Professional Corporations (PCs) vs. Limited Liability Companies (LLCs)
Professional corporations (PCs) and limited liability companies (LLCs) are two types of business structures. As a business owner, choosing a business structure is one of the very first decisions you’ll make, so for tax and liability purposes it’s important to know the difference.
Here we compare two types of business structures: PCs and LLCs.
Business Structure: Professional Corporation (PC)
Professionals in certain occupations benefit most from this business structure, including attorneys, doctors, architects, accountants, engineers, and performing artists.
The purpose of this business structure is for licensed professionals to practice a specific profession.
Only those licensed to practice can be shareholders.
Owners are protected from claims of malpractice against other owners.
Business expenses—including salaries and bonuses—are tax deductible.
Some profits can be kept for business improvement opportunities.
Bigger contributions are allowed for retirement plans.
Licensed professionals themselves are not protected against being sued.
Income is taxed at the corporate rate.
Limited Liability Company (LLC)
An LLC is run by one or more people, called members, all of whom are considered self-employed. That means each member must pay self-employment taxes.
Business profits and losses are reported on their personal tax returns.
An LLC provides the benefits of a partnership, sole proprietorship, and corporation.
Easier setup/startup process (simply file Articles of Organization with Secretary of State and pay a filing fee)
More flexible as far as laws and regulations
Members’ personal assets are separate from their business assets, so they’re not personally liable and their personal assets (home, car, etc.) won’t be at risk. This is important if legal action is taken or bankruptcy is filed.
Regarding taxes, an LLC has choices. The LLC can be taxed as a sole proprietorship if it has one member, as a partnership if it has more than one member, or as a corporation.
Can take health insurance premium deductions on tax return.
May be required to pay state taxes, franchise tax, or a yearly registration fee, depending on the state in which the LLC is established.
LLCs can expire in certain states and may have to be re-established.
Each member pays taxes on business profits (i.e., non-distributed profits are taxed).
For each business structure described above, the laws and regulations regarding the operation of the business vary by state, too, so you need to do some research. Ensure the structure you choose can legally operate in that state. You want to benefit from the business structure you choose, but you also want to be protected should something unexpected happen.
Tax implications should also be considered when choosing a business structure. There are five types of business taxes you should be familiar with as a business owner. Read more about business taxes here.
If you have questions about starting a business, LegalSpark can help. LegalSpark connects you with a lawyer who can answer questions about how to start a business, how to comply with regulations, and how to file taxes as a business owner.