A professional corporation may be required for an occupation where loyalty to patients or clients is required because of the personal and confidential information entailed. Professional corporations are incorporated under the Professional Service Corporation Act and must contain one of the following abbreviations: Chartered, Limited, Ltd., Professional Corporation, Prof. Corp., or P.C.
The requirements for incorporating as a professional corporation are similar to other types of corporations. However, the shareholders, directors, officers, and key employees are generally required to be licensed to practice in the profession operated by the corporation. There are also other registrations and filings that may be required.
A professional corporation does allow shareholders to have limited liability against actions taken by other shareholders. However, each individual shareholder is still personally liable for his or her own negligence or malpractice. The failure to properly incorporate as a professional service corporation can yield unintended consequences, such as exposing all of the members of the corporation to personal liability for the negligence or malpractice of the other shareholders.
Exit strategies and formal agreements between shareholders are essential in a professional corporation. In the event that a shareholder of a professional corporation dies, becomes disabled or loses his or her professional license, the consequences could cause the corporation to be involuntarily dissolved.
There should be a predetermined method for evaluating the stock and some form of redemption, cross-purchase or buy-sell agreement. There are alternative considerations that must be addressed for professional corporations with a sole shareholder. Any type of exit strategy should also be reflected in each individual shareholder’s estate plan as it may have unforeseen tax consequences.
