Professional Corp vs. Personal Services Corp.
What is the Difference Between a Professional Corporation and a Personal Services Corporation?
Basically, a professional corporation is an business entity composed of specific types of professionals, set up according to state law. A personal services corporation is a taxing entity set up under the regulations of the IRS. Here are more details:
What is a Professional Corporation?
A professional corporation (PC) is a corporation of professionals, organized (incorporated) under the laws of a specific states.
In some states, some professionals are permitted to form corporations under specific regulations, to allow the professionals to have the benefit of a corporation while limiting liability in certain situations.
In a corporation, the shareholders and officers are free from personal liability, but this would be a problem for a corporation formed by professionals, if they formed the corporation in order to absolve themselves of responsibility for their professional actions (malpractice).
Some characteristics of a Professional Corporation
In each state, specific types of professionals are allowed, and in some states required, to form professional corporations. Specific professions include: accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.
The PC must identify itself as a "PC" or "P.C." in its name, and all owners must be in the same profession, and all owners must be licensed in the state.
Some states require that the professional corporation must have approval from that state's licensing board.
Advantages and Disadvantages of a Professional Corporation
1. Perpetual existence. A professional corporation may continue if an individual shareholder or employee dies or leaves the company, while a partnership may need to be dissolved if this event happens.
2. Liability protection. The other advantage is that the PC form does not allow professionals to be free from personal liability from the result of his or her professional actions, but it does allow other shareholders or directors to be protected from the actions of another. This is typically the reason professionals form PC's.
3. Income Taxes. The main disadvantage of the professional corporation is that income is taxed at the corporate tax rate of 35%, rather than on an incremental scale, as with LLC's and sole proprietorships.
What is a Personal Service Corporation?
A personal service corporation (PSC) is a specific taxing entity recognized by the IRS. The IRS requirements for a personal services corporation are (over-simplified):
- Principal activity. The principal activity must be providing personal services, in the fields of " in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts," and that
- Ownership: The employee-owners must "own more than 10% of the fair market value of its outstanding stock."
Common Mistakes: Don't confuse a Professional Corporation with a Limited Liability Partnership, Professional Limited Liability Company, or a Limited Liability Company, which are different types of entities.
Disclaimer: The information in this article and on this site is intended to be general in nature and not tax or legal advice. Each individual business is unique, and taxes and regulations are always changing. Consult both your tax and legal advisors before making any changes to your business or attempting to set up a specific legal business type.