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Professional corporations are typically used by professionals such as physicians, architects, accountants, attorneys, and consultants. Some places legally require professionals in the aforementioned professions to have professional corporations. Having one's own professional corporation means that the professionals who have the corporation are, for legal purposes, employees of their own business.
Most of the time, professional corporations will likely meet the criterion to be a personal service corporation (PSC). The criterion for a PSC is that professional corporations must be properly structured according to state laws. Also, in order to meet criteria to be a PSC, professional corporations must meet criteria for function and ownership as defined by federal law.
In terms of function, all business within professional corporations must be within specific professions. For example, business must be in engineering, consulting, performing arts, health care, actuarial work, or the law profession. In terms of ownership, all professional corporation stock must be held by current or retired employees of the professional corporation, their estates, or heirs.
The laws that apply to professional corporations are different than the laws which apply to other types of corporations. For instance, professional corporations can have one director or several. Also, professional corporations must be identified by using the initials "P.C." after the name of the business. Another factor is that professional corporations can be part of a larger organization. For example, a physician's professional corporation may be a part of a larger physicians' group.
There is a 35 percent taxation rate on a PSC, as opposed to a tax rate that increases as the amount of money the PSC earns increases. Also, in a PSC, an employee's salary is treated as a business expense that can be deducted. Granted, it is still the case that an employee is taxed on any money earned.
One strength of having professional corporations is the fact that they exist forever once they are established. Also, one can have an employee 401(k) plan and can contribute a larger sum of money than sole proprietors would be able to contribute. In addition, health insurance for employees can be given tax-free.
Disadvantages of having one's own professional corporation include the limitations on the amount that can be deducted due to business losses and the 35 percent taxation rate. Also, retainment of profits in the business could be unhelpful at tax time if the business earns a lot of money. This is a significant tax disadvantage. It is generally recommended that one consult with an attorney or an accountant to determine how to handle this. Nonetheless, having a professional corporation can be helpful in many ways for self-employed professionals.