Choosing among the different types of business entities can be a challenge, but particularly so if you’re in a professional occupation, such as law or medicine. In these industries, multiple owners often work together in a busy office, and malpractice lawsuits are common. In several states, licensed professionals have the option to form a professional limited liability company (PLLC), which is a variation on the regular limited liability company (LLC).
Every state treats PLLCs differently. Some states don’t even recognize this business form. In others, licensed professionals must form a professional entity such as a PLLC. We’ll cover some of the differences among states, how PLLCs compare to other business structures, the pros and cons of PLLCs, and how to form a PLLC.
What is a PLLC?
A professional limited liability company (PLLC) is a business structure that offers personal asset protection for business owners in licensed occupations, such as medicine and law. Only recognized in some states, PLLCs are subject to the same laws as ordinary LLCs. However, the licensing board must verify each owner’s professional license and approve the PLLC’s articles of organization.
The following states allow licensed professionals to start PLLCs:
Arkansas, Arizona, Colorado, District of Columbia, Florida, Idaho, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and West Virginia
The states noted below don’t recognize PLLCs:
Alaska, Alabama, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maryland, Missouri, Nebraska, New Jersey, New Mexico, Ohio, Oregon, Rhode Island, South Carolina, Wisconsin, and Wyoming
PLLC vs. LLC: What’s the difference between a PLLC and an LLC?
Many business owners launch LLCs because this business structure offers limited personal liability for owners. A creditor of the business can’t come after any owner’s personal assets. In addition, if one owner in an LLC makes a mistake or acts negligently, the other owners can’t be held personally liable. Other benefits of LLCs include tax flexibility and relatively low setup costs.
Several states recognize the PLLC as a special type of LLC for licensed professionals—such as lawyers, accountants, doctors, and architects. Licensed professionals can also form other types of business entities. For instance, some states allow professionals to form limited liability partnerships (LLPs), and others recognize an entity called the professional corporation (PC). Your state’s secretary of state or business filing agency will be able to tell you more about the rules for professional entities in your state.
In states that recognize PLLCs, much of the same rules that apply to ordinary LLCs also apply to PLLCs. LLCs and PLLCs have the same management structure and are taxed in the same way. The key difference between LLCs and PLLCs has to do with malpractice claims.
As with a regular LLC, PLLC owners are shielded from personal liability for business debts and lawsuits, and they are not liable for malpractice committed by their business partners. However, they are personally liable for any claims brought against them for their own malpractice. If a doctor commits malpractice, then the patient can sue the doctor and lay claim to the doctor’s personal assets. For this reason, it’s very important for members of a PLLC to carry professional liability insurance, more commonly known as malpractice insurance.
Which types of businesses can start a PLLC?
In general, an individual who requires a license, registration, or certification from the state to practice a profession is eligible to form a PLLC. In some cases, such as a physician’s office or law firm, it’s clear that a PLLC can be formed, but other cases might not be as clear. Fortunately, in many states, such as Colorado and Minnesota, you’ll find a list of specific professions that are eligible to form PLLCs.
Keep in mind that all owners in the business must be licensed. Charlton M. Messer, an attorney at Messer Law Firm, PLLC, says, “PLLCs can only offer services related to its profession (as opposed to the LLC, which can transact in any business it wishes, as long as it is legal, of course). The only people that can have ownership in a PLLC are those that can provide the services that require the license.”
PLLCs typically have multiple owners, called members. However, it’s also possible to have a single-member PLLC, which is a PLLC with just one owner. On a day-to-day basis, the members might manage the PLLC collectively. This is called a member-managed LLC. Alternatively, they might appoint one of the members or hire an individual from outside the organization to serve as a manager. This is called a manager-managed LLC.
PLLCs vs. other business types for professionals
In most states, professionals have the option to form other types of businesses besides a PLLC. Here’s how PLLCs compare to other business entities:
PLLC vs. general partnership
Professionals often form a PLLC as an alternative to a general partnership. A general partnership is the most common business entity type for companies with multiple owners. However, in a general partnership, every partner is personally liable for the mistakes and actions of every other partner. For example, let’s say a doctor who’s a partner in a general partnership makes a mistake during surgery, and the patient sues. The patient can hold that doctor personally liable, but could also sue the other doctors in the practice.
In contrast, owners in a PLLC aren’t personally liable for the mistakes or failures of other partners. Personal asset protection is important in industries like medicine where malpractice lawsuits are common. In the doctor example mentioned above, the patient could sue only the doctor who performed the surgery if the medical practice was a PLLC. That doctor is personally liable for their own actions and should have malpractice insurance to protect their assets. However, the other doctors wouldn’t be at risk for the surgical mistake.
PLLC vs. limited liability partnership (LLP)
An LLP is a partnership that offers limited liability protection for owners. Unlike a general partnership, partners in an LLP are personally liable only for their own actions. The partners in an LLP aren’t liable for the actions or mistakes of other partners. In that way, an LLP is a lot like a PLLC. However, some states don’t allow licensed professionals to form LLPs. Messer says, “A PLLC differs from an LLP in that a PLLC can be required if the type of business to be transacted requires a license from the state. For instance, in Texas, an attorney could not offer legal services through an LLP.”
