Is a Professional Limited Liability Company (PLLC) the Right Entity for My Business?
If you’re in a professional field and thinking of forming your own company, you might have some questions about which business entity is right for you. You’ve likely heard the term “professional limited liability company” (PLLC) thrown around from time to time and wondered whether it’s the right direction for you.
In this guide, we discuss everything you need to know about PLLCs, including how to go about forming one, so you can make the best decision for your business.
What is a professional limited liability company?
Often abbreviated as PLLC, a professional limited liability company is a type of business that’s formed by licensed professionals, such as lawyers, doctors, and chiropractors. This type of business entity operates the same way as a limited liability company (LLC), meaning it protects individual members against malpractice claims asserted against a PLLC’s other professionals. Additionally, this type of business designation offers limited personal liability with business debts.
PLLC regulations vary by state. In some states, the PLLC designation doesn’t exist, but professionals can still form a regular LLC. Some states don’t allow professionals to use the LLC structure at all. In the states where the PLLC designation is recognized, the state determines exactly which professions are required to use it when they want to form a limited liability company.
What is a professional?
In the broadest sense, professionals are individuals working in fields that require specialized education or training and a license. In most cases, these individuals are subject to ethical rules and oversight by a government agency or professional association. For example, attorneys must comply with the standards and regulations set forth by their state bar association, whereas medical doctors are governed by their state medical board.
As mentioned earlier, the professionals who are required to form their limited liability companies under the PLLC designation vary depending on the state; however, in most states that recognize it, this requirement usually applies to the following professions:
- Medical doctors
- Certified public accountants
- Professional engineers
Of course, if you’re considering forming a PLLC, it’s vital that you check the specific rules in your state. It’s also worth noting that in most states, only professionals operating in the same field may act as partners or managers over the professional activities in this type of company. For example, non-attorneys may not own equity in a PLLC or exercise supervisory authority over attorneys related to their legal work.
Consider your options when determining the right business entity for you
Although a PLLC can be a great choice for those in professional industries, it’s important to consider all of your options before you take the plunge. Let’s take a look at what might be available to you when it comes to business formation.
What’s the difference between an LLC and a PLLC?
The most considerable difference between these two entities is who’s able to form them. While any business owner may create an LLC, a PLLC is reserved strictly for licensed professionals, as determined by the state. In some states, those with professional designations aren’t allowed to form LLCs — instead, if they want the structure provided by an LLC formation, they must form a PLLC.
Because the risk of malpractice lawsuits exists among those working in professional fields, some states require certain PLLCs to carry specialized insurance coverage for their profession.
LLCs may have more than one owner, called members, and all members carry the same limited liability. The LLC is considered a separate legal entity from its owners/members. That means the company itself can hold debt, own property, and engage in lawsuits as either a plaintiff or defendant.
One reason so many business owners choose to form this entity is because the LLC shields their personal assets from business liabilities. In most situations, members cannot be held personally liable in any litigation that the company is involved in or for any debts or judgments brought against it. In a PLLC, this protection also covers members when a partner is accused of malpractice or other wrongdoings.
LLCs also offer flexible options when it comes to taxes. Because the IRS doesn’t have a specific tax category for LLCs, its owners can choose to be taxed either as a corporation or a pass-through entity. By default, PLLCs and LLCs are taxed as pass-through entities, meaning that the business itself isn’t taxed on profits before they’re distributed to the members, who then pay taxes on their share of the profits on their personal tax returns. This avoids the “double taxation” experienced by C corporations, which are taxed at the business level and again at the personal level when profits are distributed to shareholders.
Although the benefits of forming an LLC are huge for many business owners, it’s important to consider the potential downsides that come with this business entity. That includes:
- LLCs cannot be international like corporations
- LLCs are more difficult to sell because ownership isn’t in shares
- Investors often prefer to put their money into corporations instead of LLCs
- LLC members usually cannot be paid wages
What’s the difference between a PLLC and a professional corporation (PC)?
Although PLLCs aren’t an option in every state, all states offer businesses the option of forming a professional corporation (PC). Just as with PLLCs, you might be required to form a PC instead of a typical corporation in some states if you hold a professional license.
A PC offers limited financial and legal liability in a similar way. An owner’s (also called shareholder) personal assets are shielded from liability for company debts or judgments, including claims against other shareholders. Some states require PCs to carry professional liability insurance, also called errors and omissions and malpractice insurance.
In most cases, a PC is the better way to go if you’re at the head of a larger firm or practice.
Characteristics of a PC
Ownership of a PC is based on shares. The number of shares that exist within a corporation varies from business to business, but essentially, whoever owns the most shares controls the corporation. In some states, PCs may be traded publicly, and those that are can potentially be owned by hundreds, or even thousands, of shareholders. In others, this may be limited.
Perhaps the most important characteristic of a PC is the easy process it undergoes when ownership is transferred. When the need arises to transfer ownership of a PC, it’s much easier than doing so with an LLC or PLLC. Typically, a PC’s shareholder agreement or corporate bylaws dictate what happens when a shareholder dies or chooses to leave the corporation. If no such agreement is in place, the shares are usually purchased from the person or their estate by the remaining shareholders.
Just as with an LLC or PLLC, a PC is a separate entity from its owners. It has its own set of legal and financial rights and responsibilities.
