Last Updated on September 3, 2020
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 are a special type of Limited Liability Company and 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 professionals, such as doctors, lawyers, engineers, accountants, and more. Some states require that licensed professionals to 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 providing personal liability protection by shielding the member’s personal assets. This means that the debts and liabilities of the company are considered separate from the LLC members’ personally in most circumstances. One thing to note is that when a business obtains a loan, the bank is likely going to require a personal guarantee from each of the members. In this case, if the business fails, the members will still have to pay the loan back.
LLCs and PLLCs also 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 Corporation or S Corporation 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 as a separate legal entity for the business owners, malpractice insurance should also be carried.
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 it’s 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 members of a PLLC are 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 C Corporation or S 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 in your state. 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 or licensing agency for your profession will need to approve the formation of your PLLC before acceptance by the state. In other cases, the license number will be required by the Secretary of State before forming the legal entity. Most states will require specific information when filling out the statement of specific purpose to include a description of the licensed business activity. 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 operations of the LLC.
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.
What is the Difference Between a PLLC vs Professional Corporation
Just like the PLLC, A professional corporation (PC) is an entity created under state law for licensed professionals. Instead of a Limited Liability Company structure for the PLLC, the PC is essentially a special corporation.
Some other states do not allow PLLCs, however, they will have the option to form a professional corporation. Some professionals prefer an LLC because it provides more flexibility to the owners than a professional corporation, however it’s hard to determine which is best as everyone has a unique situation.