Lawyers, doctors, accountants, and other professionals cannot engage in the “corporate” practice of their professions, except through authorized entities. Professional LLCs and professional service corporations are two such authorized entities. When considering which entity may be right for you, it is important to note their differences. At least three issues distinguish professional LLCs from professional service corporations: insurance, taxes, and governance.
1. Insurance
For starters, professional LLCs are required to have insurance, whereas professional service corporations are not. RCW 25.15.046 (3) states if an LLCs member practices a profession requiring a license, the LLC must acquire an insurance policy, bond, or some other evidence of financial responsibility (designated by rule of state insurance commissioner) covering at least $1,000,000 or greater, dependent upon the nature and size of the business. If an LLC fails to attain a sufficient policy, the members are personally liable to the extent that, had the insurance, bond, or other evidence of responsibility been maintained, it would have covered the liability in question.
Comparatively, professional service corporations are not required by statute to attain any insurance policy (RCW 18.100.050). In fact, the statute never mentions insurance for professional service corporations.
2. Taxes
When it comes to taxes, professional LLCs have the flexibility to choose a tax structure but professional service corporations have only two tax options. A professional LLC may elect to be taxed as a partnership, as a disregarded entity, as an S corporation, or as a C corporation. In comparison, a professional service corporation can only choose between being the S corporation or C corporation structure.
3. Governance
Our third and final distinction involves governance requirements. Professional LLCs may be managed in most any manner as identified in the company’s LLC agreement. No specific management structure is required by statute, and no meetings are required.
On the other hand, every professional service corporation must be managed by a rigid management structure. A professional service corporation must have shareholders, a board of directors, officers, and must hold formal, annual meetings between them.
Considerations
Many professionals fail to recognize they cannot engage in the “corporate” practice of their profession and they risk personal liability as a result. Many who do recognize they cannot engage in the corporate practice of their profession fail to consider the differences between the entities. While this post only discusses a few of the differences (and there are other entities, such as limited liability partnerships), consider them carefully. At Beresford Booth, we represent a great number of professional practices and would be pleased to help yours as well.