Professional Corporation or Professional LLC


Here’s another question that comes up fairly regularly in my inbox: when do you need to be a Professional Corporation, and when do you need to be a Professional LLC … or if you need to be either.

The professional designation comes through state laws. Basically these laws allow (or demand, in some cases) that many licensed professionals who incorporate do so through either a professional corporation or a professional LLC. More states allow for PCs than PLLCs, but there are some states that don’t require you to use either.

The idea of the professional corporation began as a way to limit liability between partners. Plus, before 1986 it produced some pretty nifty tax benefits.

Before 1986, all corporation tax rates were the same. We didn’t have different levels, like we do now with regular C Corporations and Personal Service Corporations. But personal income tax rates were much higher, especially for high-income individuals. A Professional Corporation allowed professionals to pay themselves a salary, and take their after-tax Corporation profits out in creative, tax-sheltered ways. Then 1986 came along, and personal tax rates lowered, S Corporation taxation was implemented, and professionals were trying like crazy to avoid classification as a Personal Service Corporation because those rates are higher.

The liability comes about because of your professional status. As a licensed professional, you can’t incorporate to protect yourself from a malpractice claim. That personal liability stays with you, which is why you have malpractice insurance. But that same circumstance can also lead to you being held personally liable for your partner’s mistakes, too – at least if you’re operating a regular Corporation or LLC. A professional corporation or PLLC protects you from being liable for your partners’ mistakes. I think they still make sense if you’re going into business with other people.

What I don’t like about PCs and PLLCs is your potential inability to include other people in the ownership. A lot of states don’t allow anyone other than licensed professionals to be owners. So if you’re a doc and your husband or wife isn’t, they can’t own part of your practice. Only another licensed doctor can – and even then, that doc needs the same license as you. That can create problems if you lose your license, plus what happens if you die? How do you get your major business asset to your spouse and family if they aren’t allowed to own it?

As for who needs to use one – that depends on your state. You can usually count on accountants, lawyers, engineers and doctors making the cut, but over time a lot of other health-care professionals have been added to that list. If you’re wondering about yourself, start by checking in with your governing board. Tell them you want to incorporate and practice through a business structure, and ask if you have to have a PC or PLLC.

My partner over at US TaxAid, Diane Kennedy, and I did a webinar this past Saturday, all about C Corporations, and why we think they’re about to become a critical tax-planning tool, no matter who wins the election. If you’d like to watch the webinar replay, go to www.CCorporationTax.com (it’s free!)

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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