By Mark J. Kohler, CPA, JD and Lee Chen, JD
Ordinarily KKOS recommends the “S” Corp for anyone seeking to incorporate their operational business. There are obvious asset protection benefits of incorporating, and the “S-Election” can help you save a significant amount in self-employment tax (if done properly).
However, for certain professions, there may be certain limitations, restrictions, or requirements in order to operate as a corporation. For example, doctors, dentists, lawyers, accountants, and others may have additional requirements or restrictions set by the state which they are seeking to incorporate. Thus, because of these extra requirements, many professionals miss out on important strategies believing in incorrect information regarding incorporation. HOWEVER, please know that professionals can still incorporate AND use an S-Corporation, don’t believe otherwise.
If you are a professional seeking to incorporate your professional practice, some of the possible questions you may encounter include:
- If I incorporate my practice, are there any special requirements?Yes, but just because your occupation requires a license does not necessarily mean there are any additional requirements or restrictions by incorporating. For example, a general contractor in California must be licensed, but there are no special rules for a general contractor who wishes to incorporate his/her construction business.
- Does my professional corporation need to be registered with the state where I am licensed?Most states require, in addition to your license, that you obtain a separate certificate of registration from the state for your professional corporation. However, this is often times a simple form to register and shouldn’t hold you back. You could be leaving thousands of dollars on the table if you don’t move forward, so simply check with the agency that issues the license for your practice for the procedures they require.
- Are there any restrictions on the names I can use for the corporation?Often times there are ‘naming’ rules and it is VERY important that you confirm what these rules are with the state BEFORE you select a name and begin the incorporation process. For example, a lawyer operating under a professional corporation may need to include the words “Professional Corporation” or some acceptable derivation thereof. A doctor may need to have “Medical Corporation” as part of the name, or an accountant may need the words “Certified Public Accountant” as part of the name.
- Are there any restrictions on who can serve as shareholders, officers or directors? Some professions require that only the individual that is licensed can be a shareholder, director, or officer of the professional corporation. However, when possible we still want to encourage our clients to make their family members officers and directors to justify various payroll tax strategies.
- Are there any special reporting requirements with a Professional Corporation?At the state level, there may be periodic reports required or special annual filings (over and above normal state filings). Make sure you double check with the State agency for these types of rules.
- Can a Professional Corporation be an S-Corporation? Absolutely yes! This is an IRS designation and has nothing to do with State Agency requirements for incorporation and name filing. Make sure you get a second opinion if anyone tells you otherwise.
- Is a Professional Corporation a “Service Corporation”? No, they are two different things. A Professional “Service” Corporation is an IRS designation given to a C-Corporation that provides professional services. This is a strategy we RARELY recommend because of the taxation problems it causes. Again, if someone says not to incorporate as a professional because of this issue, you have the WRONG advisor.
In summary, if you are a professional needing “asset protection” AND wanting to save on Self-Employment Taxes a Professional Corporation taxed as an “S-Corp” could be the perfect fit. In fact, in our opinion there are very rare circumstances when it ‘wouldn’t’ make sense.The attorneys at KKOS can assist you in determining what the requirements are, if any, for your profession in the state where you intend to incorporate.Please give us a call to schedule an appointment at 435-586-9366.
Mark J. Kohler is a CPA, Attorney, Radio Show host and author of the new book “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions” and “What Your CPA Isn’t Telling You- Life Changing Tax Strategies”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP. For more information visit him at www.markjkohler.com.