About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

8 Law Notes Gen. Prac. 1 (1971-1972)

handle is hein.journals/lwntgen8 and id is 1 raw text is: Volume 8, page 1 Current Survey of Professional Corporations by HARRY V. LAMON, JR., Hansell, Post, Brandon & Dorsey Atlanta, Georgia What is a Professional Corporation? IT IS A LEGAL ENTITY formed under a state law which permits professionals to practice as a corpo- ration rather than as a sole proprietorship or part- nership. This corporate entity has a certificate of incorporation, bylaws, it is managed by a Board of Directors, the interests of its shareholders are transferable, it has limited liability, and its life is usually perpetual. Should You and/or Your Clients Form a Professional Corporation? Let me review the major tax and non-tax factors which must be considered: Tax Factors What are the major tax advantages of incorpora- tion? (1) The primary area of tax benefit is considered to be the adoption of a qualified Pension and Profit Sharing Plan. The basic idea here is to set aside some current tax deductible income for retirement years. HR-10 plans for self-employed in- dividuals-more commonly referred to as Keogh Plans-allow a partner or sole proprietor to set aside up to a maximum of $2,500 a year for each individual. When this amount is set aside, the part- ner can deduct it from his taxable income. In addi- tion, this amount is put into a trust which is tax exempt. Therefore, if invested in stock, for ex- ample, the dividends each year are not subject to tax. So, the contributions and the income each year are allowed to accumulate tax-free with the partner paying no tax until distribution to him at retire- ment. Obviously, this is a great benefit-for other- wise, a professional in the 50% tax bracket would have to earn an additional $5,000 in order to pur- chase the same $2,500 worth of stock. Corporate plans, on the other hand, which are available to professional corporations, offer an even more valuable benefit. The main reason is because substantially higher contributions can be made to a corporate plan rather than to an HR-10 plan. In a corporate profit sharing plan, the maximum contri- bution is 15% of the compensation of employees covered by the plan. In the corporate pension plan, the maximum deduction is limited only to the ac- tuarial cost of the benefits to be provided at retire- ment and the reasonableness of compensation to employees covered by the plan. If both a pension and profit sharing plan are used simultaneously, the maximum deductible contribution is 25%. For example, let us assume there is a two-man partnership with each man earning $50,000. For simplicity, assume also there are no other full-time employees. Under an HR-10 plan, the maximum contribution using both a pen- sion and profit sharing plan is $2,500 each. If the two men were incorporated and each has a $40,000 salary, 'the maximum contribution, using both a pension and profit sharing plan is $20,000. If the contributions are allocated equally, each doctor would receive a $10,000 share. Obviously, the growth potential of $10,000 per year far exceeds $2,500 per year. There are also other advantages of the corporate plans over HR-10 plans, with respect to coverage, vesting and, particularly, estate tax- ation, which will not be mentioned here. (2) A second tax advantage in forming a profes- sional corporation is through the implementation of a corporate Accident and Health Plan, whereby medical benefits provided for corporate employees are deductible by the corporation and non-taxable to the employee. Flexibility is allowed in deter- mining which employees are to be covered. How- ever, if the Medical Expense Plan is set up to reimburse only stockholder-employees for medical expenses paid by them for medical care for them- selves and their dependents, the Internal Revenue Service may attempt to say that the reimburse- nients are dividends to the shareholders, thereby disallowing a corporate deduction. Similarly, the professional corporation may institute a Wage Con- © 1971 American Bar Association General permission to republish but not for profit, all or part of this material is granted, provided that reference is made to this publication, its date of issue, and that reprinting privileges were granted by permission of the American Bar Association Sections of General Practice and Young Lawyers. Law Notes, October, 1971 ECONOMICS

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most