physician accidentally kills a patient during a routine surgery, he or she can be sued for malpractice. Under normal circumstances, the entire medical practice could be sued, but since the organization functions as a professional corporation, only the practitioner who performed the lethal surgery would need to face legal action. If the corporation encountered financial issues, the property of individual professionals could not be seized in order to resolve any debts accumulated by the corporation itself. These are two examples of how limited liability can safeguard a practitioner in a professional corporation. One of the main advantages of professional corporations is the fact that it exists in perpetuity. If the owner of a sole proprietorship or partnership dies or chooses to dissolve the business, the business will dissolve along with it. If a member of a professional corporation dies or leaves, the company can continue to operate without interruption and without the individual.Many professionals choose to forgo professional corporations in favor of limited liability corporations. These business structures are less complex and they provide much of the limited liability that professional corporations are famous for. For professionals seeking more personal freedom, this may be a choice worth considering. Passive loss limitations in professional corporations may also restrict the amount that shareholders can deduct in the event of business losses. However, since the majority of professional corporations are composed of active shareholders and do not experience massive losses, this is usually not much of an issue.
Consider Your Own Professional Needs
If you are a professional belonging to one of the industries listed above, you may want to consider incorporating your business as a professional incorporation. Before you make a final decision, be sure to consider the needs of your company and your clients. This will ensure that you make the best decision possible.
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