Professional Corporation – The Purpose

Corporations come in many forms. One is a professional corporation. In this article, we take a look at what a professional corporation is and the purpose for it.

The corporation has a long history in law and has been around for literally hundreds of years. The professional corporation is a more recent creation and is a function purely of state law. By this I mean that a state must pass a law that allows for the creation of these entities as well as the regulations that govern them.

As the name suggests, a professional corporation is one that undertakes a business in a professional area. Most states interpret this to mean that the subject area must be a licensed area. Examples of this might include doctors, accountants, lawyers, architects and so on. Each state defines the list of professions per its whim.

The professional corporation is unique in that it has a specific purpose. That purpose is to alert the general public to the fact the business is providing certain services and those services are provided by licensed individuals in those areas. Okay, that’s a bit long winded. What this really means is to let a person know that when they go to Johnson Medical Doctors, Professional Corporation, the people who treat them will be medical doctors, nurses and the like.

A corporation protects its shareholders from liability, correct? Yes, but the story is a bit different with professional entities. The corporation does not provide you with any protection against a liability claim based on the professional services rendered, but it does for non-service liabilities. For example, I would have no protection from a legal malpractice claim as a lawyer, but I would be protected from a claim from my landlord over an office dispute.

So, what is in it for the professional? This doesn’t sound so great so far. There are a couple reasons professional corporations are so popular with professionals. The first is limited liability. While the corporation will not protect you from malpractice claims, it will protect you from those made against other shareholders in the entity. If there are three doctors and a claim is made against one for medical malpractice, the other two cannot be sued. This varies by state, so make sure to speak with a lawyer to determine the exact guidelines for your state.

A second reason to form a professional entity is the indirect benefits. For instance, a corporation can form retirement plans that are superior to those of self-employed individuals. By this, I mean that the total contributions to the plan are higher, the flexibility of removing money through loans is greater and so on. Tax and benefits is a constantly changing area of the law and tax code, so speaking with your attorney and CPA is a smart move before incorporating.

The professional corporation is perhaps one the most misunderstood entities available. There are definite advantages and disadvantages to it, so make sure to speak with legal counsel to ascertain whether it is the right choice for your situation.

Richard A. Chapo provides professional corporation formation services at SanDiegoBusinessLawFirm.com.