As a budding entrepreneur, you’ve been brimming with innovative ideas, game-changing services, and products that could redefine the marketplace.
You’re about to become a business owner and put all those ideas into practice. But what now? Where do you start? How do you make this business official?
Help is on the way!
It is essential that you lay a strong foundation for your business. You will need to make a crucial decision regarding the legal structure of your business. Do you need to establish a Limited Liability Company (LLC) or a Professional Corporation (PC)?
This article aims to demystify the main differences between a Professional Corporation and a Limited Liability Company, providing you with a clear, in-depth understanding of each entity.
We will delve into the benefits, drawbacks, and key characteristics of both structures to help you make an informed decision. Whether you are a licensed professional weighing the merits of a Professional Corporation, or a start-up exploring the flexible advantages of an LLC, this guide will serve as a valuable resource.
Our goal at Hall Accounting Company is to provide you with the most accurate, helpful, and applicable information to assist you in navigating this crucial choice.
Deciphering Business Entities
Embarking on your entrepreneurial journey involves deciphering numerous terms and acronyms, key among them being the type of legal entity created.
Professional Corporations (PCs), Limited Liability Companies (LLCs), and others such as S Corporations (S Corp) or C Corporations (C Corp) may seem similar on the surface, but they each offer unique benefits and constraints that can significantly affect your business operations and growth.
At the heart of these terms are basic business structures that have been designed to accommodate the diverse needs and goals of businesses. Each of these legal entities has specific implications for your personal liability, tax obligations, administrative requirements, and more.
A Professional Corporation (PC) is a specific type of corporation for certain licensed professions such as medical professionals, lawyers, accountants, engineers, etc. This business entity serves to limit the owner's personal liability, provides some tax advantages, and allows professionals to offer their services within a corporate framework. As an example, a PC offers malpractice protection for the personal assets of a doctor.
On the other hand, a professional Limited Liability Company (LLC) is a entity type that combines the features of both a corporation and a partnership. This provides the owners, referred to as members, with personal liability protection. This means that members are not personally responsible for the company’s debts and liabilities, a feature that is highly attractive for many small businesses and start-ups.
There are two other entities that you should keep in mind. An S Corporation and C Corporation. An S Corp is a corporation that has received the Subchapter S designation from the IRS. A C Corp, on the other hand, is a legal entity that protects the owners' personal assets from creditors. It can have an unlimited number of shareholders, making it ideal for larger businesses.
Benefits of a Professional Corporation
While the various types of business entities can at first seem overwhelming, each has its distinct advantages tailored to different business needs. For certain businesses, particularly those offering professional services, a Professional Corporation (PC) can offer significant benefits.
Limited Liability Protection
The foremost benefit of a PC is the protection of personal assets. In a Professional Corporation, the assets of shareholders are typically protected against the corporation's debts or lawsuits.
Professional Corporations can enjoy certain tax advantages not available to other entities. For instance, a PC can deduct the cost of benefits provided to employees and owners, such as health insurance, disability insurance, and retirement plan contributions. Moreover, PCs can also avoid the double taxation issue that plagues C Corporations.
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A word about double taxation
Double taxation refers to a situation where a corporation's income is taxed twice. The first taxation happens at the corporate level when the corporation makes profits. This is known as corporate income tax.
The second taxation occurs when these profits are distributed to shareholders in the form of dividends - the shareholders must report these dividends as personal income and are taxed again on their personal income tax returns.
This is a significant concern for C Corporations (or Professional Corporations that haven't elected to be taxed as an S Corporation), to avoid double taxation as it can result in a high overall tax rate.
Flexible Profit Distribution
A significant advantage of PCs is the ability to distribute profits in a way that is not strictly tied to ownership percentages. This flexibility can be beneficial in attracting and retaining key professionals in your corporation.
Continuity of Existence
Unlike a sole proprietorship or partnership, a PC has a continuity of existence. This means that the business structure continues to exist even if an owner dies or leaves the corporation, ensuring the longevity of the business.
In a Professional Corporation, all owners must be of the same profession, creating an environment where the nuances of your profession are understood and respected by all shareholders.
Drawbacks of a Professional Corporation
Formality and Complexity - Compared to other business entities like LLCs, PCs require more formalities and complexities in their operation. This includes annual meetings, maintaining a board of directors, establishing bylaws, and more stringent record-keeping.
Limited Scope of Business Activity - Professional Corporations are strictly regulated and limited in the scope of their activities to the provision of professional services. This means they cannot engage in business activities outside of their stated professional services. In contrast, LLCs enjoy more flexibility in the kind of business activities they can engage in.
