LLC vs.PLLC
If you own a professional services organization, you may have heard that you should structure your company as a PLLC. You are probably also wondering what a PLLC is and whether you should be one.
What’s the Difference Between a PLLC and an LLC?
A PLLC (Professional Limited Liability Company) is a limited liability company designed for licensed professionals such as doctors, lawyers, accountants, and other professional service providers. Forming a PLLC is subject to specific state regulations, and the members must be licensed in the profession for which the company is being formed.
An LLC (Limited Liability Company) is a business structure that offers the liability protection of a corporation but with the tax benefits of a partnership. Unlike a PLLC, an LLC can be formed by anyone, regardless of their profession. LLCs are flexible and can be used for various business types and structures.
The main difference between a PLLC and an LLC is that a PLLC is specifically designed for licensed professionals. At the same time, an LLC is a more general business structure that can be used for various businesses.
| LLC (Limited Liability Company) | PLLC (Professional Limited Liability Company) | |
|---|---|---|
| Definition | A type of business structure that provides limited liability protection to its owners (members). | A specialized form of LLC designed for licensed professionals (e.g., doctors, lawyers, accountants) who need to form a business entity that limits their liability for malpractice claims. |
| Formation | Formed by filing Articles of Organization with the state where the LLC is organized and paying the required fees. | Formed by filing Articles of Organization and any required professional documents (e.g., proof of licensure) with the state where the PLLC is organized and paying the required fees. |
| Management | Can be member-managed or manager-managed. In member-managed LLCs, the owners (members) manage the business. In manager-managed LLCs, the owners appoint a manager to manage the business. | Can be member-managed or manager-managed, but in most states, licensed professionals must have a controlling interest in the PLLC and must actively participate in the management of the business. |
| Taxation | LLCs are typically treated as pass-through entities for tax purposes, which means that the profits and losses of the LLC flow through to the owners’ personal tax returns. | PLLCs are typically treated as pass-through entities for tax purposes, just like regular LLCs. |
| Liability protection | Members of LLCs are generally not personally liable for the debts and obligations of the LLC. | Members of PLLCs are generally not personally liable for the malpractice of other members of the PLLC, but they may still be personally liable for their own malpractice. |
| Applicability | Any type of business can use LLCs. | PLLCs are typically used by licensed professionals (e.g., doctors, lawyers, accountants) who need to form a business entity that limits their personal liability for malpractice claims. |
| State requirements | Requirements for forming and operating LLCs vary by state. | Requirements for forming and operating PLLCs vary by state but typically include additional licensing or registration requirements for the professional members of the PLLC. |
Professional Limited Liability Companies
Professional Limited Liability Companies (PLLCs) are formed by state law, and the requirements for forming a PLLC vary by state. In general, the state’s board or agency that regulates the profession or occupation for which the PLLC is being formed will oversee the formation and operation of the PLLC.
California
For example, in California, a PLLC is formed by the California Secretary of State and the state’s relevant regulatory agency for the profession, such as the California Board of Accountancy for Accountants.
Texas
In Texas, the formation of a Professional Limited Liability Company (PLLC) is governed by the Texas Business Organizations Code (BOC). The BOC sets out the requirements and procedures for forming a PLLC in Texas and the rules and regulations that apply to PLLCs once they are formed. Additionally, the Texas Secretary of State oversees the registration of PLLCs and maintains a registry of all entities registered in the state.
Virginia
The Virginia Professional Limited Liability Act (PLLC Act) governs the formation of a Professional Limited Liability Company (PLLC) in Virginia. A PLLC is a business entity formed by members of a licensed professional to provide licensed professional services. For example, dentists, architects, CPAs, and clinical nurse specialists may form a Virginia PLLC.
Generally, all members of a PLLC must be licensed, and the PLLC must provide only one kind of professional service; but there are exceptions to these rules. State licensing boards may require prior approval to form a PLLC, and some may even require formation as a PLLC rather than LLC. (Like the State Bar)
The articles of incorporation for a PLLC must state the type of services the PLLC will provide. A PLLC may only provide the services for which it was organized. There are naming requirements for a PLLC outlined in the VPLLC Act.
