What this is: In some states, professionals licensed in fields such as engineering, healthcare and accountancy can use different entity types to form a business for providing their professional services. In other states, the option is limited to an entity type called a Professional Corporation (PC) or a Professional Service Corporation (PSC). There are also states that allow Professional Limited Liability Companies (PLLC), another professional service entity type, but this article will focus on Professional Corporations.
What this means: Professional Corporations are governed by state law and the requirements vary. Therefore, it’s pivotal for licensed professionals looking to incorporate to consider information such as what entity type is available for which occupation and what the requirements are for forming a Professional Corporation.
What is a Professional Corporation?
Unlike a general business corporation, a Professional Corporation is an entity structure with the purpose of providing professional services. It is established typically by a group of individuals who are licensed in the same profession. Each state varies on whether a specific profession must form a Professional Corporation or can provide its professional services through the usual entity types (i.e., business corporation, limited liability company, partnership, limited liability partnership). For example, in Texas, you can provide professional engineering services by forming a regular business corporation. On the other hand, in New York, a corporation cannot provide this service unless it is a “grandfathered” general business corporation under Section 7209. Moreover, a foreign business corporation authorized to practice engineering in its domestic state cannot provide such services in New York, but a foreign Professional Corporation may. In New York, engineering professionals can form Professional Corporations, Design Professional Corporations, and limited liability companies among other entity structures if the shareholders, officers, and directors are all licensed engineering professionals.
In general, the licensed professions that typically form Professional Corporations include (but are not limited to) different healthcare professionals, lawyers, accountants, engineers, social workers and veterinarians. You can check with the incorporating state’s corporate filing offices to determine which professions must form or have the option of forming Professional Corporations.
This entity type also provides limited personal liability for business debts and claims. This protection may not extend to the professional’s negligence or malpractice, but it can apply to an associate’s negligence or malpractice.
Benefits of a Professional Corporation
Forming a Professional Corporation offers several advantages for licensed professionals:
- Limited Liability Protection: Typically, owners are protected from personal liability for the malpractice or negligence of other partners.
- Tax Benefits: PCs offer potential tax advantages, including income splitting and pension plans.
- Credibility: Operating as a PC may enhance the business's professional reputation.
- Business Continuity: Generally, PCs ensure continuity beyond the retirement or death of owners, providing stability for the business.
What Are the Requirements for a Professional Corporation?
The specific requirements and limitations for Professional Corporations vary by state. However, in addition to the mandatory licenses to practice, incorporating a Professional Corporation usually requires the following:
- Filing an incorporation form and paying the appropriate filing fees.
- Providing a statement in the Articles of Incorporation of the intent to operate as a Professional Corporation.
- Defining the Professional Corporation’s purpose in the Articles of Incorporation.
- Obtaining additional approval from appropriate licensing boards if required by the state. For example, New York requires all entities providing professional engineering services to submit a “Certificate of Authorization to provide Engineering and/or Land Surveying Services in New York State."
- Adhering to the entity’s naming requirements. Some states may not have specific naming requirements while others may. For example, in Texas, the name needs to be available and must contain the word “corporation,” “company,” “incorporated,” “limited,” “professional corporation” or an abbreviation of one of these terms. Generally, states indicate that the name should not be misleading, deceptive or contrary to the law or the ethics of the profession provided. The state agency or the examining board for that profession can provide specifics regarding naming compliance.
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Restrictions for Professional Corporations
There are certain restrictions that usually apply to Professional Corporations:
Only One Service Type May Be Offered
Unless the state indicates otherwise, a Professional Corporation may generally only provide one professional service type. For instance, an engineering Professional Corporation cannot provide services outside of this profession even if it has professionals with additional non-engineering licenses.
Professional Services Must be Rendered by Licensed Professionals
Only licensed professionals may provide the professional services. In Florida, for example, non-licensed individuals such as clerks, secretaries and bookkeepers can work at a Professional Corporation, but they would not provide the actual professional service.
Only a Licensed Professional Can Incorporate
Only those licensed in the service being provided can incorporate a Professional Corporation. States such as Texas, Florida and Illinois provide that only professional organizations or professional individuals with the appropriate licenses can form this entity.
Board of Directors and Officers Must Be Licensed
Each state has different limitations for the directors and officers in a Professional Corporation. Nonetheless, they typically require that the directors and/or officers be licensed professionals.
There Are Stock Restrictions
Stock restrictions vary by state. However, states such as Texas, California and Illinois usually require that shareholders, whether individuals or organizations, be licensed in the service that the Professional Corporation is providing unless state exceptions apply. Some states may also indicate that stock transference is limited to licensed professionals. In California, for example, shares can be transferred only to a shareholder of the same corporation, to a person licensed to practice the same profession in the jurisdiction or jurisdictions in which the person practices or to a Professional Corporation unless exceptions apply.
Conclusion
When deciding whether to form a Professional Corporation, there are multiple factors to be considered, ranging from the profession type to the state of incorporation to director and officer requirements. Therefore, it’s imperative to consider all of these different requirements and the regulations for the professional service you’ll be offering to make the right decision for you.
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This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.