Ownership Restrictions - In terms of mutual understanding and aligned interests, having all owners be professionals in the same field can be beneficial. Your business's potential pool of investors can be limited by this restriction. LLCs, on the other hand, have no restrictions on ownership, making them more appealing to investors.
When should you select a PC?
Selecting a Professional Corporation over an LLC might be the best decision for licensed professionals seeking a balance of liability protection, tax benefits, professional prestige, and the flexibility to distribute profits independently of ownership shares. It's a decision that requires careful consideration and a deep understanding of both your professional needs and long-term business goals.
Now that you’ve escaped office life by registering your own company, don’t get sucked into a never-ending admin cycle. You’re going to need bookkeeping services that will get you on track from the start of your company. Hall Accounting Company offers these services at affordable rates, allowing you to get on with building your business.
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Benefits of a LLC
The main advantages of an LLC can be attractive to businesses across many industries, including retail, services, real estate, and more. These advantages include:
Limited Liability Protection
The primary benefit of an LLC is asset protection. This means that members are not personally liable for the LLC's debts and liabilities. This can be especially beneficial for businesses that carry a higher risk of liability.
LLPs are popular among professionals such as lawyers, accountants, and architects, who want to work together in a limited liability partnership, limiting their personal liability for the actions of the other partners. This can be particularly beneficial in fields where the risk of legal action is high.
Flexible Profit Distribution
LLCs do not have to distribute profits according to ownership percentages. They can choose to distribute profits in different ways, allowing for more flexibility compared to a Professional Corporation.
Ease of Operation
LLCs require fewer formalities and less paperwork than corporations. There are no requirements for annual meetings, boards of directors, or detailed record-keeping. This makes an LLC easier and more straightforward to operate, which can be beneficial for small businesses and startups.
An LLC has various options when it comes to taxation. By default, LLCs are pass-through entities, meaning business profits pass through the LLC to the members, who report them on their personal tax returns. However, an LLC can also choose to be taxed as an S Corporation or a C Corporation.
Drawbacks of Limited Liability Companies
Self-Employment Taxes: Unlike corporations, where only salaries (and not profits) are subject to self-employment taxes, all of an LLC's profits can be subject to pay income taxes. However, this can be mitigated if the LLC elects to be taxed as an S Corporation.
Limited Life: In many states, an LLC has a limited life. This means that if a member leaves the LLC or passes away, the LLC may be dissolved. However, the members can include provisions in the operating agreement to prolong the LLC's existence and protect business assets.
Fewer Incentives for Investors: Unlike corporations, LLCs can't issue stock, which can be a drawback when trying to attract investors.
Industries that would benefit from an LLC
Real Estate: The nature of the real estate industry makes it suitable for an LLC structure. Owners can hold each property in a separate LLC, to provide limited liability protection to each individual property.
Retail and E-commerce: Retail businesses, including online ones, may face liability issues, such as product liability or customer accidents. An LLC structure can provide personal asset protection against such liabilities.
Professional Services: Businesses providing services like consulting, design, IT services, etc., often choose the LLC structure for its flexibility, business income tax advantages, and protection against personal liability for business debts and claims.
Restaurants and Hospitality: Given the potential risks associated with this industry, such as food-related illnesses or accidents, an LLC can provide essential protection for the owners' personal assets.
Freelancers and Independent Contractors: LLCs provide a simple way for solo entrepreneurs to separate their business and personal finances, which can help with tax planning and provide a level of professional credibility.
At Hall Accounting Company our clients come from many of these industries and have found huge value in taking the step to start their own sustainable businesses. We were able to help them from the start, to set up their accounting structures and meet the regulatory requirements of the business entity they registered.
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Choosing the right business structure, be it a Professional Corporation, Limited Liability Company, or another entity, can be a complex decision with far-reaching implications for your business’s success and growth.
In this article, we’ve laid out the benefits and drawbacks of these business entities. However, no article can replace personalized advice tailored to your unique business situation and goals. That's where Hall Accounting Company comes in.
The structure of your business will affect the regulatory financial reports and statements that you need to generate as well as the type of tax that you need to pay. We can help manage your accounting needs, ensuring you meet all regulatory requirements, and enable you to focus on what you do best - building your business.
Reach out to Hall Accounting Company today, and let's build a strong financial foundation for your business together. Let us take the burden of accounting and compliance off your shoulders so you can focus on turning your business vision into reality.