PLLC vs. professional corporation (PC)
Many states authorize professionals to establish a PC instead of a PLLC. For both a PLLC and PC, the owners must be licensed in their profession. A corporation, however, is taxed differently from an LLC. A PC is subject to the tax and compliance rules that would impact a C-corporation or S-corporation. In addition, a PC’s management structure is different. The owners are shareholders, instead of members, and they own stock in the PC. The shareholders must elect a board of directors and hold director and shareholder meetings.
PLLC pros and cons
Now you know that business owners in professional occupations typically have multiple business entities to choose from. Here are some of the pros and cons of PLLCs that you should consider before making a final decision on which business structure is best for you.
Members of a PLLC aren’t personally liable for the malpractice of any other member. This is a big advantage over a general partnership or sole proprietorship.
PLLC members are not personally liable for business debts and lawsuits, such as unpaid office rent.
The PLLC can choose to be taxed as a pass-through entity or as a corporation.
PLLCs are easy to set up, inexpensive, and have fewer compliance requirements than a corporation.
PLLCs aren’t recognized in all states.
Even in states that do allow PLLCs, eligibility might be limited to certain licensed professions.
All PLLC earnings are subject to self-employment taxes.
How to form a PLLC
Forming a PLLC is a lot like setting up a regular LLC, although the forms involved might be slightly different. The state’s licensing board also needs to verify each owner’s professional license, which means it might take a little longer to form a PLLC, compared to a regular LLC. These are the steps involved to form a PLLC:
1. Choose a name for your PLLC
Choosing a name for your PLLC might seem like the easiest part, but every state has unique requirements. In most states, the name of your PLLC must be different from the name of other business entities in the state. In addition, the name of your business must end with “Professional limited liability company,” “P.L.L.C.,” or “PLLC.” Your secretary of state can provide more details on name requirements, including how to reserve a business name.
2. Designate a registered agent for your PLLC
In every state, business entities must designate a registered agent or statutory agent. A registered agent is a person or company who accepts service of process and official documents for your business. Professional businesses often receive official notices from state licensing boards and get sued more often, so it’s especially important to designate a registered agent. If you’re unsure who to appoint as your registered agent, IncFile is an online legal services company that provides registered agent services.
3. Get business licenses for your PLLC
The most important license for PLLCs is the professional license, which the state licensing board for your profession will grant. Every owner in the PLLC must be licensed to practice the specific profession that the business will be providing. However, there might be additional business licenses or zoning licenses that you need to apply for before you can operate. Cities and counties typically issue business licenses.
4. File your articles of organization
Next, you must file articles of organization with your state’s secretary of state. You can usually file your articles online for fast processing. The articles of organization form for PLLCs might be slightly different from the form that regular LLCs use. The licensing board for your profession will review and approve the articles, after which the state will give it its stamp of approval. You will receive a copy of the filed articles of organization to store with other business documents.
5. Draft an operating agreement
A handful of states, including California and New York, require LLCs and PLLCs to draft an operating agreement. Even if your state doesn’t require one, it’s wise to have one, especially if your PLLC has multiple owners. This document provides a blueprint for your PLLC’s daily operations, plus it summarizes each owner’s contributions to the business and share of the profits. Without an operating agreement, a PLLC could easily fall victim to disagreements among owners.
6. Pay PLLC taxes and file annual report
PLLCs, like ordinary LLCs, are pass-through entities for tax purposes both at the federal and state levels. This means that each owner will pay personal federal and state income taxes on their share of the business profits. The LLC itself won’t pay a federal income tax. Alternatively, the LLC can elect to be taxed as a corporation and pay a corporate tax on profits.
Some states charge PLLCs an annual franchise tax or a gross receipts tax based on the company’s revenue. There are also payroll tax obligations for PLLCs with employees. Finally, several states require PLLCs to file an annual report with current address and registered agent information.
7. Comply with additional state and federal regulations for PLLCs
PLLCs might have to comply with additional state and federal regulations. For instance, PLLCs with employees, with multiple owners, or taxed as corporations need to apply for an employer identification number (EIN). Every state except Texas requires businesses with employees to buy workers compensation insurance. PLLCs with employees also have to withhold taxes from their employees’ wages and pay federal payroll taxes.
After creating a PLLC, it’s important to preserve limited liability for owners by treating the business as a separate legal entity. That means getting a separate business bank account, credit card exclusively for business purposes, and tracking business finances separately from any owner’s personal finances.
The bottom line
PLLCs can be the perfect business entity choice for entrepreneurs in licensed occupations. Business owners in professional industries often prefer to go into business together, but malpractice lawsuits are common. Forming a PLLC is a great way to protect yourself from a partner’s failure or mistake. As a bonus, PLLCs are also pretty easy to set up and give you tax flexibility that you wouldn’t get with a corporation.
This article originally appeared on Fundera, a subsidiary of WealthyUpdates.