Are you in the process of forming a business for licensed professionals?
There’s a specialized form of the limited liability company (LLC) known as the professional limited liability company (PLLC) that is specifically meant for entrepreneurs operating in professions that require certifications. But how does the PLLC differ from the standard LLC, and is it the correct business entity for your company?
While the PLLC is an ideal business structure for certain types of licensed professionals, it’s also entirely unnecessary for many industries. Understanding exactly which companies the professional limited liability company is meant to serve can greatly help you decide if this is the right choice for your business, or if a standard LLC or corporation would be a better option.
Over the course of this article, we hope to help you answer this question for your business.
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What Is a Limited Liability Company (LLC)?
Before we get into the details of the professional limited liability company, we should briefly discuss what a standard LLC is.
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)?
As you might surmise, 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.
What Are the Similarities Between a PLLC and an LLC?
Considering the fact that they both have the phrase “limited liability company” in their names, it’s probably no surprise that the PLLC and the LLC have plenty of common ground.
Before we get into the differences between these entities, let’s quickly take a look at how they are similar. First and foremost, the PLLC and the LLC both provide limited liability protection for their owners, meaning that your personal assets are protected in case there is a lawsuit against 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 like 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.
You’re also allowed to choose your own management structure with either of these entities, which means you can choose to have your owners manage the company themselves, or you can designate a manager to specifically handle the role. In addition, both the LLC and the PLLC give owners the ability to split up financial distributions and contributions any way you’d like.
What Are the Differences Between a PLLC and an LLC?
Rather obviously, the main difference between the limited liability company and its professional counterpart is the designation of the PLLC for certified professionals.
This isn’t the only difference between these two entities though, as the formation process is also considerably altered for the PLLC.
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’s the Difference Between a PLLC and a Professional Corporation?
In the majority of states, if you operate a company in one of these industries, you can either form a professional limited liability company or a professional corporation.
In many ways, 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.
The first reason is that most PLLCs can save money on taxes when compared to professional corporations. The 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 Can You 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.
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 formation also deal with PLLCs, MyCorporation and BizFilings do.
Conclusion
The professional limited liability company shares quite a bit in common with a typical LLC, but there are also a few significant differences that set them apart. While they’re not offered in all 50 states, PLLCs are usually required for a company that wants to function as an LLC but provides services that require professional certification.
While there are plenty of advantages and disadvantages to the PLLC, the most important aspect to keep in mind is that the PLLC’s personal asset protection does not apply to issues of malpractice. In short, just because you operate a professional limited liability company does not mean that you don’t need to also pursue malpractice insurance.
We hope this article helped you answer any tough questions you might have had about the professional limited liability company!