Both a professional corporation (PC) and limited liability company (LLC) are incorporated legal entities. That means they are subject to state registration and annual renewals.
However, professional corporations are recognized only in certain states and reserved for some professions, whereas any type of business can form an LLC.
LLCs also enjoy more flexible tax treatments. But forming a PC offers some tax advantages as well. Both LLCs and PCs provide personal liability protection, but which one is better?
This guide should help you decide.
Table of Contents:
- What is a professional corporation (PC)?
- What is a limited liability company (LLC)?
- PC vs. LLC: the main differences explained
- Conclusions
- Commonly asked questions (FAQ)
What is a professional corporation (PC)?
A professional corporation is a legal entity created by a group of professionals like doctors, accountants, and architects.
A professional corporation or PC is governed by the laws of the state where it's formed. Shareholders of a PC have personal liability protection against both corporate debts and negligent acts of other professionals.
This added protection is valuable for professionals working in industries susceptible to malpractice like medicine or law.
Who can form a professional corporation?
The professional corporation is an incorporation structure preferred by highly skilled workers who’d like to start an independent practice rather than work a corporate job.
For example, three CPA accountants may want to start a joint practice and provide accounting and tax services. Forming a PC would make perfect sense.
Most commonly, the following professions are eligible to form a PC:
- Accountants
- Architects
- Attorneys
- Engineers
- Physicians and medical professionals
For example, some states, such as North Carolina, allow corporations to elect this status to render professional services within a single profession. But the state poses no limits on what they consider to be professional services.
Is a professional corporation an S Corp?
A professional corporation (PC) is a business entity type, whereas an S-corporation is a tax classification.
PCs can elect to be treated as S-corps for federal tax purposes.
The benefit of electing S-corp status for a PC is avoiding double taxation, where profits are taxed at the corporate level and again when shareholders receive distributions.
However, you’ll need to qualify as a small business.
What is a limited liability company (LLC)?
Limited liability companies (LLCs) are another type of incorporated business entity. Owners are protected from personal liability. The LLC formation process is simple and cost-effective.
However, this entity type also requires annual maintenance, such as registration renewal in the state. Though LLCs are treated as pass-through business entities for federal taxes, some states also impose extra franchise taxes on LLCs.
LLCs can have an unlimited number of members, and filing requirements vary by state.
LLCs have many benefits, but complexities like ownership changes make this business structure less attractive for some.
PC vs. LLC: the main differences explained
The two main differences between LLC and PC are eligibility criteria and taxation.
For example, North Carolina prohibits licensed professionals from forming LLCs to render their services.
Instead, they can opt for either a PC or a PLLC (professional limited liability company). Since both PC and PLLCs offer better individual liability protection for each member and protect them against the actions of one another, the requirement makes sense.
LLC members can run the business without any specific skills or certifications. Each owner in a PC must be a licensed professional to operate.
Another difference between a PC and LLC is in how the entities are taxed.
By default, LLCs are disregarded for tax purposes, and members report all business income on personal tax returns. An LLC can also elect to be taxed as an S-corp or C-corp.
A PC is taxed on the entity's corporate profits. If those profits are later distributed to shareholders, they are taxed again.
1. Company formation: PC vs. LLC
Both PC and LLC organizers must file the necessary paperwork with the secretary of state to form a new entity.
LLC owners file articles of organization, and PC owners file articles of incorporation in the state where they’ll do business.
The articles must specify the corporation’s services, and each owner needs to have a license or certification to provide the services.
The business name needs to be distinguishable from other businesses and include “LLC” or “PC” or some variation in the title.
Filing fees vary by state law, and additional documents or fees may be required.
For example, the cost to form a professional corporation or LLC in North Carolina is the same: $125.
Note: The actual business costs may be higher since you can be asked to pay extra for name reservation, registered agent appointment, affidavit of publication, etc.
LLCs and PCs have similarities in how they are formed, but professional corporations require additional steps.
In addition to the name reservation, registered agent selection, and filing articles, PC shareholders must also:
- Appoint a board of directors
- Create corporate bylaws and records
- Hold regular board meetings
2. Operational and maintenance costs: LLC vs. PC
Annual operating fees vary by state for both LLCs and PCs. While many states require annual registrations or franchise taxes for LLCs, some states are free to file while others can be hundreds of dollars.
An LLC in Mississippi can renew annual reports for as low as $25, while an LLC in California must pay hundreds of dollars in yearly franchise taxes to do business in the state.
How much does it cost to start a professional corporation?
Incorporating a professional corporation in your state can cost up to a few hundred dollars.
Here’s a comparison of professional corporation formation costs across different states:
Business owners can submit documents on their own or retain a company to process the formation documents, including the name reservation, filing articles of incorporation with the state, and delivering your documents.
Some states require PCs to file annual reports and pay applicable state fees. Failure to do so can result in shareholders’ suspension from providing services.
Practitioners must also pay licensing fees and renew credentials each year.
CPAs, for example, must renew their CPA license annually and complete the required continuing professional education requirements.
Licensing fees average $300 and can be hundreds more if penalties are added for late renewals.
3. Taxation: PC vs. LLC
The default tax classification of a PC is a C-corporation. Meaning, you’ll have to pay corporate taxes on profits. If the profits are distributed to owners, then they will also pay income taxes. Essentially, this is called double-taxation.
The better news is that PC owners can elect to be taxed as an S-corporation by filing Form 2553 with the IRS. Doing so allows shareholders to pay less tax and keep more profits.
Shareholders must all agree to be taxed as an S-corporation and file Form 1120S each year, even though profits and losses are passed to shareholders and taxed at their individual rates.
LLCs are attractive to business owners because of the flexibility in how they are taxed.
Depending on the number of members, LLCs have default tax classifications. A single-member LLC is a disregarded entity to the IRS and taxed as a sole proprietorship. A multi-member LLC is taxed as a partnership but can also elect to be taxed as a C-corporation or S-corporation.
Choosing to be taxed as an S-corporation allows LLC members to pay less tax. They’re instead considered employees of the corporation and don’t pay self-employment taxes. An LLC taxed as a C-corporation means members become shareholders and don’t pay tax on their profits.
The corporate earnings are taxed at the corporate rate and again if distributed to shareholders as dividends.
If the company plans to hire employees or conduct business in other states, an Employer Identification Number (EIN) and sales tax permit may be required.
Can a professional corporation be taxed as an S Corp?
Yes, a professional corporation can elect to be taxed as an S-corporation if it meets the eligibility criteria.
Instead of paying corporate tax rates, shareholders will pay their individual rates on profits. Electing S-corporation status with the IRS allows the business to avoid double taxation that's imposed on corporations.
Conclusions
Although PCs and LLCs share many features, they are different types of entities.
Only licensed professionals providing similar services can form a professional corporation. Doing business collectively without taking on other shareholders’ liabilities is a major advantage to forming a professional corporation.
LLCs have many benefits as well, including the simplicity of forming the entity. Members don’t have as many reporting or governance requirements as PC shareholders. LLC members are all equally liable for both their negligent acts and the debts of the business.
Consult an attorney or CPA before choosing the best legal entity for your business.
Commonly asked questions (FAQ)
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Last updated: Apr 2024