Professional Entity Benefits
Professional Entity Benefits
Professional Corporation (PC)
As with a typical corporation, shareholders in professional corporations are offered protection from liability for debt of the corporation. The shareholders also have no liability if another owner is guilty of malpractice. However, in the case of malpractice, if a plaintiff can point to the overall corporation's malfeasance in the malpractice, then the professional corporation may be liable.
Another way that liability rules apply differently than they do in a traditional corporation is limits on liability. In the event that one owner is found to have engaged in any practice that could fall under malpractice statutes, then they have unlimited personal liability for their own acts; they do not have liability for the acts of others. The corporation should ensure that it has the proper levels of insurance. Each individual owner should also carry the appropriate insurance policies, such as malpractice or errors and omissions policies.
Professional corporations can deduct similar business expenses as other types of businesses such as fringe benefits for employees, startup and operating costs and equipment purchases. However, there are several tax deductions professional corporations can take advantage that other types of businesses can’t. For example, the salaries and bonuses paid to owners and employees are tax deductible. Fringe benefits that are given to its owners can also be written off as business expenses. Generally, salaries as well as fringe benefits given to owners of other business entities are taxable.
The corporate tax structure permits professional corporations to retain some of its profits for improving their businesses. After the profits are taxed at the company level, professional corporations can retain up to $150,000 (check this figure) from being distributed to its shareholders as dividends. Professional corporations can use the money to finance building renovations, real estate acquisitions, equipment purchases, for example. The pass-through taxation method, which is how general partnerships and sole proprietorships are taxed, flows profits to the owners who report their shares on their individual tax returns. This tax method isn't structured for businesses to retain earnings.
Professional Limited Liability Company (PLLC)
Just like regular LLCs, a professional LLC protects you personally from debts and lawsuits against the business, with one major exception: Most states do not allow liability protection to extend to malpractice claims.
Also, when one of the partners in a PLLC is liable for negligent acts while practicing her profession, the rest of the partners usually do not share in her personal liability. Assuming that they took no part in the negligence, their assets should remain safe.
This provision not only protects your personal assets should your partner accidentally slip up during surgery, but it also keeps your malpractice claims separate so that your premiums don’t rise if your partner screws up. This protection is a huge benefit over operating as a general partnership, in which you are jointly, personally responsible for your partners’ mistakes.
Members are permitted to have different percentage allocations of profits and losses in a PLLC that are prohibited for shareholders in an S Corporation. For example, if 2 licensee shareholders each had a 50% ownership interest in an S Corporation, it would be required to receive 50% of any profits and losses of the corporation. In a PLLC, each licensee member could have a 50% ownership and voting interest but have a 60/40 (or other disproportionate) distribution of profits and/or losses of the PLLC;
Members have far greater flexibility through an operating agreement to define their rights and obligations than can be achieved in the corporation context with bylaws and minutes. A PLLC operating agreement, if properly prepared, would also cover the sale and transfer of any membership interest, methods for valuing an interest, and payment terms. These would not be covered in the formation documents for a professional corporation. A separate shareholder buy-sell agreement would have to be prepared.