Advantages and Disadvantages of a Personal Service Corporation

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A personal service corporation exists as a professional corporation where 95 percent or more of the company’s business activities occur in fields such as the performing arts, law, engineering, architecture, medicine, actuary sciences, accounting or consulting. Services provided by a personal service corporation must be performed by shareholders that work for the company, as explained by the Internal Revenue Service website.

Limited Liability

One of the biggest advantages of a personal service corporation concerns the company’s limited liability status. Establishing a personal service corporation protects the shareholders and employees from the debts, liabilities and obligations that may accumulate while running the business. This means a business creditor cannot pursue a shareholder’s home, car and other personal assets as compensation for the company’s obligations. However, a shareholder-employee has a personal obligation for errors and negligent acts committed. Also, shareholder-employees have a personal obligation for negligent acts and errors committed by employees under their supervision.

Taxes

The manner of taxation imposed on a personal service corporation serves as a disadvantage for the company. A personal service corporation must pay a 35 percent flat-tax rate on income generated by the business, regardless of the company’s income. This means a personal service corporation that makes $3,000 a year will pay the same tax rate as a personal service corporation that generates $3,000,000. Personal service corporations have less tax flexibility than a regular corporation in terms of distributing income to shareholders that work for the business, according to the Reference for Business website. Regular corporations have the ability to adjust salaries and dividends paid to shareholder-employees in such a way that the company and shareholder receive the maximum tax benefit.

Continuity and Fringe Benefits

Another advantage of a personal service corporation concerns the continuity of the company. A personal service corporation can last forever, just like a regular corporation, despite changes in ownership and management. This is in contrast to a partnership or a sole proprietorship, where the company will end automatically if an owner dies, retires or decides to sell his interest in the business. Personal service corporations have the advantage of deducting fringe benefits provided to employees from the company’s taxable income. Fringe benefits include items such as life and health insurance, death benefits, disability insurance and dependent care.

Ownership Restrictions

A drawback of operating as a personal service corporation involves the ownership restrictions placed on the business. Shareholder-employees of a personal service corporation must hold the appropriate occupational license that corresponds with the service that the company provides. For instance, shareholder-employees of a personal service corporation that provides legal services must have a state-issued license to practice law. The only individuals who can own shares of a personal service corporation are former employees that previously performed services for the company, current employees that are licensed to perform services for the business and heirs and estates of former employees. This means other corporations, partnerships, limited liability companies and foreign entities cannot own shares of a personal service corporation.

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