Limited Liability Company
A Limited Liability Company (LLC) is a general business entity comprising one or more individuals who own the LLC. These individuals are not necessary but may be licensed professionals providing licensed services. An LLC may engage in various services that may or may not include professional services.
Both structures offer similar liability protections for business debts and are taxed similarly.
It is important for individuals who are considering forming a PLLC to consult with an attorney or a professional regulatory agency to ensure that they comply with all applicable state laws and regulations.
Does formation as a PLLC eliminate liability?
No. Generally, both PLLCs and LLCs have similar liability benefits; they protect individual members from claims for personal injury unrelated to the services provided and certain financial debts of the company, and acts of malpractice committed by other PLLC members. This is different from a Partnership which imposes liability on all the partners.
A member of a PLLC is NOT protected from individual professional malpractice, intentional torts, gross negligence, malfeasance, or personally guaranteed business loans. Because they are individually liable for their own malpractice, Individual members of a PLLC should have individual professional liability insurance.
What professional services may form a PLLC?
The specific professional services that can form a PLLC may vary by state, as each state has its own laws and regulations regarding PLLCs. However, in general, PLLCs are typically available to licensed professionals who provide services that require a professional license, such as:
- Pharmacists
- Optometrists
- Physical therapists and therapist assistants
- Practitioners of the “Healing Arts” (those individuals who deal “with the prevention, diagnosis, treatment and cure or alleviation of human physical or mental ailments, conditions, diseases, pain or infirmities”), including all physicians and medical professionals who are otherwise not specifically mentioned under the Act
- Nurse Practitioners
- Practitioners of Behavioral Science (i.e., Psychologists, Social workers, Counselors, etc.)
- Veterinarians
- Surgeons
- Dentists
- Architects
- Professional Engineers
- Land Surveyors
- Landscape Architects
- Certified Interior Designers
- Public Accountants and Certified Public Accountants
- Attorneys
- Insurance Consultants
- Audiologists and Speech Pathologists
It is important to note that some states may have limitations or requirements for the types of professionals that can form a PLLC, so it is best to check your state’s specific laws and regulations.
Which one should I select?
Choosing between a PLLC and an LLC can be confusing, especially if you’re unfamiliar with the differences between the two business structures. However, some factors can help you decide which is right for your business.
Consider the nature of your business.
If you’re a licensed professional, such as a lawyer, doctor, or accountant, a PLLC may be the best option as it offers liability protection to both the company and its members from malpractice claims. On the other hand, if you’re in a non-professional industry, an LLC may be a more suitable option as it offers liability protection to the company but not individual members.
Number of members in your business.
PLLCs are typically designed for businesses with a small number of members, often just one or two. LLCs, on the other hand, can have an unlimited number of members and can be a better option for larger businesses.
Tax implications of each business structure.
PLLCs are taxed as pass-through entities, meaning that the business doesn’t pay taxes, but the profits and losses are passed through to the individual members to report on their personal tax returns. LLCs can be taxed as a pass-through entity or corporation, with different tax implications.
State laws where your business will be operating.
Some states may have specific regulations and requirements for PLLCs or LLCs, so it’s important to research these before deciding.
Advantages of an LLC
There are many advantages to setting up an LLC for your business. One of the biggest advantages is the flexibility that an LLC offers. Unlike a corporation, an LLC is not required to follow strict formalities such as holding annual meetings and keeping detailed minutes of those meetings. This makes it easier for small businesses to manage their operations without worrying too much about the legal formalities.
Another advantage of an LLC is the ease with which it can be formed. Forming an LLC is relatively simple and involves less paperwork than setting up a corporation. You can set up an LLC in just a few days instead of a few weeks or months for a corporation.
An LLC also offers its owners personal liability protection. This means the owners are not personally liable for any debts or legal issues the company may face. Their personal assets are protected from the debts of the business. This is a big advantage for small business owners who want to protect their personal assets from business-related debts.
Finally, an LLC is also beneficial from a tax perspective. The income earned by an LLC is not taxed at the business level. Instead, the income is “passed through” to the individual owners, who then pay taxes on their personal tax returns. This means that the business does not pay taxes on its income, which can result in significant tax savings for the business owners.
