If you want to create your own LLC (limited liability company), you should know that depending on the nature of your business, you may need to form a specialized type of LLC known as the professional limited liability company (PLLC).
The PLLC and the LLC have a considerable amount of overlap when it comes to the features of each business entity, but there are also some important differences that set them apart.
It’s not always easy to tell whether your business should form a standard limited liability company or a PLLC, which is why we decided to put this article together as a means of helping you make this crucial decision. If you’re having trouble figuring out whether the LLC or the PLLC is the right business structure for your entity, you’ve come to the right place.
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What Is an LLC?
The limited liability company is a business owned and operated by one or more people, who are often referred to as “members” of the LLC. The LLC is a hybrid business structure that combines the casual flexibility of sole proprietorships and general partnerships with the limited liability protection of a corporation.
The main reason for the LLC’s popularity is because it provides personal asset protection, which means that creditors can only pursue your business assets in a lawsuit against your company, while your car, house, and personal bank accounts remain protected.
In addition, many entrepreneurs save a considerable amount of money on taxes thanks to the LLC’s “pass-through” taxation, which has the LLC owners claim business profits or losses on their personal returns, and there is no corporate-level taxation.
What Is a Professional Limited Liability Company (PLLC)?
In rather predictable fashion, the professional limited liability company starts with the LLC as its foundation, then adds some layers that are specifically tailored for licensed professionals. If your business operates in certain industries, you will be required in many states to form a PLLC instead of an LLC.
Depending on your state, there may be a few more or less professions that need to seek a PLLC than in other states, but for the most part, the following certified professionals will need to form a PLLC rather than an LLC:
- Accountants
- Architects
- Chiropractors
- Dentists
- Engineers
- Lawyers
- Nurses
- Pharmacists
- Physicians
- Psychologists
- Veterinarians
It should be noted that while the PLLC business structure includes personal asset protection, it does not provide any protection from malpractice suits. This means that if your profession has any risk of malpractice lawsuits, you should absolutely acquire malpractice insurance.
Never rely on your business entity to shield you from malpractice suits or other lawsuits regarding mistakes made while conducting business in a certified profession.
Common Attributes of the PLLC and the LLC
Given the fact that both of these business entities have the phrase “limited liability company” in their names, it’s probably no surprise that there’s plenty of overlap between them.
The most important common attribute between the LLC and the PLLC is the personal asset protection that owners of these entities receive. Thanks to the LLC and PLLC’s ability to limit your personal liability, your creditors are not able to pursue your personal assets when they sue your business.
In addition, these are both pass-through entities for taxation purposes, and you can also choose how you would like your business to be taxed ― the default option is to pay taxes the same way a partnership does, but you can also elect to be taxed like an S corporation or a C corporation. While these options are not used all that often, except by high-income owners who can benefit from corporation-style taxes, it’s nice to have the option to begin with.
Another area the LLC and PLLC share in common is that of flexible managerial structures. With either of these business entities, you can either elect to have your owners handle the daily managerial aspects of your company, or you can designate a specified manager for this role. By contrast, corporations have far stricter policies when it comes to how the business is managed.
Finally, these business structures both allow their owners to divide the financial contributions and distributions however they want to. Instead of having rules and regulations that specify an even split, or one that matches each owner’s level of involvement, LLC and PLLC owners are allowed to make this decision based on what’s best for their individual businesses.
How the PLLC Differs From the LLC
The most obvious (and important) difference between a limited liability company and a professional LLC is the fact that a PLLC is structured for businesses operated by certified professionals.
There are many states that do not allow a business operating in one of these professions to form a standard LLC, and the PLLC is a necessity if you want to pursue one of these lines of business.
There are some major differences in the formation processes of an LLC and a PLLC as well. To form a professional limited liability company in most states, you need to provide proof that each member of the company is a licensed professional in the industry the PLLC is registered in.
So, if you form a PLLC for a law firm, you’ll need to prove that your members are all attorneys. In some states, only half of the members are required to be certified in the same profession, and in some others, you need approval from a state licensing board in order to form your PLLC.
We strongly advise that you check with your state to determine their exact formation process for a PLLC, because each state has a different spin on the rules and regulations, and you need to make sure you’re following the law to the letter.
What Is a Professional Corporation?
An alternative to the professional limited liability company is the professional corporation.
For the most part, the difference between these entities is similar to the differences between a standard LLC and a standard corporation, but there are a couple ways that we think the PLLC is a better option for most of our readers than the professional corporation.
For starters, a PLLC typically has lower tax obligations than a professional corporation does. Much like a typical corporation, a professional corporation is subject to what’s known as “double taxation,” which means that the company’s profits and losses are first taxed 21% at the corporate level, and are then taxed again at the individual level.
As we’ve already discussed, the PLLC is not required to pay corporate tax, but instead the income passes through the entity to be taxed at the personal level only.
While there isn’t much difference between the way taxes affect typical LLCs and corporations compared to their professional counterparts, the issue of asset protection is a bit more complex.
If you operate a professional corporation, a successful lawsuit against your company could give your creditors some control over your business, because the professional corporation allows creditors to pursue an individual debtor’s shares in the company. With a PLLC, creditors are restricted to pursuing only the net income the debtor receives from the business.
How to Form a PLLC
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If you would like to form a professional limited liability company, you could tackle the DIY route as an option. This involves creating your own articles of organization, which is the document used to officially form your business with the state.
Typically, this document needs some relatively basic info about your company, like your location, the identity of your registered agent, the names of your owners, etc. Once you’re done creating this document, you can submit it to your state and pay your formation fee. Incorporation Guru has helpful free state-by-state guides if you’d like to see what the process looks like.
Another option is to hire an attorney to form your PLLC. While we do appreciate how this option gives you the peace of mind that your business was formed correctly and in a compliant manner, hiring a lawyer can be very expensive, especially considering that many startups operate on tight budgets.
If you like the idea of having your PLLC professionally formed, but you don’t want to spend the kind of money it takes to hire an attorney, you should look into a business formation service.
These companies can form your PLLC for much less money than a lawyer charges, while still providing the peace of mind you’re looking for. While not all companies that offer LLC formations also deal with PLLCs, we think one of the following companies will do a great job forming your PLLC.
Conclusion
As you might expect, there are plenty of similarities between a standard limited liability company and its professional counterpart. On the other hand, there are also some very important differences between the LLC and the PLLC, which could result in your business being noncompliant if you form the wrong one for your company.
We strongly suggest that if you’re not certain whether you need to form a PLLC or an LLC, you check with your specific state to see which professions require a PLLC formation. Because each state has its own rules and regulations regarding who needs a PLLC and who does not, this is definitely a case of “better safe than sorry.”
We hope this article helped you determine whether your business requires a professional limited liability company, or if a standard LLC is sufficient.