Limits on Liability of Professional Corporations

What is Professional Corporation?

A professional service corporation (PC) is a business organisation in which a group of licenced professionals who specialise in a particular field collaborates to provide services. Professional corporations exist to limit the owners’ liability if other owners commit fraud or negligence. To provide services as a legal entity, physicians, engineers, accountants, lawyers, and architects are most effectively organised as professional corporations. While operating similarly to other corporations, it is different regarding liability, taxation, scope, and other related aspects. In addition, the state of incorporation determines which regulations govern the formation of PCs....

How Do Professional Corporations Work?

Organisations organised as professional corporations (PCs) represent licenced professionals (e.g., attorneys, physicians). Limited liability protection is provided to shareholders, who are primarily professionals. Articles of incorporation are required for the formation of PCs, which are supervised by a board of directors and must comply by regulations established by professional licencing boards. In addition to the potential for tax treatment to vary among professional services, share transfers frequently face restrictions....

Examples of Professional Corporation

Example 1: Assume Sid and Mark are professionals who have established a professional corporation. It has been discovered that Sid committed some errors that resulted in losses for some clients, who are now suing for compensation. Because Sid carries the loss’s obligation, he is solely responsible for reducing it for the client if the insurance does not cover it, which would have been the responsibility of both Sid and Mark otherwise....

Requirements of Professional Corporation

Legal entities come in a number of forms, including partnerships, corporations, S corporations, limited liability companies, and so forth. They vary in many different kinds of ways. However, PCs must satisfy specific legal requirements in order to attain the status to which they are qualified. The following requirements relate to the establishment of PCs: All professionals seeking to establish the PC must possess a valid licence to practise their respective fields. It is necessary that the professionals hold citizenship in the state in which they intend to establish the PC. Additionally, their places of practice should have been within the same state. State laws regulate the incorporation process for a PC. Certain states forbid non-professionals from establishing PCs. Moreover, the IRS states many other requirements for obtaining of tax benefits....

How Do You Create a Professional Corporation?

Similar to any other corporation, in order to start operations, some documents must be prepared. It is important to consider possible state-specific laws. However, the general process consists of the following steps,...

Restrictions on the Formation of Professional Corporation

Although most corporations are subject to certain regulations, professional corporations are subject to specific limits....

Limits on Liability of Professional Corporations

Like in a regular corporation, professional corporations protect their shareholders from being responsible for the debts of the company. The partners are also not responsible if another owner does something wrong. In the case of negligence, on the other hand, if the plaintiff can show that the professional company as a whole was careless, then the corporation may be responsible. Limits on liability are another way that liability rules don’t work the same way they do in a normal company. If it turns out that one of the owners did something that could be considered malpractice, they are personally responsible for everything they did, but not for what other people did. The business should make sure it has the right amount of insurance. It is also important for each owner to have the right insurance, like malpractice or mistakes and omissions insurance....

Taxation of a Professional Corporation

PCs are taxed at the rate of 21%, just like other businesses. But for PCs to get this tax rate, 95% of their business efforts must be in the area where they specialise. Additionally, at least 95% of the PC shares should be owned by people who work in the same field or have worked in the past. However, a medical professional company can get some exemptions as long as it meets certain conditions, which are, Tax exemption under Section 501(c)(3) of the Internal Revenue Code (IRC),...

Advantages of a Professional Corporation

1. Limited Liability: Shareholders have limited liability, which means that business bills and malpractice claims against other members can’t reach their personal assets....

Disadvantages of a Professional Corporation

Professional corporations (PCs) have some benefits, but people should also think about the following problems before picking this type of business structure,...

Why Choose a Professional Corporation?

A partnership is when two or more people work together to do business. If there are two or more people in a partnership, however, each person may be responsible for the debts and bad actions of the other partners. The protections for a professional business are the same as those for a regular corporation. But before you start a business, you should check to see what laws are in place in your state. Some states don’t let owners get out of being responsible for each other....

Difference Between PC and LLC

Basis Professional Corporation (PC) Limited Liability Company (LLC) Ownership Owned by licensed professionals, often in specific fields. Owned by members, can include individuals, corporations, or other entities. Members need not be licensed professionals. Liability Protection Provides limited liability protection to shareholders, separating personal assets from business liabilities. Offers limited liability protection to members, shielding personal assets from business debts and legal claims. Management Structure Managed by a board of directors elected by shareholders, with officers handling day-to-day operations. Can be handled by members, so all members have a say in decisions, or by managers, who are in charge of running the business. Formation Formalities Usually includes more paperwork, like filing articles of incorporation and following certain rules. Usually has fewer rules and more freedom in how the organisation is set up and how it runs. Taxation May have specific tax rules for professional services, and the tax rate can be fixed. Offers flexibility in taxation, allowing members to choose between pass-through taxation or corporate taxation. Transferability of Ownership There may be limits on transferring ownership that are written in the partnership agreement. There are fewer limits on transferring of membership interests compared to the transfer of ownership....

Frequently Asked Questions (FAQs)

1. What is a Domestic Proefessional Corporation?...