For many entrepreneurs, forming a formal business entity is a great way to grow an existing business, or establish a new one.
But for licensed professionals, that can be challenging, as many states don’t allow certain licensed professionals — like doctors, lawyers, etc. — to form businesses unless they form a professional corporation (PC) or a professional limited liability company (PLLC).
While these two types may sound similar, they have some key differences. In this brief guide, we’ll describe what makes them distinct. Is the PC or the PLLC the better option for your business?
Professional corporations and professional limited liability companies are actually quite different from one another, but they do have a few important things in common.
For one, the basic premise of both types is to offer licensed professionals the opportunity to form a business together. In many states that offer the PC or the PLLC, certain licensed professionals may not conduct business unless they use one of these two types.
Both the PC and the PLLC have similar rules for who can be an owner as well. There are quite a few states in which all owners of either a PC or a PLLC need to be certified professionals in the same field the business was formed for, but in some states only half of the owners must be certified. This means that if you form a PC or PLLC for attorneys, all of the owners must be licensed attorneys (or half, depending on your state’s requirements).
In addition, both a PC and a PLLC give some liability protection to the company’s owners. Granted, each owner can still be sued for his or her own malpractice, but all the other members are shielded from the malpractice of others, making a PC or a PLLC a safer option than a partnership.
Now let’s talk about what makes a professional corporation distinct from a professional limited liability company.
The difference between a PC and a PLLC is ultimately the same as the difference between a regular corporation and a regular LLC.
One major difference is how these entities are taxed. The PLLC has a few options for taxation, and all of them are likely to save ownership money compared to a PC. The professional corporation is typically considered by the Internal Revenue Service to be a C corporation, which means its profits are taxed at the corporate rate of 21%.
In addition, a PC’s owners will pay tax on their dividends when they file their individual tax returns, which is why you’ll sometimes hear this form of taxation referred to as “double taxation.”
With a PLLC, you can choose to be taxed like a C corp or an S corp, but the far more common option is taxation as a pass-through entity. With this form of tax, the business itself does not pay taxes, but instead the profits and/or losses pass through the PLLC to the individual owners, who then pay tax on their personal returns. This is cheaper for most PLLC members, unless they are wealthy people who belong to an expensive individual tax bracket.
Another significant difference is in their ongoing compliance requirements. Professional corporations have extensive maintenance requirements that include holding meetings for shareholders and directors, recording meeting minutes for all meetings, keeping stock ledgers, and more. With a PLLC, filing an annual report is usually the most time-consuming compliance requirement, and none of the items we mentioned for PCs apply.
Finally, these two entity types have different methods of management. With a professional corporation, there’s a rigid structure of management in which a board of directors oversees the broad operational aspects, while corporate officers keep track of the day-to-day minutiae of running the company.
With a PLLC, the business may be managed by its members, who all share in the managerial aspects, or by a manager. If the PLLC selects to have a manager run the company, they can hire someone to serve in that role, and the members themselves are not required to participate.
First off, it’s important to note that you may not have a choice in your state. This is because each state has different rules regarding which types of licensed professionals are required (or even just allowed) to form a professional corporation and a professional limited liability company.
For example, some states will require certain professionals to form a PC or PLLC, while also designating other professionals who are allowed to form these entities. Similarly, there are states where licensed professionals are allowed to choose whether they’d like to form a PC or PLLC, and other states where you’re only allowed to form one or the other.
Now that this bit of housekeeping is out of the way, we’ll note that we typically prefer forming a PLLC instead of a PC. This is because both entity types provide owners with personal asset protection, while the PC still requires significantly more effort to form and maintain than a PLLC does.
With all other things being relatively equal, this is a noteworthy difference that we think tips the scales in the direction of professional limited liability companies.
Ultimately, the difference between a professional corporation and a professional LLC comes down to many of the same factors that separate a standard corporation and LLC.
In general, we think that the PLLC is the better option if you want flexible taxation options and fewer maintenance requirements, while the professional corporation is a better choice for high-income ownership groups that can take advantage of the corporate tax rate.
Of course, it’s important to keep in mind that depending on your state, you may not be required or even allowed to form a PC, PLLC, or both. It all comes down to what your specific state allows, so we strongly advise that you check with your state before forming either a PC or a PLLC.
Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.
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