If the PC is taxed as a corporate entity, the income is taxed at the corporate level. Then, the remaining income is distributed to the shareholders, who pay income tax on their dividends on their personal returns. This is often referred to as double taxation. If the PC is taxed as a pass-through entity, such as an S corporation, then the corporation pays no corporate income taxes, and taxes on corporate earnings are paid only on the shareholders’ personal tax returns.
How to file taxes as a PLLC
Forming a PLLC allows you to choose the way you want to be taxed. Whether you’re the sole member of the company, or you own it with one or more other owners (members), you can elect to be taxed as a pass-through or corporate entity. If you elect for pass-through treatment, then you report the company’s income on your individual tax returns as personal income on your Schedule C, for solo owners, and as a K-1 for partners. This can actually reduce the amount of tax your company owes as your business isn’t taxed at the business level before being distributed to the owners.
Alternatively, PLLCs can choose to be taxed as a corporation. That being said, it’s important to choose how you’d like to be taxed when you form your business; otherwise, the IRS will make this choice on your behalf.
Filing taxes as an S corporation
An S corporation, also known as a small business corporation or a subchapter S corporation, is a type of business formation that allows its owners to pass income to their shareholders without first being taxed at the business level. This avoids double taxation.
When you file taxes as an S corporation, you report income from your PLLC on your personal tax returns and are assessed at your individual income tax rate. Businesses must follow strict IRS guidelines to claim an S corp election, so be sure to find and file the right form if this is a tax structure you think works best for your PLLC.
Filing taxes as a C corporation
A C corporation is a business designation that’s typically used by larger businesses. When filing your taxes as a C corporation, your personal income taxes are filed separately from your business’s, and the PLLC is taxed as its own entity. This subjects you to paying taxes at the standard corporate tax rate. When filing your personal income tax return, you claim dividends or corporate earnings as personal income.
Regardless of how you choose to pay taxes, you need to report your employees’ wages to the IRS under your employer identification number (EIN), also known as a tax ID number. When you’re ready to form your PLLC, let ZenBusiness secure an EIN from the IRS for you.
7 Steps to Forming a Professional LLC
1. Obtain approval
To form a PLLC, you need to seek approval from the state regulatory board that governs your profession. For doctors, that means applying to your state medical board, and for attorneys, it means applying to the state bar association or judiciary. Other professionals, such as engineers, architects, and chiropractors, will need to obtain approval from the organization that oversees professionals in their field.
2. Name your PLLC
You’ll need to research restrictions surrounding PLLC names in your state and choose a business name that meets those requirements. Your name also needs to be unique, and you’ll need to verify with the state that it’s available. To select and reserve a business name that complies with the restrictions in your state, use ZenBusiness’s name reservation service.
3. Choose a registered agent
A registered agent accepts legal documents and correspondence from the business entity formation agency in the state on behalf of your PLLC. The registered agent can be a third-party that isn’t a member of your PLLC, or you can choose to act as your own registered agent. Since a registered agent must be available during standard business hours, many opt to use a service. ZenBusiness can help connect you with a commercial registered agent service.
4. File Articles of Organization
Your Articles of Organization, (sometimes also called a Certificate of Formation, Certificate of Organization, etc.), is the official filing that creates your PLLC. When the state approves your Articles of Organization, it becomes official. Although every state requires slightly different information on their formation document, a PLLC should be ready to name and appoint a registered agent, give the names and information for the PLLC’s founding members, state a principal office, and designate the entity’s management structure (manager-managed or member-managed).
5. Draft and sign your operating agreement
An operating agreement defines the roles of each member in the organization, as well as name the rules that regulate it. These rules must be agreed upon by all members and will vary based on your industry, location, and the wishes of the PLLC members. Some of the more common clauses in the agreements name the powers and duties of the members, dictate distribution of profits and losses, name methods to solve conflicts, detail possible PLLC buy-outs, and dissolution protocol.
6. Apply for an EIN
As an employer and professional business, you’re required to have an EIN under which you file all business-related tax forms with the IRS. Your EIN will also allow you to hire employees and open a bank account. ZenBusiness can help you get your EIN with ease.
7. Choose a tax classification
Now that you’ve created your PLLC, it’s time to determine your tax classification. Decide if you want to file your company’s taxes as a pass-through entity (like a general partnership), an S corporation, or a C corporation, but don’t forget, you might have to elect tax treatment before you file your tax return. S corporation status must be elected no more than two months and 15 days after the beginning of the tax year you plan to file.
Get started with ZenBusiness
If you find the limited liability and tax flexibility of a PLLC business formation appealing, it might be the right choice for you and your business. Contact ZenBusiness today to see how our small business services can help you launch your dream company.
Are PLLCs harder to form than LLCs?
While forming a PLLC isn’t necessarily more difficult than forming an LLC, it does require the additional task of obtaining permission from your profession’s governing agency. The difficulty in obtaining that approval varies by profession and state.
Can professionals from different fields form a PLLC together?
This rule varies by state, but most require all members of the PLLC to be licensed in the same profession. For a definitive answer, check with your state’s licensing department.
Can a PLLC operate under a DBA rather than its PLLC name?
In most states, PLLCs are required to obtain authorization to operate under a doing business as (DBA) name. Additionally, a DBA name must not be misleading in any way.
Can a licensed professional sell or transfer an ownership interest in the PLLC?
In a PLLC, this practice is permitted only if the transfer is between two professionals who are licensed in the same profession.