Professional service businesses, such as those of doctors, dentists, attorneys, or accountants, don’t have a lot of choices when it comes to business incorporation. They must select from the professional corporation (PC, or sometimes called a service corporation, SC), professional limited liability company (PLLC) or the limited liability partnership (LLP). In evaluating these options, there are a few factors professional service businesses should consider.
Liability considerations
Certain licensed professionals carry with them higher professional liability than other professions. For example, the malpractice insurance doctors must carry varies from the liability insurance a software development company would carry. The PC, PLLC and LLP all provide certain levels of personal asset protection to owners. Understanding what is and is not provided is important.
- No protection against professional liability. Incorporating a professional service business will not protect the owners from professional liability (malpractice) claims. Professionals must still carry professional liability insurance.
- Protection of personal assets from business liabilities. Like with standard corporations and LLCs, incorporating a business as a PC, PLLC or LLP protects the owners’ personal assets from the debts and liabilities of the business. Owners’ personal assets typically cannot be used to satisfy business debts.
- Protection of personal assets from acts of others in the business. Owners of PCs, PLLCs, and LLPs are not held financially responsible for the acts of others in the business (unless they are in a supervisory role to that person).
Tax considerations
- PCs. There is a special designation under federal tax law for C corporations that perform services in the accounting, architecture, actuarial science, consulting, engineering, health, law and performing arts industries. They are called professional service corporations or PSCs.
- PSCs have a flat tax rate of 35% on corporate profits. But if corporate profits are zeroed out by paying compensation to the professionals, they leave little to no taxable income in the corporations.
- Owners must have the same tax year as the professional service corporation.
- In most cases, PCs can elect to become S corporations where income is passed-through the corporation, reported on the owners’ tax returns, and tax is paid at the individual tax rate. Some states do not recognize the S corporation election however. To see if your state recognizes the federal S corporation election, view BizFilings' state guides.
- PLLCs. Unless the business opts to be taxed like a C corporation (which LLCs are allowed to do), it will be treated like a partnership. Income is passed-through the PLLC, reported on the owners’ personal tax returns and tax is paid at the personal tax rate.
- LLPs. Income is passed-through the LLP, which files Form 1065 as well as a Schedule K for each partner, listing the partner’s share of the LLP’s income, expenses, credits, etc.
Duration of existence
It should be noted that PCs have perpetual life, but a significant change in the ownership of a PLLC or LLP can cause the business to cease to exist. For example, if there are four owners in an LLP and two leave the business, the legal status of the LLP would end. The other two partners can reorganize and create another LLP with the state in order to keep it in existence.
As you evaluate PCs, PLLCs and LLPs, remember that professional businesses can take longer to incorporate with the state. A number of states require approval of the professional’s licensing board before the business can be formed.
