Do you need to form a business entity for a certified professional?
Certain types of professions — typically including doctors, engineers, lawyers, accountants, etc. — cannot form traditional corporations, and are instead required to form professional corporations, also known as PCs.
There are several noteworthy differences between a standard corporation and a professional corporation, and it can sometimes be confusing to figure out which one you should form for your business. The incorporation process for either entity is quite similar, but you need to make entirely sure you’re forming the correct one.
Another complicating factor is the fact that the rules vary from state to state. In some states, certified professionals are only allowed to form a PC, and cannot form a typical corporation. In others, you’re given the choice to form a PC or a regular corporation.
In this guide, we’ll discuss how the corporation and the professional corporation differ, as well as how they share several similar characteristics. We hope that this article helps you determine whether the traditional corporation or a PC is the right choice for your business.
Professional Corporation vs. Corporation: The Similarities
Since these two entity types share the name “corporation,” it’s obvious that they have some things in common.
In the day-to-day business operations, a regular corporation and a professional corporation look quite similar. Both types are owned by the shareholders and led by the board of directors. This board also appoints officers to manage the business itself, regardless of whether it’s a professional corporation or a regular one.
These two classifications of corporation also have similar incorporation processes. With either one, you’ll need to choose a business name, and make sure that your desired name is available in your state. Then, you’ll need to designate a registered agent to receive important government document deliveries on your behalf.
Once you’ve done those things, you’re ready to prepare and file the articles of incorporation in order to formally incorporate your business as a corporation or PC. You will also need to draft a document known as corporate bylaws to describe the operational plans for your business, and also designate officers and directors to make important decisions.
Both corporation types also have to follow similar corporate formalities. This includes writing bylaws, keeping detailed records, holding annual shareholder meetings, and fulfilling any other corporate formalities required by your state.
Professional Corporation vs. Corporation: The Differences
1) Who can form one
While it may seem straightforward, it’s worth mentioning that corporations and professional corporations often can’t be formed by the same people. Pretty much anyone can form a regular corporation. Professional corporations, however, are more limited, as only certain professional groups can form one.
Which professions qualify varies from one state to the next, but typical professions include doctors, attorneys, chiropractors, accountants, and similar trades. In some states, these groups aren’t even allowed to incorporate under any other entity type.
In general, you should always check with your state’s Secretary of State office to make sure you’re forming the correct entity for your business. You wouldn’t want to incorporate a standard corporation only to find out you needed a PC, or vice versa.
2) Personal liability of the individual shareholders
Who can form a professional corporation is important to note, but here’s the more important distinction: each corporation type offers different liability protection to its members.
On one hand, the regular corporation gives complete personal asset protection to its shareholders and directors. If something goes wrong and the business is sued, only the corporation must pay up.
The individuals behind the business aren’t held personally responsible for the debt, and their personal assets cannot be seized as a result. In fact, it’s quite difficult to sue an individual shareholder unless the corporate veil is pierced due to fraud or gross misdemeanor.
On the other hand, a professional corporation offers partial liability protection to its members. Issues of general liability that affect the business as a whole — for instance, a defaulted loan — do not pass to the shareholders personally. In this way, the PC is quite similar to a traditional corporation, but there’s also a key difference in this area.
In a PC, each shareholder is held liable for his or her own malpractice. If, for example, a chiropractor damages a client’s spine during an adjustment and the client sues, that individual chiropractor can be held liable through a malpractice suit.
Thankfully, though, the other shareholders are not held liable for their co-owner’s malpractice.
Hiring an Incorporation Service for a PC or Corporation
There are so many companies offering to form traditional corporations that it would be nearly impossible to list them all. Thankfully, we don’t have to!
If you’re looking to form a standard corporation, take a look at our guide to the top incorporation services available. Services like ZenBusiness and Incfile are extremely popular and helpful.
For those of you looking to form a professional corporation, it’s a bit shorter list, as many of the top incorporation services don’t offer PC incorporation. However, if you’re incorporating a PC, there are still some options.
For example, you could hire MyCorporation to form your professional corporation, as they have an affordable price point that should be well within the budget of any certified professional’s startup budget. MyCorporation isn’t our absolute favorite pick for incorporating traditional corporations, but they do provide solid service, and their price tag for PC formations is quite impressive.
Conclusion
As we’ve seen, a professional corporation and a regular corporation are somewhat similar in structure — at least until something goes wrong. When a lawsuit occurs for malpractice, the professional corporation shows its uniqueness.
It’s also important to keep in mind that there’s a difference between who is allowed to form these two types of businesses. Just about anyone can form a standard corporation, except for entrepreneurs in certain certified professions.
Likewise, people in those certified professions can start professional corporations, but many people who don’t work in these fields cannot.
Guru Tip: If you’d like to compare some of the top rated incorporation services, see how our favorite options stack up against each other.