Building Your Business Business Taxes Professional Corporation vs. Personal Service Corporation By Jean Murray Updated on July 21, 2021 In This Article View All In This Article What Is a Professional Corporation? What Is a Personal Service Corporation? How PCs and PSCs Pay Taxes Frequently Asked Questions (FAQs) Photo: whyframestudio / Getty Images The terms professional corporation (PC) and personal service corporation (PSC) are often confused. Both are corporations and both are owned by professionals such as attorneys, CPAs, architects, doctors, and others. A PC is a corporation composed of specific types of professionals, set up according to state law. After forming the PC, the corporation can be qualified by the IRS to have PSC tax status. This article explains how PCs and PSCs work for owners and their businesses. Key Takeaways Groups of professionals can become corporations by registering with a state to perform professional services.The professional corporation can then meet IRS qualifications to have beneficial tax status as a personal service corporation.Only certain types of professionals can have personal service corporation status. Owners of personal service corporations are both shareholders and usually also employees. Having personal service corporation status allows owner-employee wages to be tax-deductible, reducing the corporation's tax liability. What Is a Professional Corporation? Professional corporations (PCs) are groups of professionals who register with their state as this type of business entity. Some states require the professionals to be certified by the profession's state regulatory board, and others limit the types of professionals that can form PCs. Check with your state's business division for details. States regulate the types of professions that can form a professional corporation. California, Illinois, and Kansas, for example, limit the types of professionals that can form a PC. Maine, meanwhile, requires certain professions to incorporate specifically as a professional corporation. Owners of corporations are shareholders, or owners of the company stock. Professional corporations have perpetual existence and the owners have limited liability, in the same way as other corporations. Other Characteristics of a Professional Corporation Perpetual Existence The purpose of a corporation is to generate value and wealth over the long term. To this end, corporations have been set up to have perpetual existence. A change in ownership of a partnership or sole proprietorship can mean the end of the business. But a corporation is an entity separate from its owners and it continues even after owners leave the company. Limited Liability Limited liability refers to the limits on liability for the shareholders of a corporation, based on the fact that the corporation is a separate entity from its shareholders. Shareholders aren't usually liable for debts and other obligations of the corporation unless they have executive or management responsibilities, like having a seat on the board of directors, for example. Professional corporation owners who work as employees may not have liability protection against malpractice or other negligence claims brought against them in their capacity as licensed professionals. What Is a Personal Service Corporation? Personal service corporations (PSCs) aren't started in a state; they are a specific tax status qualified by the IRS. After the PC is formed, it must go through a testing period during the year prior to the tax year in order to qualify as a PSC. The following must occur during this time: The principal activity must be performing personal services and more than 20% of compensation costs for personal services must be performed by employee-owners. Employee-owners must be considered employees (even if they are independent contractors for other purposes). The employee-owners must own more than 10% of the fair market value of the company's stock. In addition, to qualify as a PSC, owners must be in certain listed fields such as accounting, actuarial science, architecture, consulting, engineering, health (including veterinary services), law, and performing arts. PSCs must comply with some other tax regulations, including using the calendar year as their fiscal (financial) year in most circumstances. They must also follow passive activity rules that limit the owner's losses if they don't materially participate in the business during the year. Note The types of professions allowed for PSC tax status may be different from the types of professions allowed by the state where a PC is registered. For example, financial services professionals can register as a PC in some states, but they can't form a PSC. How PCs and PSCs Pay Taxes Professional corporations pay taxes as corporations, which means the corporation pays tax at the corporate rate of 21%. Owners are shareholders who pay tax on the dividends they receive. If a PSC meets all of the IRS qualifications, it can be classified as such for tax purposes. Personal service corporations also pay corporate taxes at the 21% rate, but they give a benefit to the business that traditional corporations don't have. Having PSC status allows the owners working as employees to be paid a salary, and these salaries are deductible as business expenses, reducing the corporation's tax liability. Offsetting this benefit is the requirement that employee-owner work must be fairly compensated. The employee's income is subject to income taxes and Social Security/Medicare taxes. Frequently Asked Questions (FAQs) How do professional corporations compare with professional partnerships and professional limited liability companies? Professional corporations are registered with a state as a corporation. Don't confuse a professional corporation with a limited liability partnership, professional limited liability company (PLLC), or a limited liability company (LLC), which are different types of business entities that have limited liability. PLLCs may also be registered with a state and then become qualified as personal service corporations to get corporate tax status. How do you form a professional corporation? Corporations are formed by registering with a state. The process is different for each state, but it usually involves filing an application—called articles of incorporation—with the state's business division (usually part of the secretary of state's office). How does a personal service corporation file its tax return? First, the PSC must have met the requirements of the testing period (explained above) for the year filing as a PSC. Then it must check box A, item 3 on Form 1120 U.S. Corporation Tax Return to designate itself as a personal service corporation. It also must choose "Professional Service Corporation" as its principal business activity on Schedule K. Additional forms and schedules will need to be completed for this tax return, depending on your business situation. This process is complicated so it can beneficial to seek the help of a licensed tax professional. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Northwest Registered Agent. "State-by-State Requirements for Professional Entities in All 50 States." Accessed July 21, 2021. University of Colorado Law School. "The Perpetual Corporation." Pages 768-770. Accessed July 21, 2021. IRS. "Publication 542 Corporations." Page 3. Accessed July 21, 2021. IRS. "Entities Frequently Asked Questions." Entities 5. Accessed July 21, 2021. IRS. "Publication 542 Corporations." Page 9. Accessed July 21, 2021. IRS. "Publication 542 Corporations." Page 16. Accessed July 6, 2021. IRS. "Instructions for Form 1120 U.S. Corporation Income Tax Return." Page 21. Accessed July 21, 2021.