S Corporations, C Corporations, and Professional Corporations

Compares the tax treatment, liability structure, and ownership rules of S corporations, C corporations, and professional corporations as they apply to architecture firms, including pass-through taxation, double taxation, shareholder restrictions, and state licensure requirements.

ARE · Practice Management

Overview

Choosing a corporate structure shapes everything about how your firm pays taxes, distributes profits, and protects its owners. For architects, this decision carries an extra layer of complexity: state licensing boards impose specific ownership and governance rules on firms that provide professional design services.

Three corporate forms show up repeatedly on the ARE and in real practice. C corporations are the standard corporate entity, taxed at the corporate level with dividends taxed again at the shareholder level. S corporations avoid that double hit by passing income and losses directly through to shareholders' personal returns. Professional corporations (PCs) are a special corporate form required or permitted by most states for licensed professions, including architecture, and they come with strict rules about who can own shares.

Why does this matter for the PcM exam? Because business structure decisions drive a firm's financial planning, ownership transition strategy, and risk exposure. You need to know which structure fits a given scenario, how taxation flows through each entity type, and what restrictions apply when the shareholders are licensed architects.

This topic covers the mechanics of each structure, the tax implications that distinguish them, and the specific professional corporation requirements that states impose on architecture firms.

Essential

When architects form a corporation, they pick from three main flavors: C corporation, S corporation, or professional corporation. Each has distinct tax treatment, liability protection, and ownership rules. The ARE tests your ability to apply these differences to real practice scenarios. ## C Corporations: The Standard Corporate Entity A C corporation is a separate legal entity from its owners. Shareholders exchange money or property for capital stock, and the corporation itself pays taxes on its earnings using corporate tax rates. The name comes from Subchapter C of the Internal Revenue Code. Here is the critical tax feature: double taxation. The corporation pays income tax on its profits first. Then, when those profits get distributed to shareholders as dividends, the shareholders pay income tax again on those distributions at their individual rates. Shareholders cannot deduct corporate losses on their personal returns. C corporations file Form 1120 (U.S. Corporation Income Tax Return).

Professional

Consider a five-person architecture firm in California deciding whether to form as a C corporation, S corporation, or professional corporation. The principals are all licensed architects, and they expect to earn $1.5 million in net revenue in the first year, with plans to retain roughly $300,000 for office buildout and technology investments. If the firm chooses a standard C corporation, those retained earnings stay inside the entity and are taxed only at the corporate rate. The principals defer personal income tax on that $300,000 until it is distributed as dividends later. For a young firm with heavy startup costs, this can be a meaningful cash flow advantage. The tradeoff: any dividends distributed down the road will face a second layer of taxation. Switching the same firm to S corporation status changes the picture. All $1.

TLDR

C corporation: Separate tax-paying entity. Pays corporate income tax on profits; shareholders pay again on dividends. File Form 1120. Can retain earnings inside the company.
S corporation: Same legal structure as C corp, but elects pass-through tax treatment via Form 2553. Files Form 1120S. Income, losses, and deductions flow to shareholders on Schedule K-1. No entity-level federal income tax (with narrow exceptions).
Double taxation trap: C corp profit gets taxed twice. S corp avoids this, but shareholders owe tax on their share even if no cash is distributed.
Professional corporation (PC): State-level corporate form for licensed professions. Does NOT change federal tax classification. Restricts ownership to licensed professionals (architects, in this case).
Certificate of Authorization: Most states require architecture firms to obtain one before practicing. Requires disclosure of ownership and a licensed architect in responsible charge.
Naming rules for PCs: Must typically include a licensed shareholder's name plus "Architectural Corporation" or similar designation.
Ownership transition in PCs: When a shareholder loses their license or retires, state rules often require mandatory stock repurchase by remaining shareholders.
Exam focus: Know the tax flow difference (pass-through vs. double taxation), the governance restrictions PCs impose, and that PC requirements vary by state.

ELI5

Think of a corporation like a container you put your business inside. The container has its own name, its own bank account, and its own legal identity. If someone sues the business, they are suing the container, not you personally. That protection is called limited liability. Now, there are two main flavors of this container for tax purposes. A C corporation is the default. The government taxes the money inside the container first. Then, when you take money out of the container (as dividends), you get taxed again on that same money. Two bites of the tax apple. That is double taxation. An S corporation works differently. You file a special form telling the IRS, "Hey, don't tax the container. Just tax me directly on my share of whatever the container earned." The money passes through the container straight to your personal tax return. One bite. Much simpler.

AREPractice Management

S Corporations, C Corporations, and Professional Corporations

1 min read200 words

Corporate Structures for Architecture Firms: S Corps, C Corps, and Professional Corporations

This topic covers the mechanics of each structure, the tax implications that distinguish them, and the specific professional corporation requirements that states impose on architecture firms.

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