Thinking of starting a professional firm? Business expert Barbara Weltman discusses the unique tax rules that apply to PSCs.
A professional service corporation could cover a myriad of professions, attorney, accountant, a dentist, an architect, an engineering firm. There are a lot of companies that do operate as PSCs. There are some unique tax rules for them. PSCs are essentially C corporations, regular corporations. But as a PSC, you have a flat tax, the highest corporate tax rate on whatever the profits are that you have not taken out as salary. So the net profits after salary are subject to the highest corporate tax rate. There are some other tax rules that are unique to a PSC. So, before you operate in this type of entity, you want to run this by your legal and tax advisors. Typically in a PSC, you try to zero out the profits by distributing the income as salary and other taxable compensations, so you don’t have that exposure to the top tax rate. But sometimes, you want to operate as a C corporation because it offers certain fringe benefit opportunities, and perhaps certain outside financing opportunities that aren’t available for other types of entities.