Professional Corporation & PLLC Guide: Tax Rules for Licensed Professionals

What is a professional corporation? A professional corporation (PC) is a business entity designed for licensed professionals like doctors, lawyers, CPAs, and architects. Unlike a standard LLC, a PC satisfies state licensing board requirements while offering liability protection from other owners’ malpractice. PCs default to C-Corp taxation at the flat 21% federal rate, but can elect S-Corp status to avoid double taxation. A PLLC (Professional Limited Liability Company) is the LLC equivalent, available in about 30 states.

Key Takeaways

• PCs default to C-Corp taxation at a flat 21% federal rate – This catches many professionals off guard. Without an S-Corp election, your PC faces double taxation on distributed profits.
• PLLCs and PCs serve the same purpose through different structures – A PLLC is an LLC restricted to licensed professionals; a PC is a corporation restricted to licensed professionals. Your state determines which ones are available.
• Not every state allows PLLCs – California and several other states don’t recognize PLLCs, forcing licensed professionals into a PC structure instead.
• S-Corp election eliminates double taxation for most professional practices – Filing Form 2553 lets your PC or PLLC split income between salary and distributions, potentially saving $10,000+ in annual taxes. Actual savings vary based on income, industry, and state.
• Malpractice liability still follows you personally – A PC or PLLC protects you from your partner’s malpractice claims, but not your own. Professional liability insurance remains essential.
• QBI deduction phase-outs hit professionals hardest – Law, medicine, accounting, and other specified service trades lose the 20% QBI deduction above $201,775 (single) or $403,500 (married filing jointly), making entity selection even more important.

What Is a Professional Corporation?

A professional corporation is a state-authorized entity type reserved for people who hold professional licenses. Doctors, lawyers, CPAs, architects, engineers, dentists, and veterinarians are the most common professions that form PCs.

The reason PCs exist is straightforward. State licensing boards want to make sure that only licensed individuals own and control professional practices. A regular LLC or corporation could have anyone as an owner. A PC restricts ownership to people who hold the relevant license in that state.

Every state requires certain professions to use a PC, PLLC, or professional association (PA) instead of a standard business entity. The specific professions and entity types vary by state, but the core requirement is the same: if your work requires a state-issued license, you probably can’t form a regular LLC.

PLLC Meaning: How It Differs from a PC

A PLLC (Professional Limited Liability Company) is the LLC version of a professional corporation. Instead of incorporating under your state’s professional corporation statute, you form an LLC under a professional LLC statute.

The practical differences between a PC and PLLC are mostly structural, not tax-related:

• PCs follow corporate formalities: board of directors (often just you), bylaws, annual meetings, stock certificates, and minutes
• PLLCs follow LLC conventions: operating agreement, flexible management structure, fewer paperwork requirements
• Both restrict ownership to licensed professionals
• Both provide liability protection from other owners’ malpractice

The biggest distinction is that PCs default to C-Corp taxation (flat 21% rate), while PLLCs default to partnership or disregarded entity taxation. This default matters more than most professionals realize, and we’ll cover why in the tax section below.

Which Professions Require a PC or PLLC?

While requirements vary by state, these professions almost universally need a professional entity:

• Medical professionals – Physicians, surgeons, dentists, optometrists, chiropractors, podiatrists
• Legal professionals – Attorneys and law firms
• Accounting professionals – CPAs and accounting firms
• Engineers and architects – Licensed PEs and registered architects
• Veterinarians – Licensed DVMs
• Mental health professionals – Psychologists, licensed counselors, social workers
• Real estate professionals – Licensed brokers (in some states)

Some states add professions to this list. Texas, for example, includes pharmacists and physical therapists. California includes acupuncturists and speech-language pathologists. Always check your state’s professional corporation statute for the complete list.

State-by-State Variations: PC vs PLLC Availability

Not every state offers both entity types. Here’s how the major states handle professional entities:

States that don’t allow PLLCs include California, Massachusetts, and a handful of others. In those states, professionals must use a PC (or in some cases, a professional association).

