What Is a Professional Corporation?
A professional corporation is a type of business structure that is formed and operated by a specific type of licensed professional. These licensed professionals typically consist of physicians, surgeons, dentists, lawyers, CPAs, insurance agents, and others. The filing process is similar to a traditional New Mexico corporation.
Licensed professionals often choose a professional corporation structure for the liability protection it offers the owners against business debts and claims. Note, however, that a professional corporation cannot protect shareholders from liability for malpractice or negligence. It can, however, protect from other liabilities from the malpractice or negligence of an associate.
Should You Form a New Mexico Professional Corporation?
Before you get started on forming your New Mexico Professional Corporation, it’s worthwhile to review a few aspects of your business structure and objectives to be certain that a professional corporation is your best choice. In certain cases, a business may opt to form a limited liability company (LLC) instead.
As we previously mentioned, only licensed professionals can form professional corporations. Additionally, all owners of the professional corporation must consist of the same profession. So, for example, individuals that are dentists cannot hold ownership positions in a professional corporation for lawyers.
Just like any corporation, a professional corporation issues shares to determine ownership. Determining how these ownership shares are going to be divided among owners is an important initial decision. Those owners with shares in the corporation are known as shareholders.
It’s also important to understand how a professional corporation is managed. As a corporation, the shareholders will need to elect a board of directors, which will meet periodically to set the company’s strategic direction. Additionally, the board will appoint officers to carry out the day-to-day operations and management of the corporation. Note that board members are allowed to be officers and vice versa.
Another aspect to keep in mind is that professional corporations do not enjoy the pass-through taxation classification that sole-proprietorships, partnerships, and LLCs enjoy. So, if you choose the professional corporation structure for your business you may be faced with double taxation depending on your elected tax status.
Forming Your New Mexico Professional Corporation
Once you have determined that a professional corporation is the right choice for your business. There are several steps that you’ll need to complete in order to ensure a successful formation.
Name Your Corporation
For starters, you’ll need to choose a name for your corporation that includes the words “professional service corporation” or the abbreviated form PSC. Additionally, you’ll want to choose a name that aligns with your business objectives and is appealing to potential customers.
It’s also important that the name you choose is unique from other business entities in the state of New Mexico. To check to see whether your desired name is available, you can use the business search tool located on the New Mexico Secretary of State’s website. If you’ve found a name that you want to use but are not yet ready to form your corporation, you can reserve the name for a $25 fee. The name reservation will last for up to 120 days (with the option to renew).
Next, you’ll need to select a registered agent for your professional corporation. This can be either an individual resident of New Mexico or a business authorized to operate in New Mexico. Your registered agent must be able to receive legal notices on behalf of the corporation during normal business hours.
Articles of Incorporation
To officially incorporate your company, you’ll need to file articles of incorporation with the New Mexico Secretary of State. The filing fee has a minimum limit of $100 and a maximum of $1,000. The amount varies depending on the number of shares your corporation authorizes.
Board of Directors
The individual that is incorporating your company must select initial directors to serve until shareholders chose the official directors. For a professional corporation, it’s important to remember that the directors must share the profession of the professional corporation. Once initial directors are selected, the incorporator should document these appointments for the corporation’s record.
Note: It’s important that you establish what is known as a corporate record. New Mexico law requires that professional corporations maintain permanent records of important decisions.
Your corporate bylaws serve as an important legal document for your company that outlines the procedures and rules for running your corporation. Bylaws can help to clear up any confusion and serve as an important guiding document to avoid conflict.
Some examples of what to include in your bylaws are how often your board of directors is set to meet, how votes will be conducted, how officers will be designated, and how internal disputes will be settled. In some cases, financial institutions may require that your company have bylaws in place before you can open a bank account or secure a loan.
With your board of directors appointed and your bylaws prepared, you’ll need to schedule a board of directors meeting. Among the objectives that you’ll want to complete at this initial meeting are approving your prepared bylaws, designating officers to run day-to-day operations for the company, and approving the issuance of stock certificates. Also important at board meetings is recording the minutes for the corporate record.
The state of New Mexico requires that you obtain a federal tax ID number (EIN) from the IRS in order to operate your professional corporation. Additionally, your EIN will allow you to file corporate taxes, hire employees, and open a bank account, among other things. Along with this, you will need to decide on the tax classification for your corporation: either a C-corporation or S-corporation.
C-Corporation: This is the most common classification for professional corporations. Note that C-corporations experience double taxation, in which profits are taxed at both the corporate level and shareholder personal tax returns.
S-Corporation: This classification is only available to professional corporations that issue only one class of stock, is not owned by another entity, and has fewer than 100 shareholders (none of whom are foreign). S-corporations enjoy pass-through taxation, which means that profits are only taxed on shareholder personal tax returns.
While the state of New Mexico does not require a general business license, most professions are regulated by state boards or commissions that require licenses or permits. Check to see which local licenses or permits apply to your profession.
Additionally, New Mexico generally requires that businesses with three or more employees obtain worker’s compensation insurance. As a professional corporation, you should also consider general liability insurance or other insurances that might apply more specifically to your profession.