When you incorporate your business as a PC, you're setting up a professional corporation. Not all businesses qualify for this designation, and each state has different requirements, but typically this type of corporation is used by those in medical, legal or accounting fields. Although major tax benefits aren't associated with creating a PC, this corporation type limits your liability and that of any business partners you have.
Structuring your business as a PC once meant you had more tax flexibility than many other types of corporations. The Internal Revenue Service changed that in 1986, classifying all PCs as professional service corporations and charging them a flat 35 percent tax rate. Although the tax break is no longer available for PCs, other advantages make it appeal to some business owners.
The main reason to set up your business as a PC is to limit your personal liability from lawsuits and business debts. This doesn't protect you from every financial responsibility, but it helps. For example, if a client slips and falls on your steps, she can sue your corporation but not you personally; the corporation might be required to pay her damages, but she can't touch your personal assets. However, if you're a doctor and commit malpractice, you can still be held personally liable in addition to the corporation being liable. Your PC protects other shareholders, such as other doctors in your practice. Without PC protection, they can be held personally liable for your malpractice, but when your practice is structured as a PC, only the doctor who commits the malpractice is liable.
In general, most states allow professions that require licenses to set up PCs. This typically includes doctors, veterinarians, chiropractors, dentists, attorneys, architects and accountants. At least one shareholder must be licensed in the state, although not all the shareholders need to be. If you plan to do business in more than one state, it's likely you'll need to set up a new PC for each state.
Many states offer a couple of incorporation options to licensed professionals. Professional limited liability corporations, or PLLCs, provide similar liability protection as PCs, but the incorporating parties are called members instead of shareholders. Limited liability partnerships, or LLPs, don't necessarily require you to be licensed, but they offer personal protection for you in case one of your partners makes a major mistake. If you're an attorney in an LLP, for example, you can't be sued personally if one of your business partners commits negligence in a legal case. These different classifications might offer more tax benefits for you than a PC, but check with your accountant to confirm which incorporation structure is best for you.