Corporation vs Professional Corporation: Understanding the Differences

Recently, we discussed what Limited Partnerships are, but today we are going to dive into the differences between a corporation and a professional corporation. Both corporations and professional corporations are popular types of business structures, but they differ in several important ways. In this blog post, we will explore what a corporation and a professional corporation are, the differences between them, and why it matters. While both entities have similarities, they also have significant differences that should be understood before deciding which type of entity to use.

What is a Corporation?

A corporation is a legal entity that is owned by shareholders. This means that a corporation is not owned by any one person or group of people. Instead, it is owned by the shareholders who have invested in the corporation. A corporation is formed under state law, and its purpose is to conduct business and generate profit. One of the primary advantages of a corporation is that it provides limited liability protection for its shareholders, which means that the personal assets of the shareholders are protected from any legal action taken against the corporation.

Some examples of corporations include well-known companies like Apple, Coca-Cola, and Amazon.com. These companies are structured as corporations, and they have been successful in generating profits for their shareholders.

What is a Professional Corporation?

A professional corporation, also known as a "PC," is a type of corporation that is formed by licensed professionals. A professional corporation is formed for the specific purpose of providing professional services, and it allows the licensed professionals to operate as a separate legal entity while still retaining their professional licenses. Professional corporations are commonly used by doctors, lawyers, and accountants, among others.

One of the key differences between a corporation and a professional corporation is that the shareholders of a professional corporation must be licensed professionals who are authorized to provide professional services in their respective fields. This requirement does not apply to a regular corporation.

Professional corporations provide several advantages, including professional liability protection for the shareholders. This means that if a client were to sue the corporation for malpractice, the personal assets of the shareholders would be protected. Additionally, professional corporations often have more favorable tax treatment than regular corporations, with income being taxed only once at the shareholder level.

Examples of professional corporations include law firms like Smith and Jones, P.C., accounting firms like Johnson and Associates, P.C., and medical practices like Smith and Partners, P.C.

Differences Between a Corporation and a Professional Corporation

While both corporations and professional corporations are similar in many ways, there are some key differences between the two entities that should be understood before deciding which one to use. Some of the primary differences include:

1. Ownership Requirements

As mentioned earlier, a corporation can be owned by anyone, including individuals, other corporations, or even foreign entities. However, a professional corporation can only be owned by licensed professionals who are authorized to provide professional services in their respective fields.

2. Professional Liability

Another key difference between a corporation and a professional corporation is the liability protection provided. A corporation provides liability protection to its shareholders for business debts and liabilities, but it does not provide protection against professional malpractice. In contrast, a professional corporation provides professional liability protection to its shareholders, protecting them from malpractice claims arising from their professional services.

3. Licensing Requirements

In order to form a professional corporation, the shareholders must be licensed professionals in their respective fields. This requirement does not apply to a regular corporation.

4. Taxation

A corporation is taxed as a separate entity, with the potential for double taxation if dividends are paid out to shareholders. In contrast, a professional corporation is generally taxed as a pass-through entity, meaning that the corporation's income is taxed only once at the shareholder level.

Why Does it Matter?

Choosing the right business structure is crucial for any business, and understanding the differences between a corporation and a professional corporation is essential for licensed professionals who want to operate their own practices. The benefits of a professional corporation, such as professional liability protection and favorable tax treatment, may make it a more appealing option for some licensed professionals. However, it is important to weigh these advantages against the additional requirements and restrictions that come with forming a professional corporation.