Due to the nature of their businesses, most professional service providers (e.g. accountants, doctors, and attorneys) are required to incorporate their companies under one of three specific structures. The primary reason for this is to address the increased level of service liability and legal responsibilities of these types of businesses.
In order to protect both the owner and customers, the choices for practice incorporation are limited to professional limited liability corporations (referred to as PLLCs), limited liability partnerships (known as LLPs), or professional corporations (called PCs, but occasionally referred to as service corporations, and abbreviated SCs).
While these structures do have similarities, there are several notable differences regarding taxation, liability, and perpetuity.
Taxes are an unavoidable aspect of running a business. Each incorporation structure for your professional practice has ramifications for your tax bill.
PLLC’s—offer two tax structure options. They can choose to be taxed as either a C corporation, or as a “pass-through” entity. Most owners choose the later, as it allows the practice’s owners to only pay taxes at the personal level, avoiding corporate income tax.
LLP’s—taxes are paid on a “pass-through” basis as well, but with a few extra formalities. They are required to file a few special tax forms, which specify the division of profit and loss between the partners.
PC’s—considered the “C corps” of the professional service industry, and often referred to as professional service corporations. They have a special designation for federal tax purposes, and pay a flat rate of 35% on all profits. However, due to the high wage expenses typically paid to partners, they are often left with little taxable income. In many states, PC’s can elect to file for S corp status to take advantage of “pass-through” taxation benefits.
One of the most significant challenges faced by many professionals is personal liability. Due to the importance of their work, service professionals are often required to carry special types of insurance, facing a different set of legal liability requirements. This is especially true of attorneys and medical professionals.
It is exceedingly important that owners of professional corporations are aware of these requirements. It’s always best to talk to a filing professional when starting a new practice.
There are a three main liability issues facing professional practices:
Professional liability protection— In order to offer recourse to clients claiming unsatisfactory treatment, incorporating does not protect owners of a practice from any malpractice claims filed against the company. As a result, most professionals must carry some type of malpractice insurance.
Protection against partner malpractice— In the case of a successful malpractice claim, only the partner responsible for the claim can be held financially accountable for the damages to the business.
Personal asset protection— As with any other corporate structure, the owners of a professional corporation are given personal asset protection. Because of this protection, owners typically cannot use personal funds to satisfy any claims against, or debts of, the business.
Barring any major changes to its ownership structure, a professional corporation is a perpetual entity. This means that even in the event of significant ownership changes, it is a relatively straightforward process to reorganize the business and continue operations. It should also be noted that forming a professional corporation often takes significantly longer than incorporating other businesses, as professional licensing boards are often involved in the process, and must ensure that the practice completes all industry requirements.
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