A Professional Corporation vs. an LLC

By Kay Lee

Starting a new business is a big undertaking that requires making many decisions. Once you have developed a vision for the business, you must decide how to structure it. Each state has laws that govern the basic structure and specific rules for each type of business entity permitted in that state. Two examples of common business forms in all states are professional corporations and limited liability companies. PCs and LLCs are popular choices for small businesses. You must determine which business form will best suit your company's needs.

What is a Corporation?

A traditional corporation is a type of business created by a document usually known as the articles of incorporation. This document contains information about how decisions are made within the corporation, how many shareholders the corporation will have, how it will terminate and other information related to the operation of the business. As a separate legal entity, the profits earned by a corporation are taxed at the federal and state level, and the owners are also taxed individually on the income earned from the corporation. Corporations are legal entities separate from the owners. This feature protects the owners from personal liability in the event the corporation is sued; the corporation itself is the liable party and can be sued like an individual. The corporate form protects its owners from personal liability from creditors' claims, tort claims, or other claims resulting from wrongful acts by the business. Without this protection, owners of a corporation would be vulnerable to losing personal assets in a lawsuit against the business.

What is a Professional Corporation?

A professional corporation, designated with PC after its name, is a regular corporation consisting of a group of specific types of professionals. A common example of a professional corporation is a law firm. Generally, the owners of a professional corporation are required to be licensed in the same profession, and states may require the approval of the governing organization for a particular profession, such as the state medical licensing board or state bar, to form a professional corporation. Some states prohibit certain professionals from forming LLCs. For example, Texas does not allow financial planners, patent agents or landscape architects to establish professional corporations.

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What is an LLC?

A limited liability company is an unincorporated business organization that combines the benefit of corporate limited liability with the tax structure of a partnership. The owners of a corporation are shareholders, but the owners of an LLC are members. LLCs are typically managed by their members who are protected from personal liability for the operations of the company. A major benefit of an LLC is that it is taxed in the same manner as a partnership with taxation flowing through the organization to the individual members through their personal income tax returns. This flow-through treatment provides a great deal of flexibility for the LLC's members. State laws regulate the types of businesses that can form as LLCs with certain restrictions, for example, banks and insurance companies generally cannot be LLCs.

Choosing Between a PC and LLC

Since state law dictates specific laws governing business entities, it is important to review the rules of the state where you wish to form a business before deciding whether to form a PC or an LLC. First, determine if your state permits professional corporations for the type of business you wish to operate. If permitted, the biggest difference between a PC and an LLC is the taxation of the business organization. Professional corporations are taxed like traditional corporations -- the corporate profits are taxed and owners are taxed individually on the income earned through the corporation. LLCs are taxed like a partnership, so the earnings of the business flow through the business to the individual members. Taxation occurs at the member level rather than at both the business and individual levels.

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When Is it Better to Form an LLC Instead of a Corporation?

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