What Is a Professional Corporation, and Do You Need One?

Quick answer: A professional corporation (PC) is a corporation that only licensed professionals, such as doctors, lawyers, dentists, and accountants, can form to provide their licensed services. It protects owners from business debts and from a co-owner’s malpractice, but not from their own mistakes.

Deciding on a business structure usually comes down to taxes and paperwork. But if you’re a licensed professional, you’ve got another factor most business owners don’t: your license can limit the business structures you’re allowed to use. That’s where the professional corporation (PC) comes in.

Below, we’ll cover what a professional corporation is, who it’s for, and how it protects you. Then we’ll help you think through whether or not you need one.

What Is a Professional Corporation? A Definition Explained

If your job requires a professional license, a professional corporation is a type of business structure specifically for you. It isn’t meant for freelance writers, graphic designers, or web developers. It’s for doctors, lawyers, dentists, accountants, and anyone else who needs a license to work.

A professional corporation draws a clear line around what you’re responsible for. Your own professional mistakes are always yours to answer for, but the company’s debts and any malpractice by your co-owners are not.

But why choose it over an LLC?

PC vs LLC: What’s the Difference?

The simplest way to think about the difference between a PC and an LLC is that an LLC is the flexible, all-purpose option most businesses can use, while a PC is a corporation with extra rules attached that tie ownership to a professional license. The right choice for you can look very different depending on where you practice.

	PC	LLC
Who can form one	Only licensed professionals	Almost anyone
Protects your personal assets from business debts	Yes	Yes
Protects you from a co-owner’s malpractice	Yes	Yes
Still liable for your own malpractice	Yes	Yes
Ownership	Usually licensed owners only	Generally anyone

Ownership rules are only part of the picture, though. How a PC gets taxed is just as important, and it’s another place a PC and an LLC part ways.

Tax Talk: LLC vs PC

With an LLC, the business itself pays no income tax. Instead, your share of its profit is treated as your personal income and taxed once, on your return, whether you take the money out or leave it sitting in the business.

A PC starts out differently. By default, it’s taxed like a regular corporation (C-corporation status), which means the same money can get taxed twice: the company pays the flat 21% federal corporate tax on its profits, and then you pay tax again on whatever you take home as salary or dividends. That double hit is the classic downside of the corporate setup.

The good news is that a PC doesn’t have to stay that way. Most owners elect something called S-corporation status, which lets the profits skip that company-level tax and get taxed only once on your personal return, the same way an LLC works. It can shrink your payroll taxes, too.

Determining which setup actually is the best fit for your situation comes down to your specific numbers, so this is one to work through with a tax attorney or a CPA, not settle from a blog post.

Another Trade-Off: More Upkeep

Taxes aren’t the only part of a PC that asks more of you. Compared to a simple LLC, a professional corporation may require a more formal setup and upkeep.

In practice, that means a recurring to-do list. You’ll adopt bylaws (basically the rulebook for how the company runs), name officers and hold a meeting once a year, write up minutes that record the decisions you make, file a report with the state annually, and pay the yearly state fees that keep the company in good standing. None of it is hard; it just requires good record-keeping, something we can help you with.

But the formalities of a PC are part of what keep your personal assets protected. If you aren’t consistent with the rules, someone suing you can argue the company was never really separate from you personally, and the liability shield you set the PC up for could start to crack.

Again, all of this varies state by state, so it’s worth consulting with a tax attorney to determine if a simpler option is available to you.

The Rules Are Stricter for a CA Professional Corporation

California isn’t the only state that restricts how licensed professionals can organize, but its rules are among the strictest and most clearly defined, which makes it a useful example.

In California, licensed professionals generally can’t deliver their services through an LLC. The PLLC (a professional version of the LLC) that many other states offer doesn’t exist in California at all. So for most licensed professionals, a California PC isn’t one option among many; it’s the only option. The one workaround is a limited liability partnership (LLP), but it’s only available to a handful of fields, such as law, accounting, and architecture.

This all traces back to the Moscone-Knox Act, which lays out the ground rules for professional corporations in California. Here are a few important highlights:

• Everyone who owns the practice has to be licensed. At least 51% of the PC has to belong to those licensed in the corporation’s main profession, and the remaining share can go only to a few closely related licensed professions.
• There must be one profession per PC. You can’t blend, say, a dental office and a vet clinic under the same PC.
• Expect your licensing board to be involved. Depending on your field, you register the PC not just with the state but with your board too (i.e., the State Bar for lawyers, the Medical Board for physicians). The board may also have naming rules, often requiring the name to include something like “A Professional Corporation.”

CA adds an additional tax layer as well. Remember the two ways a PC can be taxed? If your PC is taxed as a regular corporation, the PC pays California 8.84% on its net income. Electing S-corp status eliminates most of that, but you’ll still pay a 1.5% state tax. A flat $800 minimum tax applies no matter which option you pick.

These rules vary by state, so it’s ultimately a conversation for a tax attorney. But a few questions can help you get your bearings first.

Deciding Whether a Professional Corporation Makes Sense

Answers to the following questions will point you toward the answer:

• Does your work require a license? If you don’t have a license, you don’t need a PC. Look at an LLC instead. And even if you are licensed, your state decides whether your specific profession qualifies, so your licensing board is the place to confirm.
• Where do you practice? Your state may have already decided for you. California, for one, requires most licensed professionals to form a professional corporation rather than choose for themselves.
• Do you have partners? Protection from a co-owner’s mistakes matters a lot more once you’re not solo.
• How do you feel about upkeep and taxes? Between the ongoing formalities and the choice of how the PC gets taxed, there’s more to manage with a PC than with a simple LLC.

One thing to remember no matter what you choose: a PC won’t shield you from your own errors. That’s the job of malpractice insurance, so treat the two as a pair rather than a choice. The entity handles one kind of risk, and your policy handles the other.

If you’re still weighing your decision, here are the questions that come up most.

Frequently Asked Questions

Let’s Talk

Getting your business structure right from day one saves a lot of headaches down the road. I’m a California-licensed attorney with an LL.M. in Taxation, and a good part of my practice is helping licensed professionals, small businesses, and nonprofits form and restructure entities, from professional corporations to S-corps and LLCs. So if you’re trying to figure out whether a PC fits, how to structure ownership, or which tax election makes sense for you, I’d be glad to help. You can reach me through my profile at Gammon & Grange or at (619) 787-8283.

This article is intended for general informational purposes only and does not constitute legal, tax, or financial advice. Reading this post does not create an attorney-client relationship. Laws differ by state and change over time, and every situation is unique. Please consult a qualified attorney or tax professional about your specific circumstances before forming a business entity.