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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


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