California deserves special attention. If you’re a licensed professional in California, your only corporate option is a PC. California doesn’t recognize PLLCs, and it also imposes a minimum $800 annual franchise tax regardless of income, plus a 1.5% net income tax on S-Corps. These costs make California one of the most expensive states for professional entities.

PC vs PLLC vs Regular LLC: When Each Applies

Here’s the decision framework:

When to choose a PLLC: You want the operational simplicity of an LLC, your state offers PLLCs, and you plan to elect S-Corp taxation (which you probably should, at most income levels).

When to choose a PC: Your state doesn’t offer PLLCs (California), you want to retain significant earnings inside the entity at the 21% corporate rate, or you’re building a larger practice with formal governance structures.

When a regular LLC works: You don’t hold a license that requires a professional entity. Some states allow certain professionals to use standard LLCs, but check your licensing board first.

Tax Treatment Deep Dive: Where Most Guides Get It Wrong

Here’s the part most formation websites skip. The default tax treatment of PCs and PLLCs is different, and getting this wrong can cost thousands of dollars in the first year.

PCs Default to C-Corp Taxation

When you form a professional corporation, the IRS treats it as a C-Corporation by default. That means:

• The PC pays a flat 21% federal corporate tax rate on all net income
• If you distribute profits to yourself as dividends, you pay tax again at your personal rate (15% or 20% for qualified dividends, depending on your bracket)
• This double taxation can push your effective rate to 35-40% on distributed earnings
• The PC files its own Form 1120 corporate tax return

For a practice earning $300,000 in net income where the owner takes $200,000 in distributions, the math works out roughly like this: $300,000 x 21% = $63,000 in corporate tax, then $200,000 x 15% = $30,000 in dividend tax. Total tax on the distributed income: approximately $93,000, or a 31% effective rate on that $300,000. Illustrative example based on common client profiles; actual results depend on your income, industry, and state.

PLLCs Default to Pass-Through Taxation

A PLLC, like any LLC, defaults to pass-through taxation:

• Single-member PLLC: Disregarded entity. All income passes through to your Form 1040 and you pay self-employment tax (15.3%) on net earnings up to $184,500, plus 2.9% Medicare above that.
• Multi-member PLLC: Partnership taxation. Files Form 1065, issues K-1s to each member.

No double taxation. But you’re paying self-employment tax on the full amount unless you make an election.

The S-Corp Election: The Move Most Professional Practices Should Make

Whether you have a PC or PLLC, filing Form 2553 for S-Corp election changes everything:

• For a PC: Eliminates double taxation. Income passes through to your personal return. You split income between reasonable salary and distributions.
• For a PLLC: Eliminates self-employment tax on the distribution portion. Same salary/distribution split.

On $250,000 in net practice income, an S-Corp election with a $120,000 reasonable salary means:

• Payroll taxes apply only to the $120,000 salary (~$18,360)
• The remaining $130,000 in distributions avoids self-employment tax entirely
• Compared to a sole proprietor paying SE tax on the full $250,000, that’s potentially $15,000+ in annual tax savings

Illustrative example based on common client profiles; actual results depend on your income, industry, and state.

The QBI Problem for Licensed Professionals

The 20% Qualified Business Income (QBI) deduction is permanent under the OBBBA, but it comes with a catch for professionals. Law, medicine, accounting, consulting, financial services, and other “specified service trades or businesses” (SSTBs) face an income phase-out:

• Single filers: QBI deduction phases out between $201,775 and $251,775
• Married filing jointly: Phase-out between $403,500 and $503,500

Above those thresholds, you get zero QBI deduction. A doctor earning $500,000 through an S-Corp gets no QBI benefit. A construction company owner at the same income level gets the full 20% deduction.

