August 2021 has seen 427,842 business applications in total – 4.7% less than the previous month, according to the Census Bureau. These business applications consist of LLC’s, corporations, professional corporations and other business entities.
What is a Professional Corporation?
There are some similarities between a professional corporation and a regular corporation. Both the corporation and professional corporation (PC) have to write bylaws, hold shareholder meetings and pay corporate income taxes. The only time the business models really differ is when incidences of malpractice occur. In a PC each shareholder has some protection from liability, therefore if the business goes into debt shareholders likely won’t be expected to be responsible for the debt. However, unlike a regular corporation, shareholders in the PC can be sued for malpractice. In any other incorporated entity there shareholders cannot be individually sued, however the PC business structure allows that each shareholder can be sued for their own malpractice.
There are some additional benefits to creating a professional corporation, depending on where the entrepreneur chooses to incorporate, as some states are more business-friendly than others. Let’s take a closer look at some of them.
Delaware offers businesses a lot of flexibility when it comes to the corporate and board structure. Important to note is that the corporation’s officers and directors do not need to live in the state in order to serve the business. Entrepreneurs and founders also have the option to operate their business solo in Delaware, whereas other states may require at least 3 individuals to fill the roles of directors and officers. When it comes to corporate legal issues, Delaware remains a solid choice for incorporation as the state makes use of judges rather than juries. Therefore when a case is heard it should appear before a judge with expertise in corporate law, resulting in the increased likelihood of a fair, impartial and streamlined court procedure.
One of the biggest advantages to incorporating in Nevada may lie in the heightened asset protection that the state offers. When an entrepreneur incorporates in Nevada, any liability the business incur is kept with the business entity. While incorporation in any state provides entrepreneurs with liability protection, some states may have loopholes that could be used to hold entrepreneurs responsible for damages caused by the business. Entrepreneurs are also not required to list their company corporate assets for the state, but will need to do so for the Federal Government. This anonymity adds another layer of protection for the entrepreneur’s assets when starting a business in Nevada.
As a state with a high level of venture capital available to small businesses, Georgia is on the rise as one of the best states to start a business in. Interestingly, the percentage of the population that started a business in Georgia is higher than the national average, estimated at 42%. During 2020 the state lowered its corporate income tax rate from 6% to 5.75%. This, coupled with a comparatively low cost of living and high entrepreneurship rate adds to the state’s lure for professional corporations.
If flexibility in how a business will be run is a key consideration, Wyoming may be a state to consider. When entrepreneurs file their incorporation paperwork they will need to identify the individuals who will be running the day-to-day operations. Furthermore, the Wyoming state government offers several incentives to businesses that choose to incorporate there. With no corporate state income tax or franchise tax for corporations, it is no secret why this state remains a popular choice. In addition to the aforementioned benefits Wyoming does not collect personal income tax and boasts a low sales tax, nestling at 4%.
Colorado is considered to be one of the best states to start a small business and boasts a startup survival rate of just over 81%. Between Boulder and Denver, Colorado is home to big names in the startup scene, i.e: Kimbal Musk, founder of Zip2 and PayPal, Andrew Hyde, and Joe Stump (founder of SimpleGeo). These are a few examples of second and third generation entrepreneurs who’ve contributed to a thriving community. As an economically sound state, Colorado had exceptional GDP growth during 2018 and 2019, offering startups a lot of opportunities to succeed.
California offers many benefits to entrepreneurs who incorporate in the state. A California corporation can elect S corporation status if certain requirements are met. S corporation status allows a business entity to be taxed in a similar way to a partnership. In addition, California offers certain tax credits to business entities to encourage them to stay and grow in-state. California corporations may be eligible to claim new employment hiring tax credits, for example.
The entrepreneur choosing to start a professional corporation will need to consider carefully if the chosen state’s laws and tax incentives are worth their while. In general, a good rule of thumb would be to incorporate in the state where you intend to do the most business in. For most aspiring entrepreneurs incorporating in their home state remains a sound choice.