Definition
A professional corporation is a type of corporation for individuals who offer professional services, usually requiring a license, such as doctors, lawyers, accountants, or engineers. This business structure separates personal and business liability, offering the owners protections that are not available in partnerships or sole proprietorships. However, while the corporation shields professionals from personal liability, it does not protect them from liability for their own malpractice.
Key Takeaways
- A Professional Corporation is a type of corporate structure where the company’s members are all certified in a specific profession. This could be doctors, lawyers, accountants, engineers, for example.
- Setting up a Professional Corporation allows professionals to take advantage of liability protection that is not typically available in general partnerships or sole proprietorships. In other words, the corporation’s debts and liabilities are separate from the personal assets of its members.
- Despite its benefits, a Professional Corporation also has certain limitations. For instance, while it offers liability protection, it is usually limited and holds the individual professional responsible for their own professional malpractice or negligence.
Importance
A Professional Corporation (PC) is a crucial finance term as it refers to a corporate structure that is used by many professionals, such as doctors, lawyers, accountants, and engineers.
The significance of a PC lies in the fact that it allows these professionals to offer their services to the public as a corporate entity, facilitating them to take advantage of the tax benefits and liability protection that corporations typically offer.
Additionally, PCs provide an added layer of personal liability protection for professional malpractice, which can be particularly important in high-risk professions.
Notwithstanding, professionals within a PC may still personally be held liable for their negligence or malpractice, but not for the negligence or malpractice of other professionals in the corporation.
Therefore a PC is an important financial structure to ensure financial stability, tax planning, and liability mitigation.
Explanation
A Professional Corporation (PC) is an organizational structure that serves a specialized purpose and is typically used by licensed professionals such as doctors, lawyers, accountants, engineers, and architects. The essential purpose of a professional corporation is the provision of professional services within a more protected legal framework than a typical business arrangement.
This structure allows professionals to incorporate their practices, offering personal liability protection and potential tax benefits which could not be realized if operating as a sole proprietor or a partnership. A Professional Corporation is utilized for its benefits such as separating personal and professional liabilities.
This separation means that in case of any legal claim arising out of the professional’s work, only the corporation’s assets would be exposed, thereby safeguarding the individual’s personal holdings. It also offers potential tax savings as the corporation is often taxed at a lower rate than individuals.
Moreover, it offers increased flexibility in terms of managing and transferring ownership. However, it is important to remember that forming a professional corporation comes with increased administrative work, regulation and associated costs.
Examples of Professional Corporation
Law Firms: Many law firms are established as Professional Corporations (PCs). An example is the Latham & Watkins LLP, which is a global law firm and is structured as a professional corporation. These firms function as PCs because the structure limits the personal liability of the individuals practicing law in the firm.
Medical Practices: Professional corporations are commonly observed in healthcare. For example, Mayo Clinic is structured as a professional corporation, where each medical professional has individual responsibility for their professional actions, while enjoying the benefits of a corporate structure for their collective business activities.
Accounting Firms: Established accounting firms like PricewaterhouseCoopers (PwC) operate as professional corporations. In this structure, each accountant is responsible for their own professional actions and conduct, while working collaboratively with the firm’s other accountants and professionals to provide comprehensive financial services to clients.
Frequently Asked Questions about Professional Corporation
What is a Professional Corporation?
A Professional Corporation is a specific type of corporation that is composed of certain types of professionals, commonly including doctors, lawyers, accountants, engineers, and architects. These individuals are given a corporate status which lends them certain rights and protections under the law that are unique to Professional Corporations.
What are the benefits of a Professional Corporation?
Creating a professional corporation can give your business legal liability protection. The primary benefit is that it protects individual shareholders from being personally liable for the company’s debts or any claims brought against it. It also enables professionals to take advantage of corporate tax benefits.
Who can form a Professional Corporation?
Only certain types of professionals can form a Professional Corporation. The list of eligible professions varies depending on state laws, but typically includes doctors, lawyers, accountants, architects, and engineers. In many cases, all shareholders and officers of the corporation have to be licensed in the professional field.
How to form a Professional Corporation?
Forming a professional corporation typically involves filing Articles of Incorporation with the Secretary of State, drafting corporate bylaws, appointing directors, and issuing share certificates to the shareholders. These steps can vary depending on the state in which the corporation is being formed. It’s recommended that professionals consult with a legal expert or financial advisor before forming a professional corporation.
What is the difference between a Professional Corporation and a Regular Corporation?
The main difference between a Professional Corporation and a Regular Corporation is who can form them. Only licensed professionals can form Professional Corporations. Additionally, Professional Corporations provide personal liability protection for the professional services they provide, something which a regular corporation cannot do.
Related Entrepreneurship Terms
- Articles of Incorporation
- Limited Liability
- Business Entity
- Professional Liability Insurance
- Corporate Taxes
Sources for More Information
- IRS (Internal Revenue Service): The IRS website is a valuable resource for understanding tax-related issues associated with Professional Corporations.
- Investopedia: This website provides comprehensive details on a wide array of financial terms, including Professional Corporation.
- U.S. Small Business Administration: The SBA provides information about different types of business structures, like Professional Corporations.
- Entrepreneur: Entrepreneur website is a leading source for business-related information, including structures, business setup, and Professional Corporations.
