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Editorial 6 MIN READ

The professional corporation, reappraised in 2023

Why the PC still exists after the PLLC, and when it is the right wrapper for a licensed practice

The Editors
Staff, Incorporator.org
6 min read Updated
Contents 6 sections
  1. What a PC is, and where you are forced into one
  2. Federal tax: default C, elect S, and the §199A fence
  3. Reasonable compensation, Watson, and PTE arbitrage
  4. Failure modes and the 2023 compliance overlay
  5. Who should still pick the PC in 2023
  6. Sources

professional corporation is the wrapper a licensed practice uses when the state will not let the practice be anything else. The question is narrower in 2023 than it used to be, because most states now allow a PLLC, but California still mandates the PC for most licensed professions, and a handful of federal tax moves (the S-corp election, §199A, reasonable-compensation risk) make the PC worth a fresh look wherever both forms are legal.

This is for a doctor, lawyer, dentist, architect, CPA, or psychologist choosing a form this quarter. It assumes you already know the liability shield does not reach your own malpractice; it reaches everyone else's.

What a PC is, and where you are forced into one

A professional corporation is a corporation whose shareholders, officers, and directors must all hold the license it practices under. The corporate formalities are otherwise ordinary: articles, bylaws, annual meetings, minutes, stock ledger.

California will not let most licensed professionals form a PLLC at all. Cal. Corp. Code §§ 13400 to 13410, the Moscone-Knox Professional Corporation Act, defines the professions that must use a PC and caps share ownership at licensees in the same or specified related fields. Physicians, dentists, lawyers, architects, accountants, and psychologists all fall under Moscone-Knox or a profession-specific companion statute. If you are licensed and practicing in California and you want a limited-liability entity, your choice is the PC.

Most other large states offer both forms. New York allows a PC under Business Corporation Law §§ 1503 to 1511 or a PLLC under Limited Liability Company Law § 1203. Florida covers both in Fla. Stat. § 621. The practical result is that the PLLC is usually cheaper to run, and the PC is the right answer only when a specific tax move pushes you toward the corporate ledger.

The ownership restriction cuts across all of these statutes. A non-licensee cannot hold shares. A licensee whose license lapses has a limited window to divest. Estate planning around PC stock is constrained, because the buyer pool on death is restricted to other licensees.

Federal tax: default C, elect S, and the §199A fence

A PC is a corporation for federal tax purposes, which means Subchapter C by default. You can elect Subchapter S under IRC § 1362 using Form 2553 if the standard requirements are met (domestic, eligible shareholders, one class of stock, at most 100 shareholders). Form 8832 is available under the check-the-box rules, but a state-law corporation is already corporate for federal tax; the useful election is the S election. Under IRC § 1361(b)(3) and § 1361(d), QSub and QSST structures are available when a practice needs trust-based estate planning on top of S status.

The §199A deduction is where the PC analysis in 2023 turns. §199A(d)(2) treats health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services as a "specified service trade or business," along with any business whose principal asset is the skill of its owners. An SSTB loses the deduction above the income thresholds. For 2023 those are $182,100 single and $364,200 joint (Rev. Proc. 2022-38), phasing out over a $50,000 / $100,000 range. A successful professional practice is, almost by definition, above those, so §199A is usually not the reason to favor a PC over a PLLC. The final §199A regulations at T.D. 9847 (Feb. 2019) still govern.

The S-corp election is the real federal reason to pick or keep the PC form. A reasonable salary plus distributions saves the 2.9% Medicare tax (and the 0.9% additional Medicare tax above $200,000/$250,000) on the distribution slice. On a practice netting $500,000 with a defensible $250,000 salary, SE-tax savings run in the low five figures annually.

Reasonable compensation, Watson, and PTE arbitrage

The controlling appellate case on S-corp reasonable compensation is still Watson v. Commissioner, 668 F.3d 1008 (8th Cir. 2012). A CPA paid himself a $24,000 salary out of an S-corp that had north of $200,000 in earnings; the Eighth Circuit upheld the Tax Court's recharacterization of about $67,000 per year of distributions as wages, with the corresponding employment taxes, interest, and penalties. Watson cuts both ways for a PC that has elected S. It tells you splitting salary and distributions is allowed, and it tells you how aggressive you can be before the Service wins. A professional whose billings are almost entirely personal labor has a harder case for a low salary than a practice with associates and equipment. The operative compensation question in 2023 is what a hiring study says a partner in your specialty in your metro earns, because that is the number a revenue agent will pull.

State pass-through-entity taxes complicate the math. Since the SALT cap in the 2017 Tax Cuts and Jobs Act, most income-tax states have enacted a PTE election that lets the entity pay state tax and deduct it federally, bypassing the $10,000 individual cap. Notice 2020-75 blessed the approach. PCs are eligible in most PTE statutes. For a high-earning practice in California, New York, New Jersey, or Massachusetts, the PTE election is often worth more than the SE-tax arbitrage. Work both numbers.

Failure modes and the 2023 compliance overlay

The three failure modes for the PC have not changed much. Letting a non-licensee acquire shares through an ill-drafted buy-sell, which voids the corporate status in most states. Forgetting that the liability shield does not cover the licensee's own malpractice; every PC statute says so. Missing reasonable comp year after year and stacking up Watson exposure that the next audit sweeps in at once.

The new-for-2023 overlay is the Corporate Transparency Act, 31 U.S.C. § 5336, which requires most small corporations and LLCs to file beneficial-ownership information with FinCEN. The reporting rule takes effect January 1, 2024, with new entities required to file within 30 days of formation and existing entities given a one-year grace period. Professional corporations are not on the exemption list; practices generally fall under the reporting requirement unless they clear the large-operating-company thresholds (more than 20 full-time U.S. employees, more than $5 million in gross receipts, and a physical U.S. office). Most small PCs will be reporting companies in 2024. Put it on the formation checklist now.

Malpractice insurance minimums for a PC in a regulated profession tend to run higher than the equivalent PLLC minimums in both-form states. Budget accordingly.

Who should still pick the PC in 2023

A California licensee in a Moscone-Knox profession has no choice; form the PC, make the S election if the numbers work, and pay the reasonable-comp question enough attention that a revenue agent does not answer it for you.

In a both-form state, the PC is the right pick when the S election is doing real work and the corporate ledger is not a burden you resent. For a solo practitioner above the §199A thresholds, the deduction is probably gone either way, and the governing math is SE-tax arbitrage on top of a clean PTE election. For a multi-partner practice, a stock-based buy-sell often reads more cleanly than an LLC operating agreement, and a century of corporate case law is worth something on the day a partner leaves unhappily.

If your field is not a regulated license in your state, you are not forming a PC at all. Form an ordinary LLC or S-corp and skip this page.

Sources

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