Are you a licensed professional? Licensed professionals include people who are involved in professional practices, such as attorneys, doctors, architects, accountants, and nurse practitioners. Therefore, forming a professional S Corporation as a licensed professional may or may not work for you. It just depends on your set-up and how you want to scale your business.
Learning More about Forming a Professional S Corporation as a Licensed Professional
To learn more about your options for forming a professional S corporation as a licensed professional, you need to speak to an experienced business attorney. You can contact me or my legal team at any time by visiting https://molaeilaw.com for further details.
The term, “licensed professional,” has different meanings, depending on the state where it is used. In most jurisdictions, a licensed professional is someone who is licensed or authorized legally to practice law, medicine, osteopathic medicine, podiatry, dentistry, dental hygiene, chiropractic medicine, accounting, or architecture.
Some states make the definition more simple by defining a licensed professional as someone who holds a professional license in good standing. To see if a professional S-corporation is a good choice for a professional practice, you also have to define this business entity.
What Is a Professional S Corporation – How Is It Set Up?
Corporations are a common type of company. With its restricted liability, a professional S corporation shields business owners from legal troubles and financial calamities.
One of the most significant advantages of professional S corporations is that they are pass-through businesses that are not subject to double taxation.
To register as a professional S corporation, you must file Form 2553 with the IRS.
When forming a company, licensed professionals have numerous legal structures from which to choose. Because of the tax advantages and legal safeguards it offers, a professional S corporation is one of the most popular options.
That’s because, again, professional S corporations are pass-through entities that are not taxed twice. Furthermore, the personal assets of a professional S corporation’s owners are safeguarded; they cannot be confiscated in any judicial proceeding.
A professional S corporation, also known as Subchapter S company, employs a tax structure that gives a business the limited liability of a corporation with the tax advantages of a partnership or LLC.
Like a sole proprietorship or partnership, an S-corp’s profits and losses pass through to an owner’s personal tax return. While you’re set up as a corporation, you’re not double-taxed like a traditional C-corporation. Each shareholder records profits and losses on their individual tax returns.
Criteria for Forming a Professional S Corporation as a Licensed Professional
To set up a professional S corporation as a licensed professional, you must meet certain criteria. These criteria include the following:
- You must be U.S.-based.
- You cannot have more than 100 shareholders.
- You can only issue one class of stock.
- Shareholders must be individuals or certain estates or trusts.
- Shareholders cannot include corporations, foreign shareholders, or partnerships.
- Companies cannot be insurance businesses or financial institutions.
Why Setting Up a Professional S Corporation as a Licensed Professional Makes Sense
Many licensed professionals like the S corporation designation, as it covers their needs in terms of liability and taxation. When you set up a professional S corporation as a licensed professional, you not only avoid double taxation, you don’t have to pay the self-employment taxes required for partnerships or sole proprietorships. You just pay the individual income taxes owed on your earnings after they have passed through the business.
Moreover, profits are taxed at a lower tax rate than they are on regular income, making this business formation more beneficial to owners. If you experience losses, you can use the deficit to offset other income received on your tax return.
What You Need to Know about Setting Up an S Corporation as a Licensed Professional in California
Be forewarned: If you set up your professional S Corporation in California, you are not given the tax breaks of other states. While most states follow the IRS rules and do not impose an income tax on S corps, California is an exception. If you set up a professional S corporation as a licensed professional in California, you’ll have to pay a 1.5% franchise tax on any net income you make.
Because your “nexus” is in the state where you practice, and you’re required to pay the tax, you may want to form a registered limited liability partnership (PLLP or LLP), as you cannot establish a professional limited liability company (PLLC) or limited liability company (LLC) as a professional in the Golden State.
However, again, you’re restricted along these lines as well. You can only set up a PLLP or LLP as a public accountant, lawyer, or architect..
Contact Mollaei Law for Further Advice and Help
To determine your best move legally, you’ll need to contact me and discuss your business objectives and what you want to achieve from a liability and tax standpoint. You can email me anytime to begin a discussion.
Contact sam@mollaeilaw.com to get your questions answered about how to increase your earnings and save on taxes.
I can also help with forming a professional S corporation and keeping it operational. You’ll deal with more formalities when setting up a corporation, all of which I can handle for you.
Key Takeaways When Establishing a Professional S Corporation as a Licensed Professional
What is good about forming a professional S corporation is that owners can deduct the expense of the wages paid when figuring the amount of income that passes to shareholders. You can also transfer ownership without facing harsh penalties for taxation.
Nor are you ever subject to the double taxation that traditional C corporations experience. S corporations are pass-through entities, so the business’s income is never taxed.
How Do I Begin a Professional S Corporation as a Licensed Professional?
To begin a professional S corporation as a licensed professional, you need to follow some basic steps. I can help you through the process and keep you up and running thereafter. Email me anytime at sam@mollaeilaw.com.
- Choose the name of your business. Your practice’s name must not be similar to any other name in the Secretary of State (SOS) of business names. It must also follow the naming conventions established in your field.
- Draft the articles of incorporation and file them with the SOS. These articles are also called a certificate of incorporation. This document provides your business’s basic data, including its purpose, incorporators, and name and address.
- File your professional S-corporation info with the IRS. Once your corporation’s name and articles of incorporation are accepted, you’ll need to complete a form 2553 with the IRS. To make the form official, each shareholder must sign it. You must file the form by March 15th during the year your business elects the S corp status.
Obtain the Necessary State and Local Permits
While you have to follow the above steps to make your business official, you also have to obtain the necessary state and local permits, if applicable. Again, you can only form a professional S corp if you run your practice or business in the US and you have up to 100 shareholders.
Establish Your Company’s Operational Rules and Procedures
You cannot set up a professional S corporation without the guidance of an attorney, as a professional S corporation has a large number of operational guidelines you need to follow.
Some of these regulations include the scheduling of director and shareholder meetings, following specific rules about taking meeting minutes, and subscribing to SEC mandates for performing stock transfers. You also must provide stipulations for establishing the salaries of each owner and officer, whether or not your business makes money.
What Happens Next?
If you’re forming a professional S corporation as a licensed professional, you’ll need to speak to a knowledgeable business attorney. Contact me anytime to start your business and to stay operational. I am available 24/7. Email sam@mollaeilawl.com to schedule an appointment today.
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