While federal tax law determines how various types of corporations are taxed, it is the various States’ laws that authorize the formation of businesses as corporations in the first place. These laws specify what types of businesses may be formed as certain types of corporations. Generally, a corporation may be formed to operate any lawful business. However professions that carry a risk of professional liability are required to incorporate as Professional Corporations. Doctors, medical professionals, lawyers, and accountants are some examples of professionals who would need to incorporate as Professional Corporations. The exact professions will vary from state to state.
Incorporating allows these professionals to limit their personal liability for business debts and for the malpractice liability of their business partners. For example, if two lawyers practice together in a partnership, each could end up paying for any malpractice damages awarded against the other. However, if they operate their business as a professional corporation, the lawyer who does not commit malpractice will NOT be personally liable for the malpractice of the other lawyer. However, the professional corporation law requires that the business carry adequate malpractice insurance. Both lawyers will also be protected from personal liability for the actions of employees, as well as for other business debts.
Another alternative form of incorporation is a Nonprofit Corporation. Different state laws will apply to forming a nonprofit corporation as well. Generally businesses that have a religious, charitable, literary, scientific or educational purpose may form as nonprofit corporations. A nonprofit corporation will usually try to qualify as a tax-exempt corporation under the Internal Revenue Code as well. This means that the corporation will not have to pay federal income tax on profits. Act carefully when considering whether to incorporate as a nonprofit business: once you incorporate as a nonprofit corporation, you will no longer own the business. A nonprofit corporation does not have shareholders. Its profits are to be used only to support its religious, charitable, literary, scientific or educational mission. This does include paying its employees a reasonable salary.
Because each type of corporation has different requirements regarding how the corporation is formed and how it must be operated, you should check with an attorney who practices in the area of corporate law when considering if one of these alternative forms of corporation is right for your business.
