What is a PLLC?
PLLC stands for a professional limited liability company. Before deciding which business structure is the best for your needs, it’s important to understand the benefits and criteria of a PLLC and how it’s distinguished from a Limited Liability Company (LLC).
PLLCs have the same benefits as an LLC, including the availability of pass-through taxation, protection of personal assets, and limited liability for owners. However, PLLCs are only available to businesses that are required to have state-issued professional licenses for specific professions, such as chiropractors, lawyers, architects, veterinarians, psychologists, accountants, and more. Some states require that licensed professionals form PLLCs, while others allow professionals to elect to form either an LLC or PLLC.
Related: How does an LLC Protect You?
What is the Difference Between a PLLC and LLC?
There are not many differences between LLCs and PLLCs. They essentially function the same way, with one exception.
Limited Liability Companies are most known for the protection from personal liability provided to their members. This means that the debts and liabilities of the company are considered separate from the LLC members’ personally in most circumstances. LLCs enjoy great flexibility in taxation. They can be taxed in a variety of ways, including as a sole proprietorship or partnership, or elect to be treated as a C Corp or S Corp for tax purposes.
The main difference between a Professional LLC and a regular LLC is that while PLLCs have the same liability protection, they do not shield the members of the PLLC from professional malpractice claims. Each member of a PLLC may still be held personally liable for any acts of malpractice.
Even though a PLLC offers additional liability protection for the business owners, malpractice insurance should also be carried.
Related: What is an LLC?
Who Should Form a PLLC?
As mentioned above, a PLLC is an LLC available to only certain licensed professionals who will offer their services through the business. Each state has its own requirements for PLLCs and professions that qualify. Some states do not even have PLLCs as an option for filing. If you believe you are a professional for the purposes of establishing a PLLC, you will need to evaluate the individual rules of your state to make sure you comply with any prerequisites to filing the formation documents.
In some states, the formation of a PLLC may only be done by a small business that requires a state license, while other states may have a broader definition.
Like LLCs, PLLCs are easier to form and maintain than corporations. There are fewer formalities than those required of corporations, but PLLCs still enjoy the separation between individual owners and the business entity. PLLCs are a good fit for a company that wants to provide professional services, have limited liability protection, and avoid the overwhelming compliance required of corporations.
Another important consideration before starting a PLLC would be the future continuity issues if you were to retire, die, or sell the company. If you are in a state that requires that all PLLC members be license-holding professionals for each service provided, your ability to transfer ownership down the road will be limited.
Another alternative to the PLLC is a Limited Liability Partnership (LLP), which is a type of partnership where the partners are only liable for their actions. Unlike the general partnership, where all partners are equally liable for the actions of the others, the Limited Liability Partnership offers limited liability protection for owners.
How is a PLLC Taxed?
Forming either an LLC or a PLLC provides you with multiple tax options. By default, both LLCs and PLLCs are taxed as either a sole proprietorship or a general partnership. As pass-through entities, any company profit or loss is not taxed at the entity level but passed onto the individual members and taxed at their personal tax rate.
However, a PLLC can also choose to be taxed as a corporation by filing an election with the IRS.
How to Form a PLLC
To form a PLLC, you must first research the particular prerequisites and compliance mandates for doing so with the Secretary of State (or similarity named state agency responsible for entity formations). Forming the PLLC legal structure is very similar to an LLC except for a few extra steps when filling out the Articles of Organization (some states call it the Certificate of Formation or Certificate of Organization), and in some states, submitting proof of professional licensing.
Sometimes the state licensing board for your profession will need to approve the formation of your PLLC before acceptance by the state. Once your filing is accepted and you receive your certificate of filing from your state agency, your business is officially a PLLC. You can then add “PLLC” after the official name of your company.
A PLLC will be required to have a registered agent the lives or operates in the state of formation. Some PLLCs will hire a registered agent service, while others will have the owner, attorney, accountant, or friend act as the agent.
For additional protection, an LLC Operating Agreement should be adopted to better define the member’s rights, responsibilities, and protection of business debts.
As a licensed professional, it’s important to understand which type of company you need to form and the applicable state laws. Generally, forming a PLLC, if allowed in your state, can provide you with the necessary protection you need to run your business smoothly.
Every state will differ slightly with the requirements of maintaining a PLLC, however similar to the LLC, the PLLC will typically pay taxes and file an annual report. The only difference may be to verify a current state license.