Fundamentals Of The Illinois Professional Service Corporation
Illinois Professional Service Corporations are governed by the Professional Service Corporation Act (805 ILCS 10). A Professional Service Corporation in Illinois is a type of corporate structure created under the Professional Service Corporation Act (805 ILCS 10). This type of entity is designed for licensed professionals who wish to incorporate their practices. These professionals include, but are not limited to, accountants, architects, engineers, and lawyers.
A Professional Service Corporation shares many characteristics with a traditional corporation. For example, it is a separate legal entity from its owners, meaning it can sue, be sued, own property, and enter into contracts in its own name. However, one distinctive feature of a Professional Service Corporation is that all shareholders, directors, officers, and employees engaging in the professional services of the corporation must be licensed in the same profession. This is markedly different from other business entities where there are no specific professional licensing requirements for shareholders, directors, or officers.
In terms of liability, a Professional Service Corporation limits the personal liability of its shareholders for the corporation’s business debts and obligations, similar to a traditional corporation. However, it’s important to note that professional service providers remain personally liable for their own professional malpractice.
Taxation is another important aspect to consider. A Professional Service Corporation can choose to be taxed as a C Corporation, where the corporation pays tax on its income, and then shareholders pay tax on any dividends received, leading to a situation often referred to as “double taxation”. Alternatively, it may elect S Corporation status, if it meets certain requirements, where the corporation’s income, deductions, and credits flow through to shareholders for federal tax purposes, helping avoid double taxation.
Before selecting a Professional Service Corporation as their preferred business entity, licensed professionals should weigh these characteristics against their professional goals, financial circumstances, and potential risks.
Operating A Professional Service Corporation – Advantages and Disadvantages
Operating a Professional Service Corporation (PSC) comes with unique advantages and disadvantages when compared to a Professional Limited Liability Company (PLLC) and a traditional corporation. The primary advantage of a PSC over a PLLC and a traditional corporation is that it offers personal liability protection for its owners from the corporation’s debts and obligations, just like a traditional corporation. However, unlike a traditional corporation, all shareholders, directors, officers, and employees who provide professional services must be licensed in the same profession, which can be an advantage in promoting a unified professional identity and standard.
PSCs may also have certain tax benefits. If eligible, a PSC can elect to be treated as an S corporation for tax purposes, allowing for pass-through taxation, where income and losses are passed through to the shareholders’ personal tax returns, avoiding the double taxation that can occur with traditional C corporations.
However, there are disadvantages to consider as well. A key drawback is that individual professionals in a PSC remain personally liable for their own professional malpractice, a risk that is also present in a PLLC but not a traditional corporation.
Moreover, PSCs require more formalities compared to a PLLC. They must follow corporate formalities like holding regular board of directors and shareholder meetings, keeping minutes of these meetings, and issuing stock. Not observing these formalities can jeopardize the liability protections offered by the corporate structure. In contrast, a PLLC has more operational flexibility and fewer required formalities.
Compared to traditional corporations, a PSC’s requirement that all shareholders, directors, officers, and employees engaged in professional services be licensed in the same profession restricts who can own shares and be involved in the management of the corporation. This can be limiting if the company wishes to bring in investment or management expertise from non-licensed individuals or entities.
Organizing a Professional Service Corporation In Illinois
Establishing a Professional Service Corporation (PSC) in Illinois under the Professional Service Corporation Act (805 ILCS 10) requires the submission of specific legal forms and the development of crucial legal documents to ensure proper organization.
To register a PSC, an Articles of Incorporation form (BCA 2.10 (PSCA)) must be filed with the Illinois Secretary of State. This form requires information about the corporation, including the name of the corporation, the specific professional service the corporation will provide, the number of shares the corporation is authorized to issue, and the names and addresses of the initial directors. Incorporation of the professional corporation must comply with the Illinois Business Corporate Act of 1983, except that the name must end with one of the following: “Chartered,” “Limited,” “Ltd.” “Professional Corporation,” “Prof. Corp.,” or “P.C.” The Articles of Incorporation must also include a statement that all shareholders, directors, and officers are licensed to provide the stated professional service.
Along with the Articles of Incorporation, a filing fee is also required. Once the Illinois Secretary of State approves the Articles of Incorporation, the PSC officially exists. Licensed professionals should understand that even if the professional service corporation’s name is available to register with the Illinois Secretary of State, this does not mean it is available for use under trademark law. Licensed professionals are encouraged to conduct a search and clearance of all state and federal trademark databases to ensure the name is available for use before registering the medical corporation.
However, other documents, while not required for registration, should be developed for proper organization. A set of Bylaws should be drafted, which outline the internal rules for the corporation such as director and officer roles, meeting procedures, and shareholder rights. Although not required to be filed with the state, Bylaws are crucial for clarifying the internal operations of the PSC.
A Shareholder Agreement is another important document, especially for corporations with multiple shareholders. It can detail how shares can be bought, sold, or transferred, and how disputes among shareholders can be resolved.
Additionally, PSCs are required to obtain any necessary licenses or permits, both for the individual professionals and the corporation as a whole. The PSC will also need to apply for an Employer Identification Number (EIN) from the IRS, registering the professional service corporation with the Illinois Department of Revenue, registering the professional service corporation with the Illinois Department of Financial and Professional Regulation, and applying to do business in the city and/or county where the corporations operations are conducted.
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