What is a Professional Corporation? Rules, Structure & Benefits

When it comes to establishing a business, professionals such as doctors, lawyers, engineers, and accountants often opt for a legal structure known as a professional corporation (PC). A professional corporation combines the benefits of a corporation with the flexibility required for professional practices.

In this article, we will delve into the concept of a professional corporation, exploring its structure, advantages, and considerations that professionals need to keep in mind.

Defining a Professional Corporation

A professional corporation, also referred to as a professional service corporation or PSC, is a legal entity formed by licensed professionals to provide their specialized services while enjoying the benefits of a corporate structure. Unlike a traditional corporation, a professional corporation is typically restricted to specific professions, which may vary based on the jurisdiction’s regulations.

The key feature that sets a professional corporation apart from other business structures is that the shareholders of the corporation are required to be licensed professionals within the same field. For instance, in a medical professional corporation, only licensed physicians can hold shares.

Structure and Formation

To establish a professional corporation, professionals must adhere to certain legal requirements, which may vary depending on the jurisdiction. Typically, the process involves:

1. Obtaining Professional Licenses: Each shareholder of the corporation must possess the necessary professional licenses or qualifications to practice in their respective field.
2. Incorporation Process: Professionals need to file the necessary documents, such as Articles of Incorporation, with the appropriate state or provincial authority. These documents outline the corporation’s purpose, structure, and the names of the professionals involved.
3. Shareholder Agreements: Professionals forming a PC often draft shareholder agreements that outline ownership percentages, decision-making processes, and other important aspects of the corporation’s operations.
4. Compliance with Regulations: Professional corporations are subject to specific regulations and restrictions imposed by governing bodies. These regulations aim to ensure that professional standards and ethics are maintained.

Benefits of a Professional Corporation

Professional corporations offer numerous advantages to licensed professionals. Some key benefits include:

1. Limited Liability Protection: Like traditional corporations, professional corporations provide limited liability protection to their shareholders. This means that the personal assets of the professionals are generally protected from the debts and liabilities of the corporation.
2. Tax Advantages: Professional corporations may have access to tax benefits not available to other business structures. For example, they may be eligible for certain deductions and income-splitting opportunities, potentially reducing the overall tax burden.
3. Enhanced Credibility and Perpetual Existence: Operating as a professional corporation can enhance the credibility and professional image of the business. Clients often perceive professional corporations as more stable and trustworthy. Additionally, the existence of the corporation is not tied to the individual professionals, allowing for continuity and succession planning.
4. Flexibility in Ownership and Growth: Professional corporations offer flexibility in terms of ownership and expansion. They allow for the issuance of shares to attract new professionals, making it easier to bring in partners or shareholders. This flexibility facilitates the growth and development of the practice.

Considerations and Limitations

While professional corporations offer several advantages, professionals should also consider certain limitations and factors:

1. Regulatory Compliance: Professionals must adhere to specific regulations imposed by their governing bodies. Failure to comply with these regulations can result in disciplinary actions.
2. Administrative Burden: Operating a professional corporation entails additional administrative tasks, such as maintaining corporate records, filing annual reports, and ensuring compliance with state/provincial requirements. Professionals may need to engage legal and accounting professionals to assist with these obligations.
3. Restricted Scope: Professional corporations are typically limited to specific professions and may not be suitable for all types of businesses.

Final thoughts

In summary, a professional corporation is a legal entity that allows licensed professionals to operate their practices under the protection of a corporate structure. It provides limited liability, potential tax advantages, and a sense of credibility and professionalism to clients. By forming a professional corporation, professionals can enjoy the benefits of a traditional corporation while maintaining the flexibility and compliance required for their specific fields.

However, it is essential to understand and comply with the regulations imposed by governing bodies and be prepared for the administrative responsibilities that come with operating a professional corporation. Overall, a professional corporation can be an advantageous choice for professionals seeking to establish a secure and growth-oriented business entity for their specialized services.