Professional Corporations Offer Tax Breaks

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While LLCs and S corporations two terms are often discussed side-by-side, they actually refer to different aspects of a business. An LLC is a type of business entity, while an S corporation is a tax classification. It lets the Internal Revenue Service know that your business should be taxed as a partnership. To become an S-corporation, your business first must register as a C corporation or an LLC. A business must meet specific guidelines by the Internal Revenue Service in order to qualify as an S corporation.

It’s important to check with your local Secretary of State office to determine how S corporations are taxed in your state. Certain provinces and territories (e.g., Ontario and British Columbia) offer more relaxed share ownership roles by family members of specific professionals. For example, in Ontario, physicians and dentists are permitted to have family members (i.e., spouse, adult children, or a trust for minor children) own non-voting shares in the professional corporation. In these situations, you may be able to split income through a corporation by paying dividends to adult family members who are shareholders. The main reason for any professional to consider incorporating is often the significant tax advantages.

The Following Information Applies To Firms Taxed As C Corporations:

Professional corporations are not flexible business structures like partnerships, sole proprietorships or limited liability companies which is why they do not reap the benefits of pass through taxation. An S corporation usually does not pay federal taxes at the corporate level. As a result, an S corporation can help the owner save money on corporate taxes. The S corporation allows the owner to report the taxes on their personal tax return, similar to an LLC or sole proprietorship.

Many states require that a registered agent is to be assigned for the S corporation. The agent should receive all legal documents and correspondence between state and federal agencies. To become an S-corporation, your business first must register as a C corporation or an LLC and meet specific guidelines by the Internal Revenue Service in order to qualify. There are some other matters to take into account when deciding whether to incorporate a professional practice.

Tax Benefits Of A Limited Liability Partnership

Either way, they protect their owners from personal liability in case of legal judgments or debt. Someone might still sue an individual owner for that owner’s negligence or malpractice, but the other owners are not held liable for the failure or malpractice of any other co-owner.

Of course, the shareholder/employees still must pay personal income taxes on the income they receive. A limited liability company is easier to establish and has fewer regulatory requirements than other corporations. LLCs allow for personal liability protection, which means creditors cannot go after the owner’s personal assets. An LLC allows pass-through taxation, meaning business income or losses are recorded and taxed on the owner’s personal tax return.

Professional Corporations Offer Tax Breaks

Professional corporation owners who work as employees may not have liability protection against malpractice or other negligence claims brought against them in their capacity as licensed professionals. Having personal service corporation status allows owner-employee wages to be tax-deductible, reducing the corporation’s tax liability. The professional corporation can then meet IRS qualifications to have beneficial tax status as a personal service corporation. While the IRS requires that other corporations use an accrual accounting method for tax reporting, professional corporations are permitted to use the cash accounting method, with no limit on their taxable income. This means the PC can defer the reporting of income that is taxable until the year in which it receives payment for services .

Pay some salary, especially if there is only one shareholder and the income is from such shareholder’s services. A professional corporation, or PC, is a type of business organization used by members of certain professions who seek the benefits and protections of a corporation but who are not permitted to form a traditional corporation. In other states, the option to form a professional limited liability company exists. Professional corporations can deduct any losses that occurred from the sales or exchanges of properties between the employee owners and the corporation.

Once established, many states require LLCs to file an annual report, which the state may charge a fee. The corporation must establish a tax year based on the calendar or get IRS approval of an alternate calendar. Also, you may lose the privileges of a corporation if your client is only one person or company. For instance, the IRS will not treat your practice as a corporation if, as a doctor, you work for a single hospital. No deduction is allowed for entertainment, amusement or recreation; membership dues for a club organized for business, pleasure, recreation or other social purposes; or a facility used in connection with any of the above. PSCs must comply with some other tax regulations, including using the calendar year as their fiscal year in most circumstances.

Professional corporations are groups of professionals who register with their state as this type of business entity. Some states require the professionals to be certified by the profession’s state regulatory board, and others limit the types of professionals that can form PCs.

What Is Better: An Llc, C Corp, Or An S Corp For An Architect?

Further, an S Corporation may use either accrual or cash basis accounting practices. Access to your client information, secure messaging with Manulife, submit new business online, access compensation statements, view your recent transactions and top accounts. Get everything you need for business formation and compliance in one place. No need to spend hours finding a lawyer, post a job and get custom quotes from experienced lawyers instantly. Meals provided for the convenience of the employer, through an eating facility or other de minimis food and beverage is no longer 100 percent deductible, but now falls into the 50 percent category. First, the PSC must have met the requirements of the testing period for the year filing as a PSC. If an LLC, or Limited Liability Company, seems like the ideal vehicle for your side business, you may be wondering if you can form an LLC while employed at another job.

PCs are subject to a 35% flat federal tax rate on their corporate earnings, which can be a disadvantage since C corporations are taxed at 15 to 34% for their earnings below $100,000. With an LLC or partnership, income is passed through to the members and partners who pay personal tax rates on the income, with rates between 10 and 35%.

Implications Of Electing As An S Corp

They can also deduct losses from the sale or exchange of property between the corporation and employee-owners. Additionally, PCs can create retirement plans and 401s for employees with higher contribution limits than unincorporated businesses are permitted to use. Professional corporations tend to be classified by the Internal Revenue Service as “personal service corporations”. Prior to incorporating a professional corporation, you will first need to check which professions are required to form professional corporations in your presiding state. Investors who buy shares of a professional corporation and become shareholders are fully shielded from the personal liability with regards to debt that is incurred by the corporation.

