Limiting Business Liabilities
Business Liability Issues for Professional Corporations
Don't assume that incorporation automatically shields you from business liabilities. Members of a professional corporation may be surprised to learn that they can still be held personally liable for professional negligence.
Professional corporations are businesses comprised of professionals like accountants, lawyers, health care professionals (e.g. doctors or dentists), veterinarians, and other specialized service providers.
The way professional corporations are handled varies from state to state. While some states require professional corporation status for these kinds of businesses, others allow them to choose between a professional corporation and a regular corporation.
What's the difference? Depending on the professional's circumstances, it can be quite significant – at least from a liability perspective. One of the reasons regular corporations are attractive is because they offer a liability shield. Shareholders in the corporation are not legally liable for the business. But in a sole proprietorship or general partnership, owners' personal assets are exposed to the legal liabilities of the company.
From a liability perspective, professional corporations fall somewhere between a regular corporation and a general partnership. In the past, professional corporations received preferential tax treatment compared to partnerships. Those tax benefits disappeared in 1986. Yet there are still reasons why professional corporations may be an attractive option for specialized service professionals especially when you consider how they deal with the issue of liability:
Professionals are liable for their own negligence and malpractice.
In a professional corporation, each professional member is liable for his or her own negligence and malpractice. In other words, the corporation can't be used to shield service professionals' personal assets from liability. So if a doctor engages in an act of gross negligence, he can (and in today's legal climate, probably will) be sued individually for his actions.
Professionals are not liable for the negligence and malpractice of an associate.
The big benefit of a professional corporation is that members are not legally liable for the actions of other professionals within the corporation. When one doctor is sued for negligence or malpractice, the other doctors in his professional corporation are protected from litigation, provided they were not directly involved with the patient. This is a significant departure from a general partnership in which each partner is liable for the other partners' actions. Even though professional corporations no longer enjoy tax advantages, many professionals continue to rely on them because they offer a level of liability protection.
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