What Is a Professional Service Corporation?

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A professional service corporation is a special type of corporation formed by persons engaged in an occupation or profession that requires a license, such as attorneys, doctors, accountants and engineers. Each state has its own corporate law that specifies the criteria for forming and operating a professional services corporation; these laws typically include restrictions on who can be a shareholder, director or officer of the corporation. The Internal Revenue Service also has special tax rules for professional service corporations.

Formation Requirements

A professional service corporation is formed in the same general manner as any for-profit corporation, by filing articles of incorporation or similar documents with the state agency that oversees compliance with corporate law, such as the secretary of state. The name for the corporation must usually include the words "professional service corporation" or “professional corporation,” or the designation “P.C.” or "PSC." After incorporating, state laws typically require registration with the board or agency in charge of professional licensing prior to rendering professional service.

Restrictions on Ownership and Management

State law restricts ownership of a professional service corporation by limiting who can be a shareholder to persons properly licensed to render the professional services provided by the corporation. Some states, such as California, mandate these restrictions be clearly printed on stock certificates and in the bylaws of a professional service corporation to prevent an unlawful transfer of stock to an unlicensed person. Similar restrictions typically apply to the corporate management, such as officers and directors. With the exception of customary support staff, all corporate personnel must be individually licensed to render professional services to act on behalf of the corporation.

Liability Issues

A primary reason for any business to incorporate is to protect the business owners from liability for the debts and obligations incurred by the business. For professional services corporations, this limited liability protection is modified to protect clients of the corporation who may suffer damages due to professional negligence or malpractice. Any licensed professional who commits malpractice will be liable for his conduct regardless of whether he is a member of a professional services corporation. However, other members of the corporation who were not involved in the negligent conduct will not be personally liable.

Tax Issues

Forming a professional corporation does not provide any particular income tax advantage for the shareholders. Since 1986, the IRS treats professional service corporations as “personal services corporations” that are taxed at a flat rate of 35 percent, rather than at the graduated income tax rates for corporations. The shareholders may benefit by electing to be taxed as an S corporation, which is taxed like a partnership with all profits and losses attributed to the shareholders.

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