A professional corporation is a type of businesses structure through which an owner (or group of owners) operate their business. Like regular corporations, professional corporations are considered incorporated entities, and are thus given certain liability protections that unincorporated entities—such as sole proprietorships and general partnerships—aren’t granted.
While almost any type of business can form a corporation, only certain businesses can form professional corporations. Namely, professional corporations are exclusively for business owners in “professional” occupations. The definition of “professional” varies state-by-state, but generally includes persons of licensed occupations, such as doctors, lawyers, and financial professionals. When these types of professionals choose to incorporate their business, it’s called a professional corporation.
So the question then becomes: which types of firms should form professional corporations? Obviously, only some types of professionals (ie. doctors, lawyers, and financial professionals) are permitted to form these entities, but should they? The answer to this question is multifaceted, and heavily influenced by state-specific regulations.
Liability Protections for Professional Entities: Should I Incorporate my Practice?
Professional corporations, akin to their non-professional counterparts, are considered incorporated entities and, as such, are granted certain limited liability protections by the state in which they operate. In other words, similar to the traditional incorporated business structures (such as corporations and LLCs), professional corporations are considered their own legal entities, with obligations, assets, and debts separate from that of the owners.
This is in sharp contrast to non-incorporated structures, like sole proprietorships and general partnerships. When non-incorporated operations find themselves in debt or legal trouble, owners are personally liable for the obligations of their business. Frighteningly, this means that owners risk their personal assets—things like their home, savings accounts, and other valuables—when their non-incorporated business struggles.
Therefore, the foremost reason why groups of professionals form professional corporations instead of general partnerships is to obtain this important protective layer between themselves and their business.
The liability protections associated with professional corporations are mostly equivalent to liability protections of non-professional corporations, with one key exception: with professional corporations, owners are protected from the claims and debts of their business, unless the legal claim was a result of the owner’s own mistake. Said another way, owners of professional entities remain liable for professional malpractice claims brought against themselves, despite the fact that their incorporated business is properly formed. Although owners aren’t shielded from their own claims, they are protected from the malpractice or negligence of their fellow owners.
The reason for this “limitation” on limited liability is the nature of the work or service being provided by the professional. Reconsider the types of occupations that are commonly considered “professional”: doctors, lawyers, and financial professionals. Notably, these occupations necessitate a professional relationship between an expert and a client. Poor judgment or negligence on the part of the expert can result in severe distress for the client—be it physical injury or financial harm. In these situations, clients may claim malpractice for damages caused by their professional’s actions. In the context of a professional entity, a professional corporation would not shield the owner from this claim.
The Types of Firms that Should Form Professional Corporations
Many attorneys highly recommend incorporation, almost irrespective of the type of occupation. The benefits of converting from a partnership or sole proprietorship into a corporation—namely the legal separation of personal and business obligations—often outweigh the negatives. Nonetheless, when it comes to forming an incorporated entity, the “professional vs. nonprofessional corporation” distinction will depend on your particular occupation and local state regulations.
Generally, laws concerning professional entities vary widely by-state. This means that depending on your state of operation, you may have different filing requirements, different naming conventions, and different entity options when trying to form a professional corporation. Likewise, states don’t agree on what occupations should be considered “professional”. Some of the more common professional occupations include:
- Healthcare Professionals (ie. Physicians, Dentists, Surgeons, Optometrists, Chiropractors, Acupuncturists, and Psychologists)
- Public Accountants
- Financial Professionals (ie. Accountants, Investment Managers, and Financial Advisors)
Importantly, these aren’t nationally-recognized designations. For example, while an architect may be considered a professional occupation in Oregon and Ohio, this isn’t the case in Pennsylvania. Lawyers and doctors are almost always deemed professional occupations (while in some cases, only certain types of doctors are given the professional designation).
Clearly the rules of professional incorporation are not only nuanced, but incredibly state-specific. More often than not, incorporation is a wise decision, but one that must be made with the help of a professional. Most types of firms can form an incorporated structure, but their specific occupation and their local laws will determine whether their corporation is a professional or a non-professional entity.