The Difference Between a C-Corporation & a Personal Services Corporation

By Etta Mills-MacDonald

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.

Definitions

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.

Business Activity

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.”

Ready to incorporate your business? Get Started Now

Owner Participation

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.

Ownership Percentage

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.

Ready to incorporate your business? Get Started Now
Differences Between Sole Proprietorship, Partnership, & Corporation

References

Related articles

What Is the Difference Between a Nonprofit and a Mutual-Benefit Corporation?

When you think of a "nonprofit," you likely envision an organization that provides a public service, such as feeding the hungry, and accepts tax-deductible donations. However, this is only one type of nonprofit entity. A mutual-benefit nonprofit is a type of nonprofit corporation that works for the betterment of a select group of members, rather than for the benefit of the public.

What Is an LLC License?

A limited liability company is a type of business structure that shields the owners of the company from personal liability for the financial dealings of the operation. An LLC does not pay federal taxes since the profits are only reported on the owner's tax return as personal income. The creation of an LLC is governed by state law and members must file certain documents with the appropriate state department to gain approval to operate as an LLC.

Can a Corporation Be a Member of an LLC?

A limited liability company, or LLC, is a type of business organization authorized by state statute. All state LLC statutes permit other types of business entities, such as a corporation or partnership, to serve as a member of an LLC, and usually place few restrictions on the ability of a corporation to be an LLC member.

LLCs, Corporations, Patents, Attorney Help

Related articles

How to Obtain a Copy of a Filed Sub S Corp Election

An eligible corporation or entity can elect to be an S Corporation by filing Form 2553 with the Internal Revenue ...

Corporation vs. Officer vs. Owner

A business that operates as a corporation generally drafts bylaws – a document that governs all aspects of the company. ...

Professional Corporation Tax Advantages

For firms whose main source of revenue is from the provision of professional services, many states allow the business ...

Can a C-Corporation Be a Partner in a Partnership?

Typically, a C corporation is allowed to be a partner in a partnership. However, as is often the case in corporate ...

Browse by category
Ready to Begin? GET STARTED