What Is A Professional Corporation?
What is a professional corporation? A professional corporation is a specific form of business entity that most licensed professionals must use instead of a classic corporation or LLC.
California is considered one of the least business friendly states in the nation. This bias certainly extends to professionals in the state. The state government has dictated that, as a matter of law, professionals should not be allowed to form limited liability companies or traditional corporations for their practices. The reason for this is the state does not want professionals to be able to hide behind these entities if a client or patient alleges the professional performed in a negligent manner. Bill Gates is shielded from personal liability for the debts of Microsoft, but you are not if you commit malpractice.
A person defined as a professional in the state of California may only form a professional corporation. They may designate their professional corporation as either a "C" or "S" entity for tax purposes. The "best choice" used to be fairly clear, but has changed through the years. Now an analysis of one's business needs to be done to ascertain the best choice. As always when discussing tax issues, you should consult with your CPA to make the best determination for you given your overall tax situation.
Okay, so what exactly is a professional corporation? It is very similar to a traditional corporation with one huge exception. The professional corporation does not protect your personal assets from a claim of malpractice. The entity does provide protection, however, for other areas. An example will help explain the difference.
Assume I am a primary care physician. I form a professional corporation for my practice. I then have two disputes arise concerning my practice. One is a patient claiming I failed to diagnose a condition, an act of malpractice. The second is a dispute with my office landlord over an air conditioning system that is on the fritz and turning my office into a sauna. If I lose the malpractice claim, I am personally liable for the judgment. If I lose the case against the landlord, only the assets of the professional corporation are at risk and I cannot be held personally liable for the judgement.
So, why would anyone form a professional corporation? The answer is there are tax benefits to doing so. Moreover, the lack of protection from liability is taken care of by caring malpractice insurance, just as you would when practicing as a sole practitioner. In short, it makes sense to file as a professional corporation if you are a professional in California.
What is a professional corporation? In California, at least, it is an example of just how unfriendly the political climate is for professionals and businesses. If you are interested in forming a professional corporation in California, please contact me at 619-637-6043 for a consultation.