252 Planning and Forecasting
they are deductible to employers but excluded from income only for employees.
Since a sole proprietor or partner is not considered an employee, the value of
benefits such as group medical insurance, group life insurance, and disability
insurance policies would be taxable income to them but tax free to the officers
of a corporation.
Professional Corporations
There are two common variations of the corporate form. The first of these is
the professional corporation. Taxation played a major part in its invention.
Originally, limitations on the amounts of money that could be deducted as a
contribution to a qualified retirement plan varied greatly depending upon
whether the business maintaining the plan was a corporation, a partnership, or
a sole proprietorship. The rules greatly favored the corporation. Partnerships
and sole proprietorships were required to adopt Keogh plans with their sub-
stantially lower limits on deductibility. However, doctors, lawyers, architects,
and other professionals, who often could afford large contributions to retire-
ment plans, were not allowed to incorporate under applicable state laws. The
states were offended by the notion that such professionals could be granted
limited liability for the harms caused by their businesses.
Eventually, a compromise was struck and the “professional corporation”
was formed. Using that form, professionals could incorporate their businesses,
thus qualifying for the higher retirement plan deductions but giving up any
claim to limited liability. As time went by, however, the Internal Revenue
Code was amended to eliminate most of the differences between the deduc-
tions available to Keogh plans and those available to corporate pension and
profit-sharing plans. Today, professional corporations are subject to virtually
all the same rules as other corporations, with the exception that most are clas-
sified as professional service corporations and therefore taxed at a f lat 35%
rate on undistributed profit.
As the tax incentive for forming professional corporations has decreased,
many states, perhaps with an eye toward maintaining the f low of fees from
these corporations, have greatly liberalized the availability of limited liability
for these corporations. Today in many states professional corporations now
afford their stockholders protection from normal trade credit as well as tort li-
ability arising from the actions of their employees or other stockholders. Of
course, even under the normal business corporation form, a stockholder is per-
sonally liable for torts arising from his or her own actions.
Subchapter S Corporations
The second common variation is the subchapter S corporation, named for the
sections of the Internal Revenue Code that govern it. Although indistinguishable
from the normal (or subchapter C) corporation in all other ways, including lim-
ited liability for its stockholders, the subchapter S corporation has affirmatively