How to Qualify As a Personal Service Corporation
Meet the minimum requirement for providing services., Provide professional services that meet IRS definitions., Pass the ownership test., Check with your state's office of Secretary of State., Complete the Articles of Incorporation., File the...
Step-by-Step Guide
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Step 1: Meet the minimum requirement for providing services.
The IRS will examine the work of your company.
To qualify as a professional service corporation, substantially all of the activities of your business must consist of professional services on the part of employee-owners.
Shareholders in a qualified personal service corporation must provide at least 20% of the corporation’s services.
For example, if your personal service corporation is a law firm, at least 20% of the operations of the corporation must consist of legal services.
This percentage will be reflected in the company's payroll.
While a personal service corporation will employ secretaries, office managers and other staff, at least 20% of salary payments will have to consist of compensation for qualifying professional services. -
Step 2: Provide professional services that meet IRS definitions.
The IRS limits the type of professional services that qualify for special tax treatment.
Qualified professions, as listed in the Internal Revenue Code, include: accounting actuarial science architecture consulting engineering health (including veterinary services) law performing arts , To qualify as a professional services corporation, at least ten percent of the corporation’s stock must be owned by employees or retired employees.
This percentage can include stock passed by inheritance to other parties. , Tax regulations are a federal matter administered by the IRS, but corporation law is enforced by the various states.
If you wish to create a personal service corporation, ask your Secretary of State's office about which professional services qualify for personal service corporation status. , Creating a corporation is usually a relatively easy process.
In most states this begins by filing what are called Articles of Incorporation.
The Articles will consist of certain information about the business and officers as well as stock allocation.
In most states you can find a template for the Articles of Incorporation on the Secretary of State’s website.
Many states use a fill-in-the-blanks format in compliance with simplified filing requirements.
For more detailed information about completing Articles of Incorporation, check out Fill out Articles of Incorporation or Form a Corporation.
Hiring a lawyer to help you complete the Articles may be a good investment. , When the Articles are complete, file them with the Secretary of State.
That office or its website will explain filing requirements.
You will probably be asked to provide several copies signed by one or more of the incorporators.
You will also be required to pay a filing fee of approximately $100.
The fee varies among the states.
In Virginia, for example, the filing fee is $25 plus a sliding-scale amount based on the number of shares of company stock outstanding.
In New York the filing fee for a personal services corporation is $125. , In most states, to remain in good standing as a personal services corporation, you must meet certain annual requirements.
If you do not comply with the state requirements, you risk losing corporation status.
If this happens, you will also lose IRS tax benefits.
The most common requirements for maintaining corporate standing are the following:
Conduct annual meetings and file annual reports.
Most states require at least annual meetings of shareholders and directors and annual reports filed with the Secretary of State’s office.
Pay annual franchise taxes.
Most states levy a corporate or franchise tax for the privilege of doing business within the state.
Maintain updated by-laws.
By-laws list the “rules” of operating a corporation.
These must be kept current and accurate.
If the corporation changes its methods of operation, it must make corresponding changes to its bylaws.
Bylaws are not generally filed with the Secretary of State but must be maintained by the corporate officers. , A qualified Personal Service Corporation (QPSC) is eligible to compute its taxes using the cash method of accounting.
This is usually more beneficial than the accrual method.
The accrual method would be required for a corporation whose gross annual receipts exceed five million dollars. , Individuals who operate a business and provide services generally choose to incorporate in order to separate their personal assets from the assets and liabilities of the business.
In most states a QPSC enjoys this type of protection. , A QPSC with at least three shareholders is eligible to establish a Voluntary Employees’ Beneficiary Association (VEBA), which can provide employees with tax-free benefits.
These benefits are usually administered by banks or insurance companies. , A QPSC pays federal income tax at a flat rate of 35% (as of 2016).
However, the owner-employees of the corporation can work with their accountants to limit the corporation’s annual taxable income.
This is accomplished by passing the corporation’s income through to the shareholders as salary, bonuses and fringe benefits.
These payments are generally tax deductible for the corporation. -
Step 3: Pass the ownership test.
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Step 4: Check with your state's office of Secretary of State.
