This research is supported by you, our readers, through our independently chosen links, which earn us a commission. Learn More
If you own a small business and think about registering it with the state, there are a lot of business entities to choose from.
However, most entrepreneurs seem to favor two possible options: a limited liability company (LLC), or a professional corporation (PC). Although these two entities sound pretty similar, they suit different purposes, and several nuances should be considered before registration.
So, get cozy and check our in-depth PC vs LLC comparison that helps you choose which business entity is more suitable for your goals.
What is a Limited Liability Corporation?
Limited Liability Corporation (LLC) is the type of business organization that combines the limited liability of the corporation and the tax benefits of the partnership, which include:
- The absence of the income tax. Members of the LLC file the profits and the expenses of the company on their income tax returns.
- Pass-through taxation system. This means that LLC evades double taxation, unlike traditional corporations.
What is a Professional Corporation?
A professional corporation (PC), or Professional Service Corporation (PSC) is the type of business organization formed by licensed professionals in certain fields. The list of professions that require a license to operate may vary from state to state, but generally includes the following:
- medical practitioners;
- funerary services;
- social workers;
- veterinarians, etc.
How Similar Are PC and LLC?
So, let’s start our PC vs LLC comparison with the similarities because there’s only one:
Both PC and LLC are relatively easy to form.
To register a limited liability company, you need to file the Articles of Organization with your resident state and pay the formation fee. You also may want to appoint a registered agent service, which separates your personal and business assets and minimizes your exposure to the state.
For a professional corporation, you have to go through two additional steps:
- Getting the Certificate of Approval from the licensing body of your resident state, which acknowledges your profession.
- Signing your incorporation documents by a licensed professional.
If you don’t have time to do go through the formation process, you can redirect it to online formation services — there are a lot of them available!
What are the Differences Between PC and LLC?
Now, although LLC and PC are some of the least regulated business entities, they have different purposes. So, let’s take a look at the main differences between these business structures.
Any US citizen is eligible to form an LLC in their resident state. However, if you’re a business owner, be aware that some businesses aren’t eligible to operate under the LLC. These include insurance companies, law firms, or banking businesses. In these cases, you can register your business as a Limited Liability Partnership (LLP), or form a traditional corporation.
Also, some states require at least two owners for an LLC, while others are perfectly fine with a single-member company. Consult your Secretary of State for detailed information.
As for professional corporations, they can only be formed by a licensed individual or a group. Plus, the group should have a license in the same field: for example, a group of doctors or architects.
Different states have different regulatory mechanisms for business registration. For example, the Massachusetts Secretary of State doesn’t allow single-member LLC. Or, you might need a foreign qualification to register your LLC or a professional corporation in the non-resident state.
#2 Personal Liability
There are some similarities between LLC and PC when it comes to liability: both business entities offer liability protection from debt, and creditors cannot come for the owner’s assets if the company goes bankrupt.
However, there’s no protection against the personal liability for the owner’s or member’s malpractice or incompetence. If a doctor makes a mistake during surgery, the patient’s family can sue him, and he will face the consequences of his actions.
Malpractice protection is often a defining factor when it comes to registering a business. In many cases, it’s more advisable to form a professional corporation because it helps you avoid financial liability for the wrongdoings of others in your group.
#3 Taxation Differences
Another significant difference between LLC versus PC is that they’re taxed differently.
A professional corporation is taxed like a traditional corporation, on both federal and state levels. If you’re a sole practitioner, then double taxation might be a major drawback for you. PCs that are organized by a group of individuals usually suffer less because their after-tax profits are distributed more evenly.
A limited liability company is taxed as a sole proprietorship regardless of whether it’s single-member or not. This means that the owner (or members) filing the annual profits and expenses on their income tax return, which is also known as a pass-through taxation model. This model helps you evade double taxation.
However, you can register your LLC as a corporation — which is more advisable if you plan to expand to other states or hire employees — and in this case, it will be taxed as such.
#4 Management Differences
Finally, professional corporations and limited liability companies have a different management structure, but generally, PC offers more flexible managing than LLC.
There are two ways of managing an LLC:
- Member-managed LLC. This model is more common in single-owner LLC or companies formed by small groups. Here, each member shares the same vote share and is equally valuable when it comes to making important company decisions, which encourages members to be proactive. The main document that establishes the organizational structure of a member-managed LLC, is an operating agreement. In this document, the company owner establishes the rules and conditions that are required to operate the company (for example, the number of votes that make a quorum), and outlines the responsibilities of each member of the team.
- Manager-managed LLC. This model is more suitable for large businesses or companies where members lack sufficient managing experience. In this case, the owner appoints more than one manager to operate the company (or even can hire employees from outside the company). The responsibilities of the manager are established in the operating agreement and typically include control over the working team or managing of a particular department. However, managers cannot make structural changes, such as hiring staff or changing the company’s structure — that power remains by the owner(s).
As for a professional corporation, its members are also employees, and their responsibilities are outlined in the articles of incorporation. But they can also hire attorneys or accountants to manage the legal formalities or share these responsibilities among themselves.
Which business entity pays fewer taxes?
The current tax rate for a professional corporation is 21%, which is the same as that for traditional corporations. Limited liability companies have a 15.3% tax rate, which consists of 12.4% for Social Security and 2.9% for Medicare.
Which business type is more beneficial for solo practice?
If you’re a licensed specialist, then you can only register as a professional corporation, otherwise, you won’t be eligible to register the business at all. Small businesses or start-up owners might benefit more from LLC formation.
Do I need business insurance?
In the case of registering under an LLC, your assets are well-protected, and you can only be held accountable for the actions of the company itself. However, it’s still advisable to have some amount of insurance coverage as an extra layer of protection.
Professional corporations, on the other hand, can be legally obligated to purchase insurance to cover their malpractice or operating errors. So, if you’re registered as a PC, be sure to file in with a reliable insurance provider.
Knowing the differences between various business entities is very important if you’re trying to register your own company.
Generally, a professional company has a more flexible management structure and offers more benefits to licensed practitioners, but it may be subject to double taxation and personal liability.
And if you want to combine the benefits of a pass-through taxation model with the protection of personal assets, and if your business doesn’t require a state license, then the best way to operate for you is the LLC formation.
Hours of Research