Professional's Guide to Business Incorporation
Incorporation offers small businesses and their owners a slick way to reduce both legal liability and income taxes. But the rules for incorporating a professional practice can be tricky. Fortunately, one can make incorporating a profession easier by following five simple tips:
Tip #1: Verify You Need a Professional Corporation or Professional Service Corporation
State law determines whether a professional in your field can form a regular corporation or (alternatively) needs to form a professional corporation or a professional service corporation.
Accordingly, your first business incorporation step is to figure out whether you need to incorporate as a professional corporation.
You can typically answer this "professional corporation versus regular corporation" question by telephoning the state government agency or affiliated organization that grants your professional license. If you're a physician, for example, you probably call the state medical board. And if you're a lawyer, you probably call the state bar association.
Note: You can also look at what other local professional peers are doing. But be careful! Sloppy professionals sometimes form a regular corporation when by law they're really supposed to form a professional corporation--A mistake that usually reduces the liability protection that the professional corporation provides.
Note: I provide a more detailed discussion of professional corporations in the FAQ at my Fast Easy Incorporation Kits website. See, for example, this FAQ article.
Tip #2: Clearly Designate Your Corporation as "Professional"
Usually, you incorporate a profession in the same basic way as you incorporate any other business. You simply file articles of incorporation with the secretary of state's corporations division.
However, the naming rules for professional corporations differ from those for regular corporations.
A regular corporation identifies itself as a corporation by using an acronym like "Inc" or "Corp" or by using a phrase like "corporation" or "incorporated" as part of the name.
A professional corporation, in contrast, needs to use an acronym like "PC" (which stands for professional corporation) or "PS" (which stands for professional service corporation) or the phrases "professional corporation" or "professional service corporation."
Check with your secretary of state to determine which phrases and acronyms are acceptable in your state.
A related tip: If you will practice professionally in more than one state, you should verify your professional corporation's name works in all the states in which you'll operate because the naming rules do differ between the states.
Tip #3: Confirm Shareholders Possess Professional Licenses
A quick point: The owners of a professional corporation generally need to hold appropriate professional licenses in order to be shareholders in the corporation.
For example, a professional corporation that practices dentistry must be owned by dentists. A professional corporation that provides civil engineering services must be owned by professional engineers.
Tip #4: Verify You Follow Any Other Naming Rules for Your Profession
In same states for same professions, the licensing state agency also has other naming requirements for professional corporations. For example, the name or names of the shareholder or shareholders owning the corporation and practicing via the corporation may need to be used in the corporate name.
Research this possibility by calling your state licensing entity--and then carefully follow the rules they provide.
Tip #5: Secure Professional Liability Insurance, If Required
A final and often missed business incorporation task concerns securing professional liability insurance.
Some states require that professional corporations acquire a liability insurance policy in order to receive legal liability protection from incorporation. State law, for example, might require the shareholders or the corporation to acquire at least one million dollars of insurance or bonding coverage.
Be sure to check for this possibility--and then talk with your insurance agent or your professional association about getting any required coverage.
About the author: Seattle tax accountant Stephen L. Nelson taught the S corporation capstone course in Golden Gate University's graduate tax program. A CPA for more than three decades, Nelson holds an MBA in finance from the University of Washington, an MS in taxation from Golden Gate University, and a BS in accounting from Central Washington University.