-
Step 5: Complete the Articles of Incorporation.
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Step 6: File the Articles of Incorporation with your state.
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Step 7: Maintain your corporate standing.
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Step 8: Use the cash method of accounting.
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Step 9: Receive limited liability protection for shareholders.
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Step 10: Offer tax-free life- and health-insurance to employees.
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Step 11: Limit the corporation’s tax payments.
Detailed Guide
The IRS will examine the work of your company.
To qualify as a professional service corporation, substantially all of the activities of your business must consist of professional services on the part of employee-owners.
Shareholders in a qualified personal service corporation must provide at least 20% of the corporation’s services.
For example, if your personal service corporation is a law firm, at least 20% of the operations of the corporation must consist of legal services.
This percentage will be reflected in the company's payroll.
While a personal service corporation will employ secretaries, office managers and other staff, at least 20% of salary payments will have to consist of compensation for qualifying professional services.
The IRS limits the type of professional services that qualify for special tax treatment.
Qualified professions, as listed in the Internal Revenue Code, include: accounting actuarial science architecture consulting engineering health (including veterinary services) law performing arts , To qualify as a professional services corporation, at least ten percent of the corporation’s stock must be owned by employees or retired employees.
This percentage can include stock passed by inheritance to other parties. , Tax regulations are a federal matter administered by the IRS, but corporation law is enforced by the various states.
If you wish to create a personal service corporation, ask your Secretary of State's office about which professional services qualify for personal service corporation status. , Creating a corporation is usually a relatively easy process.
In most states this begins by filing what are called Articles of Incorporation.
The Articles will consist of certain information about the business and officers as well as stock allocation.
In most states you can find a template for the Articles of Incorporation on the Secretary of State’s website.
Many states use a fill-in-the-blanks format in compliance with simplified filing requirements.
For more detailed information about completing Articles of Incorporation, check out Fill out Articles of Incorporation or Form a Corporation.
Hiring a lawyer to help you complete the Articles may be a good investment. , When the Articles are complete, file them with the Secretary of State.
That office or its website will explain filing requirements.
You will probably be asked to provide several copies signed by one or more of the incorporators.
You will also be required to pay a filing fee of approximately $100.
The fee varies among the states.
In Virginia, for example, the filing fee is $25 plus a sliding-scale amount based on the number of shares of company stock outstanding.
In New York the filing fee for a personal services corporation is $125. , In most states, to remain in good standing as a personal services corporation, you must meet certain annual requirements.
If you do not comply with the state requirements, you risk losing corporation status.
If this happens, you will also lose IRS tax benefits.
The most common requirements for maintaining corporate standing are the following:
Conduct annual meetings and file annual reports.
Most states require at least annual meetings of shareholders and directors and annual reports filed with the Secretary of State’s office.
Pay annual franchise taxes.
Most states levy a corporate or franchise tax for the privilege of doing business within the state.
Maintain updated by-laws.
By-laws list the “rules” of operating a corporation.
These must be kept current and accurate.
If the corporation changes its methods of operation, it must make corresponding changes to its bylaws.
Bylaws are not generally filed with the Secretary of State but must be maintained by the corporate officers. , A qualified Personal Service Corporation (QPSC) is eligible to compute its taxes using the cash method of accounting.
This is usually more beneficial than the accrual method.
The accrual method would be required for a corporation whose gross annual receipts exceed five million dollars. , Individuals who operate a business and provide services generally choose to incorporate in order to separate their personal assets from the assets and liabilities of the business.
In most states a QPSC enjoys this type of protection. , A QPSC with at least three shareholders is eligible to establish a Voluntary Employees’ Beneficiary Association (VEBA), which can provide employees with tax-free benefits.
These benefits are usually administered by banks or insurance companies. , A QPSC pays federal income tax at a flat rate of 35% (as of 2016).
However, the owner-employees of the corporation can work with their accountants to limit the corporation’s annual taxable income.
This is accomplished by passing the corporation’s income through to the shareholders as salary, bonuses and fringe benefits.
These payments are generally tax deductible for the corporation.
About the Author
Andrea Williams
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