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FAQ: Business Organizations and Transactions

What entities can professionals use to start their businesses?

States restrict which business forms certain kinds of professionals may choose when they begin a business solely to provide their professional services. These laws most commonly apply to health care professionals, attorneys, engineers, veterinarians, psychologists and social workers. Although requirements vary from state to state, professionals generally may choose to be sole proprietors or to form a partnership, a professional limited liability partnership or a professional corporation. Professionals should consult their attorneys to determine what business forms are available to them in their state.

Sole Proprietorship

If a single professional opens a practice without choosing a business entity, the practice becomes a sole proprietorship. No filing is required. A sole proprietor is legally inseparable from his or her business. If the sole proprietor dies or ends his or her practice, the business dissolves. He or she is personally liable for all of the business's debts. The sole proprietor accounts for business profits on his or her individual tax returns.

Partnership

Similar to a sole proprietorship, if several professionals begin practicing together without registering a business entity, they have formed a partnership. A partnership exists until a partner dies or leaves the partnership; then the original partnership dissolves, and the remaining ex-partners may choose to reform again. Partners share all profits, losses and legal liabilities. If one partner commits malpractice, the other partners may be liable for any damages not covered by the offending partner's malpractice insurance. Partnerships have a tax advantage in that profits and losses are reflected in the partners' individual tax returns and the partnership is not separately taxed.

Professional Corporation

A corporation is separate from, and survives the death or departure of, its owners and shareholders. The corporation is taxed as an independent entity, which subjects shareholders to double taxation when they must pay individual income tax on taxed business income, distributed to them as dividends. The hallmark of a corporation is that it shields its shareholders from liability for the acts of the company or its shareholders.

A professional corporation is similar to a general business corporation, but it is subject to a few restrictions. It must generally be formed purely to provide professional services; all shareholders must be licensed to render that service. For example, in a professional corporation formed to provide dental services, all shareholders must be licensed dentists.

The primary reason to form a professional corporation is to limit personal liability. For example, a member of a medical group would not want to be liable for another member's malpractice. The corporate entity provides that shield.

Professional Limited Liability Partnership

Some states have a version of this entity. A professional limited liability partnership is a hybrid partnership comprised of licensed professionals.

Professional Limited Liability Company

A professional limited liability company (PLLC) is similar to an LLC, or limited liability company. An LLC limits personal liability like a corporation, but its owners, also referred to as members, are not subject to double taxation as they would be in a corporation. Only certain types of licensed professionals may form PLLCs. Members are often required to carry certain amounts of malpractice insurance or to be bonded.

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