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In many states, professionals who want to incorporate their business can do so only as a “professional corporation.” In other states, professionals have a choice of incorporating as either a professional corporation or a standard corporation. What services constitute professional services are defined by state law, and vary from state to state. However, it is typically professions requiring a license, such as doctors, engineers, chiropractors, lawyers, and accountants, among others.

Professional corporations provide a limit on the owner’s personal liability for the regular commercial debts and other business liabilities of the corporation. However, incorporating does not protect a professional against liability for negligence or malpractice. Generally, licensed shareholder-employees of professional corporations remain personally liable for their own negligent or wrongful acts, or acts of those under the professional’s direct supervision or control, if performing professional services on behalf of the corporation. Thus, asset protection planning for the professional’s other personal assets must be implemented. The limited liability shield of the corporation may, however, protect professionals from personal liability for the negligent acts of other professionals in the incorporated professional practice.

The formation requirements for a professional corporation are similar to those of a standard corporation, with a few exceptions. The articles of incorporation for a professional corporation resemble those of a standard corporation; however, approval by the state licensing body and signature of a licensed professional as the incorporator, as well as their license number, may also be required prior to filing the formation documents with the secretary of state.

Depending on your state of incorporation, there are some other key differences between a professional corporation and a standard corporation. For example, some states restrict who may own stock in a professional corporation. Certain states require that the shareholders and the board of directors must all be licensed practitioners of the specific service the corporation provides. Other states require that at least half of the shareholders and directors be licensed professionals.

Furthermore, most state laws dictate that an indicator showing that the company is a professional corporation must be listed in the name, such as “Professional Corporation,” or “PC,” and must meet any further business name requirements imposed by the state, such as requiring that the profession be listed as part of the company name (e.g., Jones Architects, PC).

Generally, the corporation must be formed to render only one professional service, but some professions are allowed to form a corporation to render more than one service in related fields. For example, a licensed physician may be allowed to incorporate a professional corporation together with a licensed surgeon. It is important to note that the corporation must render professional services only through licensed members, managers, officers, agents, and employees and each licensed professional must carry the amount of liability insurance specified under the rules that apply to the profession.

Some states allow professionals to operate through an LLC, while others do not. Of note, Nevada has always allowed professional LLCs, while California has only allowed them since 2011.

If you are a licensed professional be sure to speak with your professional advisors about the advantages and limits of a professional corporation (or LLC, if allowed), and about related asset protection strategies before there is a problem.

For more information on this, please read Start Your Own Corporation.