Professional Corporation

Definition

A professional corporation (PC) is a type of corporate structure specifically established for professionals who are engaged in fields that require individual licensing and expertise. These fields typically include law, medicine, architecture, engineering, accounting, and other specialized professions. The formation and operation of a PC is usually governed by state laws, which often include requirements that all shareholders must be licensed to practice the specific profession in which the corporation is engaged. This corporate form provides certain legal advantages, such as limiting the personal liability of its members for business debts, while still allowing the professionalism and personal responsibility expected in these fields.

Examples

Medical Practice: Several doctors form a professional corporation to run a medical clinic. This structure allows them to pool resources, share responsibilities, and limit personal liability for business-related risks while each physician remains individually responsible for their professional conduct.
Law Firm: Attorneys join to form a professional corporation where they can collectively offer legal services, share office space, reduce operational costs, and still ensure that each lawyer is accountable for their own professional conduct.
Architectural Firm: Licensed architects create a professional corporation enabling them to collaborate on large projects more effectively and provide more comprehensive services with reduced personal risk related to business operations.

Frequently Asked Questions (FAQs)

Q1: What is the primary purpose of a professional corporation?

A1: The primary purpose of a professional corporation is to provide a legal structure for professionals to practice collaboratively in their respective fields while enjoying certain corporate benefits, such as limited liability and tax advantages.

Q2: Can anyone form a professional corporation?

A2: No, only individuals licensed to practice in specific professions such as law, medicine, or accounting can form a professional corporation. Moreover, state laws often require that all shareholders or members of the corporation be licensed professionals in that field.

Q3: What are the benefits of forming a professional corporation?

A3: The benefits include limited liability protection, potential tax advantages, enhanced ability to raise capital, and the ability to perpetuate the business beyond the involvement of the original practitioners.

Q4: How does liability work in a professional corporation?

A4: While a professional corporation limits personal liability with regard to business debts or malpractice lawsuits, individual members are still personally liable for their own acts of malpractice or professional negligence.

Q5: Are professional corporations taxed differently from other corporations?

A5: Professional corporations can be taxed as C corporations or S corporations, similar to regular corporations, with specific considerations based on the professional corporation’s structure and jurisdiction.

Limited Liability Company (LLC): A business structure that provides limited liability to its owners but allows more flexibility in management and profit distribution.
S Corporation: A special type of corporation that allows for pass-through taxation, where the corporation’s income is taxed only at the shareholder level, not the corporate level.
C Corporation: A traditional corporation that is taxed separately from its owners, with potential benefits such as unlimited shareholders and different classes of stock.
Partnership: A business form where two or more individuals share ownership and personal responsibility for the business.

Online References

Internal Revenue Service (IRS): Provides information on the tax treatment of professional corporations.
American Bar Association: Offers resources for law professionals, including insights on forming professional corporations.
American Medical Association: Offers resources for medical professionals, including corporate practice guidelines.

Suggested Books

“Corporate Law: Examples & Explanations” by Alan R. Palmiter
“Taxation of Professional Corporations” by Michael Schlesinger
“Professional Corporations” by Henry R. Ginger
“Understanding Professional Corporations” by Robert Chira

Fundamentals of Professional Corporation: Business Law Basics Quiz

### Can a professional corporation include shareholders who are not licensed in the profession? - [ ] Yes, it can include any investors. - [ ] Only if they hold minority shares. - [x] No, all shareholders must be licensed professionals. - [ ] It depends on the state laws. > **Explanation:** One of the key requirements for a professional corporation is that all shareholders must be licensed to practice in the specific profession that the corporation is engaged in, as mandated by state laws. ### What is one primary advantage of forming a professional corporation? - [ ] Unlimited liability for shareholders. - [x] Limited liability for business-related debts. - [ ] No need for professional licenses. - [ ] Simplified business management. > **Explanation:** A primary advantage of forming a professional corporation is limited liability for business-related debts, protecting shareholders' personal assets from business risks. ### In which scenario is a professional corporation most commonly formed? - [ ] Retail businesses - [ ] Manufacturing sectors - [x] Professions requiring individual licenses, such as law or medicine - [ ] Public utilities > **Explanation:** Professional corporations are most commonly formed in professions that require individual licenses, such as law, medicine, accounting, and architecture. ### What type of taxation can a professional corporation elect? - [x] C Corporation or S Corporation taxation - [ ] Only C Corporation taxation - [ ] Only S Corporation taxation - [ ] No specific taxation type > **Explanation:** A professional corporation can elect to be taxed as either a C Corporation or an S Corporation, allowing for flexibility in how income and taxes are handled. ### Who is responsible for professional misconduct in a professional corporation? - [ ] The corporation only - [ ] The senior shareholders - [x] Each individual for their own misconduct - [ ] The board of directors > **Explanation:** Each individual shareholder or professional is personally responsible for their own acts of professional misconduct or negligence, even within a professional corporation. ### What is a key difference between a professional corporation and a general corporation? - [x] Only licensed professionals can own a professional corporation. - [ ] Professional corporations offer no liability protection. - [ ] Only professional corporations are taxed. - [ ] General corporations can only be small businesses. > **Explanation:** A key difference is that only licensed professionals can own and operate a professional corporation, which may not be true for general corporations. ### Can a professional corporation be formed by individuals in various different professions? - [ ] Yes, any combination of professions. - [x] No, only within one specific profession. - [ ] Only if allowed by state law. - [ ] Only if approved by a regulatory body. > **Explanation:** A professional corporation must be formed by individuals licensed in the same specific profession, ensuring that all shareholders meet the necessary professional qualifications. ### What is a typical state requirement for the shareholders of a professional corporation? - [x] All shareholders must hold professional licenses in the corporation's field. - [ ] Shareholders must all be residents of the state. - [ ] At least one shareholder must be a certified accountant. - [ ] Shareholders must all be on the board of directors. > **Explanation:** Typically, state laws require that all shareholders of a professional corporation must hold professional licenses in the field the corporation is engaged in. ### Which of the following is a common field where professional corporations are used? - [x] Medicine - [ ] Grocery retail - [ ] Manufacturing - [ ] Hospitality > **Explanation:** Professional corporations are commonly used in fields like medicine, law, and architecture, where the practice requires specific licenses and professional qualifications. ### Do professional corporations have perpetual existence? - [ ] No, they only last for the founder's lifetime. - [ ] Yes, but only until all shareholders change. - [ ] No, they must renew every ten years. - [x] Yes, similar to other corporations, unless stated otherwise. > **Explanation:** Professional corporations, like other corporations, can have perpetual existence beyond the involvement or lifetime of the original founders unless specific conditions state otherwise.

Thank you for diving into the world of professional corporations and challenging yourself with our quiz! Continue exploring these key concepts for a deeper understanding of business law and professional corporate structures.