Professional vs. Personal Corporation
The terms Professional Corporation (PC) and Personal Service Corporation (PSC) are often confused. Both are corporations and both are owned by professionals such as attorneys, CPA's, architects, and others.
A professional corporation is a business entity composed of specific types of professionals, set up according to state law. A personal services corporation is a taxing entity set up under the regulations of the IRS. But there is much more to the differences between these two types of businesses.
What Is a Professional Corporation?
A professional corporation (PC) is a corporation of professionals, organized (incorporated) under the laws of a specific state. In some states, some professionals are permitted to form corporations under specific regulations, to allow the professionals to have the benefit of a corporation while limiting liability in certain situations.
In a corporation, the shareholders and officers are free from personal liability, but this would be a problem for a corporation formed by professionals if they formed the corporation in order to absolve themselves of responsibility for their professional actions (malpractice).
A professional corporation must form a corporation within a state. It is not an LLC or a partnership, and it is taxed as a corporation. A PC is taxed like other corporations at the current flat rate of 21 percent. The owners perform work in their professional capacity as employees; this work must be fairly compensated and it is taxed at the employee's tax rate. The owners pay FICA tax (Social Security/Medicare tax) as employees, not self-employment tax.
A PC can elect S corporation status, in which case the profits are passed on to shareholders.
Some Characteristics of a Professional Corporation
In each state, specific types of professionals are allowed, and in some states required, to form professional corporations. Specific professions include accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts. Different states have different lists of professions that can form a professional corporation. Check with your state's business division for more information.
The PC must identify itself as a "PC" or "P.C." in its name, and all owners must be in the same profession, and all owners must be licensed in the state. Some states require that the professional corporation must have approval from that state's licensing board.
Perpetual Existence of a PC
A professional corporation may continue if an individual shareholder or employee dies or leaves the company, while a partnership may need to be dissolved if this event happens.
Liability Protection of PCs
The other advantage is that the PC form does not allow professionals to be free from personal liability from the result of his or her professional actions, but it does allow other shareholders or directors to be protected from the actions of another. This is typically the reason professionals form PC's.
Taxing Professional Corporations
The main disadvantage of the professional corporation is that income is taxed at the corporate tax rate of 21%. As noted above, the employees pay tax on their income as employees.
What is a Personal Service Corporation?
A personal service corporation (PSC) is a specific taxing entity recognized by the IRS. The IRS requirements for a personal services corporation are (over-simplified) as the principal activity must be providing personal services, in the fields of
accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and performing art.
Also, to qualify as a PSC the employee-owners must "own more than 10% of the fair market value of its outstanding stock."
Taxing Personal Services Corporations
A personal services corporation is taxed at the current 21% flat corporate tax rate.
Personal services corporations must comply with some specific tax regulations, including having a calendar year fiscal year. They must also adhere to certain passive activity regulations, meaning that corporate officers must actively participate in the business.
in the same way as Professional Corporations, the business can pay shareholders for their work as employees, taking a deduction for employee wages and benefits, and reducing corporate income.
PSC and PC vs Other Business Types
Remember that both of these entities are corporations. They are not partnerships or limited liability companies (LLC's). Don't confuse a Professional Corporation or Personal Service Corporation with a Limited Liability Partnership, Professional Limited Liability Company, or a Limited Liability Company (LLC), which are different types of entities.
The information in this article and on this site is intended to be general in nature and not tax or legal advice. Each individual business is unique, and taxes and regulations are always changing. Consult both your tax and legal advisors before making any changes to your business or attempting to set up a specific legal business type.