Professional Corporation

A Professional Corporation (PC) is formed for the purpose of conducting a profession which requires a license to practice, including attorneys, physicians, dentists, certified public accountants, architects, and real estate brokers.

Most states provide for such corporations under special statutes which allow the corporation to operate with a single director who is a professional.  Unlike a regular corporation, a professional corporation does not absolve a professional for personal liability for her own negligence or malpractice. The main reason why groups of professions choose this organizational structure is that, unlike a general partnership, owners are not personally liable for the malpractice of other owners.

Should a member of the PC die, the PC survives, unlike a sole proprietor or partnership.  A PC also provides protection to its members from another member's professional negligence.  

Professional corporations can create retirement plans and 401(k) plans for their employees that have higher contribution limits than plans available to individuals or unincorporated businesses. In addition, professional corporations can provide health and life insurance as a tax-free benefit to their employees by establishing a Voluntary Employees' Beneficiary Association (VEBA). They can also take tax deductions for disability insurance, dependent care, and other fringe benefits provided to employees. In most cases, such benefits are tax-deductible for the corporation and are not considered taxable income for employees.

A PC in general does not generate any retained earnings.  This is because retained earnings are taxed at a maximum rate of 35%, and a PC is not allowed a graduated tax rate like other corporations.

Since most professional corporations have only active shareholders and do not experience losses, however, this tax liability is not usually an issue. The flat corporate tax rate that applies to professional corporations may be another source of disadvantage. Retaining earnings within the business will rarely make sense due to the higher tax bracket, and this may reduce the firm's flexibility in distributing income to shareholders/employees.

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