Advantages of a PLLC
A PLLC, or Professional Limited Liability Company, is a limited liability company (LLC) typically used by professionals who provide services requiring a license, such as lawyers, accountants, dentists, and doctors. One of the main advantages of a PLLC is that it offers personal asset protection to its members, just like an LLC. This means that the member’s personal assets, such as their homes and cars, are protected from any business debts or liabilities incurred by the PLLC.
Another advantage of a PLLC is that it offers greater flexibility than other business structures. For example, a PLLC can be owned by a single member, which is known as a single-member PLLC. This is particularly beneficial for professionals who work alone and do not require the capital or resources of a larger company.
Additionally, a PLLC allows for pass-through taxation, which means that the profits and losses of the business are passed through to the members and reported on their personal tax returns. This can be advantageous for professionals who do not need to reinvest their profits into the business and prefer to pay taxes at their individual income tax rates.
Disadvantages of an LLC
While LLCs offer numerous benefits to business owners, there are also some disadvantages. One of the main disadvantages is that LLCs are limited in terms of how they can raise capital. Unlike corporations, LLCs cannot issue stock or sell ownership shares to raise money. This can make it difficult to attract investors or raise funds for expansion.
Another disadvantage of an LLC is that it can be complicated to manage. LLCs require all members to be involved in decision-making, which can lead to disagreements and slow the decision-making process. Additionally, LLCs require a significant amount of paperwork, including annual reports and state filings, which can be time-consuming and costly.
Another potential disadvantage of an LLC is that it may not be the best option for businesses that plan to go public or be acquired by a larger company. LLCs are not designed for this type of growth, and it may be difficult to transition to a new business structure if the company reaches a point where it needs to raise more capital or take on investors.
Disadvantages of a PLLC
While there are many advantages to forming a professional limited liability company (PLLC), there are also some disadvantages that you should consider before choosing this entity type for your business.
Firstly, forming a PLLC requires more paperwork and documentation than forming a regular LLC. In addition to the usual organization and operating agreement articles, you must provide proof of your professional license. You may need to submit additional documentation to obtain a certificate of registration (PDF).
Another potential disadvantage is that PLLCs are not recognized in every state. Some states only allow certain professions to form PLLCs, while others do not recognize them at all. If you plan to operate in multiple states, you may need to form a different entity type in some of them.
Finally, PLLCs may be subject to more regulations and oversight than regular LLCs. This is because they are designed to provide liability protection to professionals, who are held to a higher standard of conduct than other types of businesses. This can lead to additional fees and requirements, such as mandatory insurance coverage or continuing education requirements.
Tax Considerations for PLLC vs. LLC
When it comes to tax considerations, both PLLCs, and LLCs have their pros and cons. PLLCs have a tax structure similar to general partnerships, where the company is not taxed; the profits and losses are passed through to the owners and taxed on their personal income tax returns. This can benefit members of the PLLC as they can take advantage of certain deductions and credits on their personal taxes. However, PLLCs may also be subject to additional business taxes in some states.
On the other hand, LLCs also have a pass-through tax structure like PLLCs. However, LLCs have more flexibility in terms of how they are taxed. They can be taxed as a sole proprietorship, partnership, S corporation, or C corporation. The tax structure chosen will depend on the size and type of the LLC, as well as the owners’ goals.
Another important tax consideration for both PLLCs and LLCs is the self-employment tax. Owners of both types of businesses are typically subject to self-employment tax on their share of the business’s profits. However, LLCs can elect to be taxed as an S corporation, which allows the owners to pay themselves a salary and only pay self-employment tax on that salary, potentially reducing their overall tax burden.
Conclusion
Choosing the right business structure is crucial for any entrepreneur or business owner. The decision can impact the future of your business, from taxes to liabilities and more. In this post, we have compared PLLC and LLC, two popular business structures, and highlighted their similarities and differences.
- LLCs are great for small businesses and protect from personal liabilities
- PLLCs, on the other hand, are for licensed professionals who want to provide services to clients.
Ultimately, the choice between PLLC and LLC depends on your business needs and goals. It’s important to research, consult with professionals, and consider your long-term plans before deciding. Remember, changing your business structure is possible, but it can be costly and time-consuming, so getting it right from the start is essential. We hope this post has given you a better understanding of PLLC vs. LLC and helped you make an informed decision.
