WHAT'S A PROFESSIONAL SERVICE CORPORATION
A Professional Service Corporation (PSC), also known as a Professional Corporation (PC), is a legally recognized business structure designed for licensed professionals who provide specialized services. This corporate entity allows professionals to operate within a formal business framework while benefiting from corporate protections, tax advantages, and liability limitations.
Many states require professionals in regulated fields to form a Professional Corporation rather than a standard business entity. These corporations ensure that licensed practitioners comply with industry regulations while gaining financial and legal benefits.
Who Can Form a Professional Service Corporation?
A Professional Service Corporation is typically restricted to individuals who hold professional licenses. Some of the professions that qualify include:
- Medical and Healthcare Professions – Physicians, dentists, chiropractors, pharmacists, veterinarians, registered nurses, optometrists, podiatrists, and mental health practitioners.
- Legal and Financial Professions – Attorneys, accountants, financial advisors, and auditors.
- Engineering and Design Professions – Architects, engineers, surveyors, and interior designers.
- Therapy and Wellness Professions – Physical therapists, speech-language pathologists, occupational therapists, respiratory therapists, acupuncturists, and athletic trainers.
- Social and Psychological Services – Psychologists, social workers, and counselors.
In most cases, ownership of a Professional Corporation is limited to individuals licensed in the same profession. This means that only licensed professionals or professional entities within the same field can hold shares or membership interests. However, non-licensed employees, such as administrative staff and assistants, can still be hired by the corporation but cannot hold ownership rights.
Why Form a Professional
Corporation?
Many professionals initially operate as sole proprietors or partnerships, but these structures offer little liability protection and limited tax advantages. By incorporating as a Professional Service Corporation, professionals gain access to substantial financial and legal benefits that enhance their practice’s long-term stability.
1. Limited Liability Protection
One of the most significant advantages of a Professional Corporation is personal liability protection. While professionals remain personally responsible for their own malpractice or negligence, they are not liable for the malpractice of other shareholders within the corporation. This structure shields individual practitioners from:
- Business debts
- Contractual obligations
- Employee-related lawsuits
2. Significant Tax Advantages
A Professional Corporation provides several tax benefits not available to sole proprietors and partnerships. Notable advantages include:
- Full Deduction of Health and Insurance Expenses – Unlike sole proprietors, a Professional Corporation can fully deduct health and accident insurance costs for employees and their families. This includes medical reimbursements, disability insurance, and life insurance premiums.
- Dividend Tax Deductions – A Professional Corporation can deduct up to 80% of dividends received from a taxable domestic corporation. In contrast, self-employed professionals must report 100% of dividends as taxable income.
- Lower Capital Gains Tax on Stock Sales – When selling stock in a Professional Corporation, capital gains may be taxed at a maximum rate of 28%, compared to 39.6% for self-employed professionals selling ownership interests in a private practice.
3. Improved Business Credibility and Growth Opportunities
A Professional Corporation enhances a practice’s credibility and financial stability, making it easier to:
- Attract higher-value clients and contracts
- Qualify for business loans and financing
- Expand operations through partnerships or additional practitioners
- Transfer ownership through stock sales, ensuring business continuity
For professionals planning for long-term success, forming a Professional Corporation offers structured growth, tax efficiency, and legal security.
How to Apply for 501(c)(3) Tax-Exempt Status
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Step 1: Verify State-Specific Requirements
Each state has different rules for forming a Professional Service Corporation. Before proceeding, check with your state licensing board to confirm:
- Whether your profession requires a Professional Corporation.
- Specific naming requirements (some states require "PC" or "PSC" in the business name).
- Any additional licensing or registration requirements.
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Step 2: Choose a Business Name
The name of a Professional Service Corporation must:
- Be unique and distinguishable from other businesses in the state.
- Comply with state naming regulations (some states require the inclusion of "Professional Corporation" or "PC").
- Reflect the profession of the corporation (e.g., "Smith & Associates Dental PC").
- Perform an entity name search to confirm availability before filing incorporation documents.
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Step 3: File Articles of Incorporation
To establish a Professional Corporation, file Articles of Incorporation with the state business registration office. This document typically includes:
- The corporation’s name and business purpose
- Names and addresses of the incorporators and board of directors
- A statement confirming that the business will provide licensed professional services
Some states require additional approval from licensing boards before the incorporation process is finalized.
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Step 4: Obtain an Employer Identification Number (EIN)
An Employer Identification Number (EIN), issued by the IRS, is required for:
- Filing federal and state taxes
- Opening business bank accounts
- Hiring employees and processing payroll
The EIN serves as the corporation’s official tax identification number.
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Step 5: Draft Corporate Bylaws and Issue Shares
Corporate bylaws outline the internal governance structure of the Professional Corporation. These should include:
- Procedures for shareholder meetings and voting
- Rules for adding or removing shareholders
- Operational guidelines for decision-making and financial management
Once the bylaws are in place, shares must be issued to qualified professionals, ensuring compliance with ownership restrictions.
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Step 6: Comply with Ongoing Legal and Tax Requirements
After incorporation, a Professional Corporation must meet state and federal compliance requirements to maintain legal standing. This includes:
- Filing annual reports with the state business registry
- Paying corporate taxes and complying with IRS tax regulations
- Maintaining professional licenses and permits
Failure to meet these obligations can result in penalties, fines, or dissolution of the corporation.
Is a Professional Service Corporation Right for You?
For licensed professionals seeking tax efficiency, liability protection, and business growth opportunities, forming a Professional Service Corporation is a strategic decision. This structure provides
Stronger financial protections than a sole proprietorship or partnership
Access to corporate tax benefits, reducing taxable income and expenses
Increased business credibility, making it easier to attract high-value clients and contracts
Given the long-term benefits and cost-efficiency, forming a Professional Corporation is a smart move for professionals looking to protect their practice, optimize tax savings, and ensure business longevity.
Is a Professional Service Corporation Right for You?
We specialize in forming and managing Professional Service Corporations, ensuring compliance with state and federal laws. Our services include:
- Filing Articles of Incorporation and obtaining state licensing approvals
- Assisting with EIN registration and tax compliance
- Drafting corporate bylaws and governance documents
- Providing ongoing legal support to maintain corporate standing
If you're ready to form a Professional Service Corporation, let us handle the paperwork and compliance while you focus on growing your practice! Perform an Entity Lookup to check name availability and begin the incorporation process.