A corporation is an independent legal body that is taxed separately from its owners. With proper setup, a corporation can provide tax advantages and shield its owners from liability for its debts, negligence and other legal obligations. All types of corporations are formed under state law by filing articles of incorporation with the state agency responsible for regulating businesses. In addition to general corporations, there are several types of specialized corporations, including personal service corporations. These businesses are either registered under state law or operate under the rules set out by the Internal Revenue Service governing their restricted ownership and management provisions.
C corporation is an IRS classification that governs the majority of general corporations. The C refers to the chapter of the federal tax code that controls the way the corporation pays taxes. A personal service corporation is a specialty corporation that receives certain tax benefits if it can meet the IRS ownership requirements. A corporation’s owners are called shareholders because they own the stock of the corporation.
A C corporation can be formed for any purpose, while a personal service corporation must be formed to deliver personal services. The IRS defines personal services as including “any activity performed in the fields of accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and the performing arts.”
Shareholders of a C corporation are free to participate in the daily operations of the business if they choose, or they can hire officers and other employees to run the business for them. A personal service corporation has far stricter requirements for owner participation than a C corporation. The IRS requires the shareholders of a personal service corporation to also be employees of the corporation. These shareholders must perform more than 20 percent of the corporation's services. For example, a physician who is the sole owner of her medical practice as a personal services corporation must personally perform greater than 20 percent of the medical services provided by her practice.
IRS rules allow the shareholders of a C corporation to own any percentage of the business, while the employee-owners of a personal service corporation must own more than 10 percent of the fair market value of its outstanding stock. Outstanding stock consists of all shares that are available to investors, including shares held by the company's owners.