Today at Functional Lawyer, we are talking about professional corporations, professional LLCs, and other professional entities. What are they? How are they different from regular corporations? Are there any specific naming rules that you have to follow? I will be covering a variety of licensing questions, some protections for you against malpractice, and some taxation rules as well.
Firstly, a professional corporation is a corporation that is formed by licensed professionals whose company’s purpose is to provide the service that they're licensed to practice. To put it simply, it is a group of licensed professionals forming a business.
One of the first things to consider is the naming conventions that are in play when forming a corporation. Most states’ rules vary a little bit here, but at the very least, you may be required to have the initials “PC” for a professional corporation, “PA” for a professional association, or "PLLC" for a professional LLC, as part of your business name. You may also have to include the type of profession that you're going to practice in the name. Examples would include: medicine, law, law firm, accountants, CPA, etc. The point here is to indicate that you're doing something that you are licensed to do and to be transparent about your corporation.
Did you know that there are specific rules in terms of who can actually be in ownership of a professional corporation or professional LLC? This depends on your particular state. Sometimes, everybody who is an owner has to have the same type of licensure. Sometimes, the licensed professionals have to own at least 51% of the corporation, or just have to have a majority of ownership shares. You need to check with your state about who can co-own a professional entity. This is highly important as different states require you to jump through different hoops. Some states like California and New York, among others, require professionals to file and form a corporation or entity that is specifically professional in nature. Other states allow you the option to choose whether you want to file as a professional entity or as the generic version of that entity type, such as a regular corporation or LLC. You can check with your Secretary of State and sometimes with your licensing board as well (although the Secretary of State is usually more helpful for your state's rules, which includes how to file as an entity).
Additionally, they might require that you get a "Certificate of Good Standing" from your licensure board, or otherwise prove that you are who you say you are and that you're licensed to do the thing that you want to do. Again, each state differs. New York, for example, is very odd in that they go through their Board of Education. So before you can file your entity type in New York, you have to get approval from the Board of Education of New York. Similarly, California requires that you get the name approved by the medical board before you can file with the Secretary of State. So, definitely check with your state's rules first so that you are in the clear.
If you had a choice, after seeing all the rules and stipulations, why would you pick a professional entity versus a regular entity? And, why do we form entities at all? There are two, main reasons. One reason is that you will have different taxation treatment for an entity. The second and potentially more important reason is for compensation and limitation of liability. We form a regular LLC or a regular corporation, generally, to shield us personally from the liability or debts of the company. So, if you start a company and then go bankrupt, or if you owe a ton of money and have to dissolve the company, nobody can come after you unless you were acting in fraud. Nobody can really come and get your house or your personal effects; they're limited to the assets of the company. And that's the same if there's a lawsuit or any creditors who are coming to get the assets of the company. It brings peace of mind to know that they usually can't come after your personal assets (car, house, personal bank accounts, retirement funds, etc.). This form of protection is why we form entities in the first place.
Another issue to consider is that if you're in a group with three or four doctors and everybody is practicing medicine, it’s only a matter of time until somebody gets a malpractice suit or the threat of a malpractice suit against them. (If you practice long enough, you'll get at least one in your career.) However, the key thing with professional entities is that you are seen as an owner in the business and the license; you're a licensed professional who owns a share of a professional corporation. In this case, you are actually shielded from the malpractice liability of your co-owners. Normally, something done during the course of a business is imputed to the business, making the business as a whole responsible for any incident or any debt. For example, if an employee is driving to deliver something for the business and gets into a car wreck, that’s the business's liability. This is the case for corporations and the other types of LLC associations as well. However, for professional entities, each individual person is responsible for their own incidents, especially in terms of malpractice.
Imagine that John, who works down the hall from you, was really negligent and gets a malpractice judgment against him for $5 million. It should be up to John and his malpractice carrier to take care of this situation. Thankfully, in a professional entity, this is the case. You, as a co-owner of the business, are not liable for that malpractice suit. (Obviously, if there is gross negligence going on, such as you see John come in stumbling from the night before, clearly drunk or hungover, and you don’t say anything to stop him from performing that open heart surgery that morning, then you could be held in partial responsibility. You could be liable as a co-owner if you know but don't stop something pretty bad.) The bottom line, if you want to shield yourself from liability in terms of the negligence of others, you should choose a professional entity so that you may be responsible for your own actions as a co-owner.
The other reason why we start entities is for tax treatment. By default, professional corporations are taxed like a C Corp, but they are eligible in a lot of respects to apply for S Corp status. S Corp status means that the money coming into the business is not taxed twice. However, there are some additional rules that you have to follow in order to be eligible for S Corp status. Most of us in functional medicine are eligible when we are forming small companies that serve American citizens. It’s important to note that taxation for a professional corporation or professional LLC is no different than a regular corporation or LLC; you still have either double taxation unless you are approved for S Corp status. Check with your accountant to see what Corp status is best for you.
So, to recap, for professional entities, the number one draw is siloing malpractice liability amongst each member who is an owner. Remember, there's not a whole lot of difference between the regular entity type and the professional entity type aside from some naming restrictions and different formation rules. At any rate, you will want to definitely check with your Secretary of State in order to understand the proper way to form a professional corporation in your particular state. Additionally, always check with an accountant to determine your best tax status as well.
Scott Rattigan is an attorney, co-founder of a thriving functional medicine membership practice, and the founder of Functional Lawyer. He is an award-winning writer and speaker who is dedicated to helping functional and integrative medicine doctors succeed in building their dream practice.
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