In most states, including Washington state, professionals can’t incorporate as a just a regular corporation. In other words, while a plumber who wants to incorporate can use a traditional corporation for his plumbing services business, a physician can’t. And while a contractor who wants to incorporate can setup a regular corporation for his construction company, an engineer can’t. Instead, these professionals must set up “professional corporations” or “professional service corporations.”
Determining When Professional Corporation Status Is Required
If you’re a profession considering incorporating, you first need to determine whether you’re required to use a professional corporation. The usual rule is that a profession that requires a license from the state does need to use a professional corporation. But there are a couple of more definitive ways to determine when a professional corporation is required:
1. Use a search engine like Google to display a list of local professionals. If the business names that Google displays for fellow professionals use acronyms like “P.C.” and “P.S.” or if the names include the phrase “a professional corporation,” you can assume that your state requires professionals in your category to operate as professional corporations, also known in some states as professional service corporations.
2. You can typically call either the secretary of state in your state or the state agency that licenses your profession and ask whether you need to use a professional corporation in your case.
By the way, even if your state’s laws require a professional corporation for people in your professional category, you may still occasionally see professionals who have incorrectly setup a regular corporation and not a professional corporation. You’ll be able to identify these regular corporations because their names include acronyms like “corp” and “inc” or the words “corporation” or “incorporated.” The fact that you see some names like this along with other professional corporations doesn’t mean that you don’t have to use a professional corporation. Rather, this situation just means that some of your professional peers goofed up.
Note: A similar situation exists with regard to professionals and limited liability companies. In many states, professionals can’t use a regular limited liability company. Rather, professionals need to use professional limited liability companies. A regular limited liability company uses the acronym LLC in its name. A professional limited liability company uses the acronym PLLC in its name. And one other related note: In some states, professionals cannot setup an LLC and must instead use a professional corporation if they want liability protection.
What’s Different With a Professional Corporation
Typically, state laws change the rules a bit for professional corporations. I’m not going to generalize too much here. But you commonly see a handful of “extra” rules for professional corporations:
Professional Corporation Ownership Rules: Commonly, for example, state law will say that only licensed professionals can be shareholders in a professional service corporation or state law will say that the majority of the shareholders in a professional service corporation need to be licensed professionals. A professional corporation that practices law in the state of New York, for example, might only be able to have attorneys admitted to the New York bar as shareholders. Or, a professional corporation that provides surgical services in California might only be able to have physicians licensed by the state medical board as shareholders.
Professional Corporation Business Naming Rules: Another common rule you’ll see in the state laws that create professional corporations concerns the corporation name. In addition to the usual sort of corporation naming rules (like including an acronym or word that flags the entity as a corporation), you’ll often see rules that require the corporate name look a certain way or provide certain information. For example, the professional corporation name may need to include the professional’s name and or the profession. A dentist named John Q. Smith, for example, might need to use something like “John Q. Smith, DDS, PS” for his professional corporation name. A physician, as another example, might need to use something like “Jane Doe, MD, PC”
Professional Corporation Operating Rules: A final common rule you’ll see with professional corporations concerns the operation of the professional services business in the state. Professional corporation laws may require that the business operate or be managed in a specific way. The law may require, for example, that each office or location be managed by a professional licensed by the state. In other words, a multiple office public accounting firm operating as a professional corporation in Washington state would need a CPA licensed by Washington state for each office.
Professional Corporation Tax Rules: Wholly independent of state corporation laws, federal and state tax laws minimize the tax advantages of incorporation for professional corporations in some situations. For example, if a professional’s business consists almost entirely of employee-shareholders performing services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts and consulting and the corporation is treated for tax accounting purposes as a C corporation, the corporation may be treated as a “qualified personal service corporation.” This label forces the corporation to use the 35% C corporation income tax rate for calculations of its tax liability, reduces the threshold at which the 15% accumulated earnings tax may apply, and also requires the C corporation to use a handful of other, taxpayer-unfriendly accounting procedures.