• PLLCs and PCs differ in some of their business compliance requirements and income tax treatment.
• LLCs protect the owners’ personal assets from losses, company debts, or court rulings against the company.
• The only distributions used should be scheduled periodic distributions based on profits of the corporation.
• Some of these guidelines include adopting bylaws and conducting annual meetings.
• Because they are a corporation and not a partnership, PCs can completely deduct any business expenses or interest the corporation owes to employee-owners.

Also, employees of an S corp are also members, which means they’re eligible to receive cash payments via dividends from the company’s profits. Dividends can be a great incentive for employees to work there and help the owner attract talented workers. Personal service corporations also pay corporate taxes at the 21% rate, but they give a benefit to the business that traditional corporations don’t have. Having PSC status allows the owners working as employees to be paid a salary, and these salaries are deductible as business expenses, reducing the corporation’s tax liability.

How To Form An Llc

For example, a physician found guilty of malpractice is personally responsible for damages awarded by the court. If a C corporation qualifies as a small business corporation, it can elect to be taxed as an S corporation by the IRS.

• Both are corporations and both are owned by professionals such as attorneys, CPAs, architects, doctors, and others.
• While it is true that a C corporation will only pay tax at 21 percent, most professional service firm owners want to draw most of the income out of the business each year.
• Only certain types of professionals can have personal service corporation status.
• If you have a professional corporation, you may qualify for pass-through taxation by electing to be treated as an S corporation by the IRS.
• Further, an S Corporation may use either accrual or cash basis accounting practices.

A professional corporation and a professional LLC are business entities that licensed professionals may wish, or be required, to form. S corporations have always had an incentive to keep shareholders’ salaries lower and shareholders’ Schedule K-1 income higher. While the Act makes that even more advantageous, the IRS has the ability to reclassify amounts to wages based on reasonableness and charge the entity payroll tax penalties. The best advice is to make sure the shareholders’ salaries are reasonable in the marketplace.

Professional Corporation Tax is the tax levied on corporations offering professional services such as health clinics, dental offices, architectural practices, and others. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments. This deduction generally is not available to specified service businesses, such as law firms, accounting firms, medical practices and consulting firms. It appears that the exclusion for professional service firms from this deduction does not apply to engineering and architecture firms.

Keep in mind, however, that a professional may not be able to recover the Goods and Services Tax/Harmonized Sales Tax (GST/HST) charged to the professional corporation by the management company if the professional can’t claim an input tax credit. In addition, a professional can choose between taking salary or dividends as compensation from a corporation. In an unincorporated business, the profits are simply taxed as business income on the business owner’s personal tax return. Now let’s look at some of the possible advantages and disadvantages when comparing the professional limited liability company and professional corporation structures. Keep in mind that which structure will best serve a business will depend on many factors. That’s why I strongly encourage business owners to discuss all of the variables with their attorney and a trusted tax expert.

• PLLC members must also pay self-employment taxes on their net earnings from the business.
• A corporation might be able to raise cash from venture capitalist firms, which provide money to businesses in exchange for a share of the profits.
• As stated earlier, an LLC gives the owner or owners limited liability, which means that each owner is not personally liable for any company related lawsuits or any debts that belong to the company.
• In regular corporations, shareholders are absolved and protected from personal liability.
• A PC is a corporation composed of specific types of professionals, set up according to state law.
• An S corporation eliminates the double taxation of income and 35% flat rate for C corporations.
• Forming a PLLC involves filing Articles of Organization with the state, and incorporating a PC involves filing Articles of Incorporation.

A board of directors is an elected group of individuals that act as a governing body representing the shareholders. The board is required to meet at regular intervals and keep minutes for the meetings. The board is also required to establish policies for the management team. Issuance of stock for the S Corporation can be in the form of common or preferred stock.

How The Tax Cuts And Jobs Act Impacts Professional Service Firms

It’s important to check with your local state, county, and town offices to determine if there are business licenses and permits that need to be filed. Depending on the type of business that you’ll be operating, your state may require a permit or license to be in place before you can begin operating your business. Also, if the LLC will be selling goods that are subject to a local sales tax, you’ll need to file with your local tax office so that you can collect the sales taxes and remit them to the state.

Some firms may have segments of their business that might not be considered the “practice of law” or other profession that may be conducive to being spun out into a separate entity. If the new entity is not in the professional practice and is not considered a consulting business, then the partners may be able to take advantage of the pass-through deduction for that segment of the business. Because they are a corporation and not a partnership, PCs can completely deduct any business expenses or interest the corporation owes to employee-owners.

What Are “articles Of Incorporation” For An S Corporation?

Another advantage available to professional corporations is perpetual existence. Unlike sole proprietorships and partnerships—which legally dissolve when an owner dies or leaves the company—professional corporations can continue operations without interruption if a shareholder/employee dies or withdraws. Another advantage is that professional corporations may enable shareholder/employees to avoid personal liability for another employee’s negligence. In most cases, one owner is liable for another’s actions only if he or she would have been liable as a shareholder of a regular corporation. In contrast, all members of a regular partnership are exposed to personal liability. Like the LLC and C corporation business structures, PLLCs and PCs may have one or more owners.