A ROBS setup is not allowed for professional service corporations.
What Are Professional Service Corporations?
Professional Service Corporations (PSCs) allow for the incorporation of an individual or group of individuals to render the same professional service to the public for which such individuals are required by law to be licensed or to obtain other legal authorization. PSC rules require shareholders, directors, officers (secretary and treasurer excepted) , and employees rendering the service to hold that license.
A corporation won’t insulate you from your own malpractice or from that of your employees. PSC’s, unlike general business corporations, do not legally shield the owner from a negligence claim. As a result, for those in solo practice, the PSC offers no legal advantage. However, a PSC can be important for those who practice in a group. A PSC can protect against personal liability for the negligence of a partner.
For IRS treatment of professional service corporations, click this link.
Why is a ROBS setup is not allowed for professional service corporations?
Can you answer this question based on your current knowledge of ROBS requirements? (I’ll pause here while you think about it).
Correct! in a ROBS arrangement, the 401K Plan becomes a shareholder of the corporation. The 401K plan is not a licensed professional. Therefore, may not own stock in a PSC.
The Key Question for Service Providers
If you want to create a service business, and that service requires a professional license, here is the key question we must answer before knowing whether we can create your corporation with ROBS funding:
- Does your State require business entities for your profession to register as professional service entities? I do not know a specific source that breaks down this issue by State. The best place to ask is either your professional board or your Secretary of State office.
If YES, you may not use ROBS funding.
If NO, are you willing to use a general business corporation? Remember, if you are the only one providing the service, there is little difference between the two. However, if you envision more than one service provider, a general corporation might make you liable for your partner’s negligence. Please see an attorney in your State for a full discussion.