Professional corporations are used by professionals such as doctors, architects, accountants, lawyers, and consultants. They must meet specific criteria for function and ownership, and are subject to different laws than other types of companies. They have advantages such as existing forever and being able to have a 401(k) plan, but also have disadvantages such as a 35% tax rate and limitations on deductions for business losses.
Professional corporations are often used by professionals such as doctors, architects, accountants, lawyers and consultants. Some places legally require professionals in the professions mentioned to have professional companies. Owning a professional company means that the professionals who own it are, for legal purposes, employees of their own businesses.
For the most part, professional corporations will likely meet the criteria of being a personal services corporation (PSC). The criterion for a PSC is that professional firms are properly structured in accordance with state laws. Additionally, to meet the criteria to be a PSC, professional firms must meet the criteria for function and ownership as defined by federal law.
In terms of role, all businesses in professional companies must be in specific professions. For example, the business must be in engineering, consulting, performing arts, healthcare, actuarial work, or the legal profession. In terms of ownership, all shares in the professional corporation must be held by current or retired employees of the professional corporation, their estates or heirs.
The laws that apply to professional companies are different from the laws that apply to other types of companies. For example, professional companies may have one director or several. In addition, professional companies must be identified using the initials “PC” after the company name. Another factor is that professional companies can be part of a larger organization. For example, a physician’s professional corporation may be part of a larger group of physicians.
There is a 35% tax 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.
A strength of having professional corporations is the fact that they exist forever once established. Also, it is possible to have a 401(k) plan for employees and contribute a larger amount of money than sole proprietors could contribute. In addition, health insurance for employees can be tax-exempt.
Disadvantages of owning a professional business include limitations on the amount that can be deducted due to business losses and the 35% tax rate. Also, withholding business profits can be useless on taxes if the business makes a lot of money. This is a significant tax disadvantage. It is generally recommended to consult a lawyer or accountant to determine how to handle this. However, having a professional corporation can be helpful in many ways for self-employed professionals.
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