Today I wanted to give a brief overview of the differences between a professional services corporation and a traditional corporation. For the purposes of this blog, I am lumping together companies using the phrases, “chartered,” “professional association,” “P.A.,” “professional limited liability company,” “P.L.L.C.” or “PLLC.” I will refer to all the professional services corporations as “P.A.” solely for ease in writing but please keep in mind that they are different and the reasons to use one entity structure over another is a choice to discuss with an attorney.
The main difference between a P.A. and a traditional corporation is the type of business that each transacts. A P.A. is required to organize for the specific purpose of providing professional services in a specialized field, i.e. law, accounting, real estate, etc. The phrase professional service is defined by Florida Statute 621.03 as, “any personal service to the public that requires…the obtaining of a license or other legal authorization.” A traditional corporation can organize for “any lawful purpose or purposes.” Some secondary differences are that the issuance of stock or memberships for a P.A. is limited to individuals or professional corporations that are licensed or authorized to provide the same professional services; shareholders or members cannot enter into agreements that allow another person to exercise their voting rights; and shareholders or members of P.A.s are restricted to selling their shares only to other individuals or professional organizations that are eligible to be shareholders or members of the organization.
The obvious question then becomes if a P.A. limits what business activities I can engage in and a traditional corporation does not, then why would I ever choose a P.A.? The simple answer is that if you are going to provide services to the public and you want to incorporate, you are required too. The Florida legislature specifically enacted statutes that allow for professionals to incorporate but only on their terms
Why do people incorporate their business? The number one reason I've heard is to protect them from personal liability. While incorporating a new or existing business may protect the business owner from personal liability, the act of incorporation alone does not necessarily accomplish that goal. To understand why, you must first understand the reason for a corporate entity.
A corporation is a separate legal entity that is distinct from its owners. Corporations are born out of statutes and as such the requirements for forming a corporation vary from state to state. Generally, corporations are required to file a document which shows its intention to be a corporation (in Florida, Articles of Incorporation). These documents can be very general and usually state the corporation’s basic information i.e. name, address, what type of business it is authorized to conduct, number of shares authorized, etc. The initial document is then followed by the corporation’s bylaws. The bylaws are a detailed document which dictate the corporation’s existence. The bylaws layout the shareholder’s rights are and how they exercise those rights, how many directors are on the board, what those director’s obligations to the corporation are, what actions the board can take, what officers the corporation can have, what those officer’s responsibilities are, all the way down to what the corporation’s seal should look like and of course the all-important issuance of dividends.
At this point you are wondering what this has to do with limiting liability? The answer is that corporate formalities matter. There is a legal theory known as “piercing the corporate veil,” which is basically a fancy way of saying disregarding the corporate entity and treating it as an extension of the business owners. As a business owner, if a “piercing” happens, the number one reason you incorporated just disappeared and now the business’s assets and your personal assets are on the table.
As small business owners, it is important to remember the corporate formalities, especially when you are the only shareholder, the chairman of the board of directors, the president, and any other title that you want to throw in there. It is important that you take the time to make bylaws, hold the shareholder’s meetings and take minutes, hold the board of director’s meetings and take minutes, keep records of who owns the shares of the corporation, and keep all of that information in a safe place. That way when the time comes and you get sued and the plaintiff is arguing that your business is just an extension of yourself, it might be what saves your assets.
Jeffrey Lampley, Esq.
I am attorney in Southwest Florida who practices in the areas of Business Law and Bankruptcy. This Blog is a combination of useful information and my thoughts on life. Enjoy.