This phase-out makes the C-Corp vs S-Corp decision more nuanced for high-earning professionals. If your income is well above the QBI phase-out, retaining earnings in a PC at the 21% corporate rate might be worth the double taxation trade-off, especially if you’re reinvesting those earnings rather than distributing them.

For a full breakdown of C-Corporation mechanics, see our C-Corporation Tax Guide.

Formation Steps for a PC or PLLC

The process is similar to forming a standard LLC or corporation, with one critical addition: licensing board approval.

1. Confirm your state allows your entity type. Check whether your state offers PCs, PLLCs, or both for your profession.
2. Get licensing board approval. Most states require a certificate of good standing or direct approval from your professional licensing board before the Secretary of State will accept your filing.
3. Choose your entity name. It must include the proper designation (P.C., P.A., PLLC, etc.) and typically must include the name of at least one licensed professional.
4. File formation documents. Articles of incorporation (PC) or articles of organization (PLLC) with your Secretary of State. Filing fees range from $50 to $500 depending on the state.
5. Create governance documents. Bylaws and shareholder agreement (PC) or operating agreement (PLLC).
6. Get your EIN. Free from the IRS, available online in minutes.
7. Make your tax election. File Form 2553 (S-Corp) or stick with the default. This is where most professionals need a CPA, not a formation service.

Common Mistakes Professionals Make

Accepting the default tax treatment. Forming a PC and never filing an S-Corp election means you’re paying the C-Corp 21% rate plus personal tax on distributions. For most practices under $500,000 in net income, S-Corp election produces a lower total tax bill.

Choosing entity type based on a blog post. State laws vary dramatically. What works in Texas doesn’t work in California. What’s optimal at $150,000 in income isn’t optimal at $600,000.

Ignoring the QBI phase-out. High-earning professionals in specified service trades (law, medicine, accounting) lose the entire 20% QBI deduction above the income thresholds. This changes the entity selection math significantly.

Skipping the operating agreement. Even for a single-owner PLLC, an operating agreement protects your liability shield and defines what happens if you bring in a partner later.

Frequently Asked Questions

Can a non-licensed person own shares in a professional corporation? No. State laws require all shareholders (PC) or members (PLLC) to hold the relevant professional license. If a shareholder loses their license, they typically must sell their shares within a defined timeframe.

What happens to a PC if the owner dies? Most states require the shares to be transferred to another licensed professional or redeemed by the corporation. The estate can hold shares temporarily, but a non-licensed heir can’t operate the practice.

Can I convert my existing LLC to a PLLC? In most states, yes. The process typically involves filing an amendment with your Secretary of State and getting approval from your licensing board. The IRS doesn’t care about the legal structure change; it only cares about your tax election.

Do I need a separate malpractice insurance policy for my PC? You should carry professional liability insurance regardless of your entity type. A PC protects you from your partner’s negligence, but not your own. Every professional should carry individual malpractice coverage.

Is a PLLC the same as an LLC? Functionally, a PLLC operates like any LLC. The difference is who can own it (licensed professionals only) and the filing requirements (licensing board approval). Tax treatment, management structure, and operating agreements work the same way.

Can a PC have employees who aren’t licensed? Yes. Non-licensed employees can work for a PC or PLLC. The ownership restriction applies only to shareholders or members, not staff.

Bottom Line

For most professional practices, the optimal path is a PLLC (where available) with an S-Corp election. It gives you LLC flexibility, eliminates double taxation, and reduces self-employment tax. If your state doesn’t offer PLLCs, a PC with an S-Corp election accomplishes the same tax result with slightly more paperwork.

The entity selection question gets more complex above the QBI phase-out thresholds. At that level, retaining earnings in a C-Corp at 21% might beat the S-Corp route, depending on how much you distribute vs. reinvest.

For a broader look at all entity types and first-year tax obligations, see our Starting a Business Tax Guide.

Licensed professional choosing your entity structure? Get started with SDO CPA.