So, you’ve decided to start a business. Congrats! Which business model will you choose? Our business entity series explains each of the business structures, helping to identify the advantages and disadvantages of each legal entity.

Many people have heard of LLC’s and C Corporations. But a lesser-known business structure is a Professional Corporation (PC). A PC is an incorporated business under state law available for professionals who register with their state among other business entity options offered such as a professional service limited liability company (PLLC) and a registered limited liability partnership (LLP). Some states require the professional to be certified by the profession’s state regulatory board. Laws vary by state, for the purposes of this article, we are going to focus on New York.

In New York, the professions that are authorized to form a PC are licensed physicians, attorneys, counselors-at-law, and other occupations listed in Title VIII of the New York Education Law.
For advice on other ways to structure your business, check out our blog.

What is a Professional Corporation?

The types of licensed professionals that can form a PC vs. an LLC are set by each state. A PC allows a licensed professional to conduct his practice as a corporation and to be treated under Federal and State law as a corporation.

To form a PC, you’ll need to comply with the rules of the state licensing board for your profession. This includes submitting your PC’s articles of organization to the licensing board for approval and having all the filing documents signed by a licensed professional. States may also limit the type or number of owners for the PC who are not licensed professionals.

The Advantages of a Professional Corporation

  • Your business can have perpetual existence.
  • You can offer your services through a corporate entity.
  • The owner of a corporation only needs to withdraw the money you need that year, not necessarily the money you earn. That way you can control your tax bracket.
  • PC’s can pay out salary or dividends. Dividends are taxed at a lower income rate than salaries, which are taxed at the personal marginal income tax rate.
  • You can hire and contract workers not actively practicing the same profession.

The Disadvantages of a Professional Corporation

  • A PC may only be formed for the purpose of providing services in one professional practice area. You may only provide the services that you received authorization to perform in your Certificate of Authority (COA) (see below).
  • You must adhere to the rules and regulations set by your governing professional body. This varies by state.
  • In contrast to a corporation, the owner (and shareholders, if applicable) are liable for any malpractice or negligence. You are not protected by the corporation. But if you are in business with other attorneys, for example, and you each have a PC, you will not be liable for their negligence or malpractice.
  • Your shareholders must actively practice in the same profession. There are some states that allow a PC to issue non-voting shares to immediate family.

The Steps Involved in Setting Up a Professional Corporation in New York

  • Talk to and hire a capable business attorney to help prepare legal documents.
  • Talk to and hire a capable accountant. The tax forms can be complicated.
  • Send a signed copy of your Certificate of Incorporation (COI) and a filing fee to the applicable licensing agency. In New York, most commonly this agency is the NYS Education Department.
  • Once the COI is received, you will receive a COA or good standing from the licensing agency.
  • File the COI and the COA with the New York Department of State.
  • Select a unique corporation name. The name must include the words “Professional Corporation.” The name of your company must accurately reflect the services that are being provided.
  • Do a name availability inquiry. Since this database may not be updated, you will also need to submit a written request and fee to the Department of State, Division of Corporations.
  • If the name is available, reserve the name for 60 days by filing an Application for Reservation of Name.
  • Once you receive your Certificate of Incorporation, apply for an EIN. Then submit IRS Form SS-4 to elect Professional Service Corporation status for tax purposes.
  • Set up a business bank account.
  • Procure the required insurances. As noted in the Disadvantages, this structure doesn’t offer personal liability protection from the corporation. If you are in a high-risk industry, such as the legal industry, insurance can reduce your risk.
  • You may issue stock, though this is not legally required in most states.
  • You may also draft a shareholder agreement to outline the rights and responsibilities of shareholders. You will need to keep a record of the names and addresses of all shareholders, along with the number and class of shares held by each and the date each shareholder became an owner of the share.
  • If shareholder meetings are held, you must take minutes of the proceedings.
  • Get professional bookkeeping support.
  • Complete file a Biennial Statement two years after filing the Certificate of Incorporation (COI) and every two years after that.

Tax Information for a Professional Corporation

A PC will be taxed as a C corporation and file Form 1120 at the Federal level. The tax return deadline for PC’s is March 15 for calendar year filers. A 6-month extension is available by filing Form 7004 by the original due date. For New York State, it is required to file a NY General Business Corporation Franchise Tax Return (NYS CT-3).

If the business is registered in New York City, the company must also file the New York City Business Corporation Tax Return (NYC-2 or NYC-2S for the short form). In addition, PCs are required to issue annual forms for the dividends paid to shareholders (Form 1099-DIV).

If you have any questions about whether this is the right designation for your business, or about the requirements, please contact us. As with all major decisions, it’s best to speak with your accountant prior to deciding which business structure is the best fit.