Choosing the appropriate form of business for your company is complicated—and if you are an attorney, physician, accountant, architect or other licensed professional, there are some extra factors to consider. As a professional, you may want to opt for the liability protection and flexibility that a limited liability company (LLC) offers, as opposed to forming a corporation or partnership.
But in many states, professionals whose jobs require licensing by the state aren’t legally allowed to form an LLC. Instead, they must form a professional limited liability company (PLLC).
In this article, we’ll look at the difference between an LLC vs. PLLC, who should form a PLLC, and what is involved in forming a PLLC.
Understanding the LLC
First, let’s start with a quick rundown of the characteristics of the limited liability company (LLC). Business owners often choose the LLC structure because it offers the same protection from personal liability that a corporation does, without all the onerous formalities, ongoing paperwork, and annual filings required to keep your corporation in good standing.
LLCs must file articles of organization with the state, but the management structure is much more flexible in nature than the corporation. The owners are referred to as “members,” and the LLC can be managed on a day-to-day basis either by its members, or by nonmember managers. This differs from a corporation, where the owners need to elect a separate board of directors, issue shares, and hold annual shareholder meetings and directors’ meetings that are recorded with minutes in the corporate records.
For professional services businesses, the advantages of an LLC are easy to see. However, in some states, professional services such as medical care, legal advice, tax services, accountants, and other occupations that require licensing by state regulatory boards are restricted by law from using the LLC entity structure. Instead, they can choose the PLLC entity structure.
Note: The one exception is California, where professionals cannot form an LLC or PLLC; instead, they can form a professional corporation or limited liability partnership.
Like the LLC, the PLLC protects its owners and members from personal liability in case of judgment or debt, without the strict formalities required of a corporation.
LLC vs. PLLC Advantages and Disadvantages
How Do I Form a PLLC?
The state licensing board and State Secretary will inform you what kind of information you are required to file. Typically, you start by getting your state’s licensing board to approve your PLLC’s articles of organization. This is an additional step that an LLC does not have to deal with. Requirements for approval will vary depending on your profession and your state. In most states, however, you’ll need to provide proof that every member is licensed in the profession of your business and to have at least one licensed professional sign the company’s articles of organization.
After you get the approval from your state licensing board, you will need to file your articles of organization and any other required documents with your Secretary of State’s office. Once your PLLC is formed, your state may also require you to add “PLLC” after the official name of your company to properly designate it to others.
Who Can Own a PLLC?
Rules and requirements for PLLC licensed owners vary from state to state. Some states require all the members to have specific licenses for the service offered. In other states, you may be allowed to form a PLLC that has as low as 50 percent professional ownership.
Like a corporation, an LLC is considered an entity separate and apart from the business owner/s. As such, it can continue to exist after the owner/s retire from or leave the business, sell the business, or die. The PLLC, however, may face some additional difficulties when it comes to business continuity.
If you are in a state where all the PLLC members must hold licenses for the service you’re providing, transferring ownership will be restricted. If a licensed member (owner) leaves the business or dies, you may have to dissolve or re-form the PLLC.
How is a PLLC Taxed?
The IRS does not recognize either LLCs or PLLCs. Instead, whether you choose an LLC or PLLC, you’ll have to choose the way you want the business to be taxed: as a sole proprietorship, a partnership, an S corporation or a C corporation.
Most of these options treat the business as a “pass-through” entity (unless the members decide to have the business taxed like a corporation). That means the business owners report their share of company’s profits and losses on their personal income tax returns. Members of an LLC or PLLC are also allowed flexibility in allocating profits and losses among themselves—they don’t necessarily have to allocate profits or losses in proportion to the amount of ownership interest each member has.
As with an LLC, members of a PLLC can be investors only, and can have as little or as much say in running the business as they choose, as long as this is specified in the operating agreement. PLLC investors, like owners, report their share of company’s profits and losses on their personal income tax returns.
Obtaining protection from personal liability for the businesses’ judgments and debts is a major reason why many business owners choose the LLC structure. In general, the same is true for the PLLC; however, there are a couple of important differences when considering LLC vs. PLLC:
- In a partnership, all partners are liable for each other’s malpractice suits. While the PLLC protects members from each other’s malpractice suits, it does not protect individual members from their own malpractice suits. Each member is responsible for his or her own malpractice suits, so to protect yourself, you should carry your own malpractice insurance.
- If you have a PLLC, banks may also ask for a personal guarantee in order to lend money to your business. This means you will be personally liable for any debts guaranteed by you.
Getting Help With Entity Formation
Deciding on the right business formation and legal structure for your company is a time-consuming process. That’s why so many professionals decide to hire outside experts to handle the required filings and documentation for their chosen business structure.
Let CorpNet help. Contact the CorpNet team and let them help you register the right business entity for your new venture.