Selecting the right form of business for your company is complex, and if you are an architect, accountant, physician, attorney, or any other professional, it becomes tougher. This is because you have to consider some extra factors while choosing the right business structure. As a professional, you might want to opt for the liability protection and flexibility that a limited liability company (LLC) offers compared to the partnership or corporation.
But many states do not allow professionals who require licensing to form an LLC. Instead, they can form a PLLC, which is a professional limited liability company. In this article, we will understand all the differences between PLLC vs LLC.
PLLC vs LLC
Forming a PLLC vs LLC is an easy decision as soon as you understand all about each company’s restrictions and requirements. If the company is in a business that requires a license or certification, then a professional limited liability company (PLLC) might be required by your state; else, you can choose to open an LLC. Let us look at both and understand all about them.
What is an LLC?
First, let us start by understanding all the characteristics of the limited liability company (LLC). Business owners usually choose the LLC structures since they offer the same protection from personal liability that a corporation does.
LLCs are much simpler and only need to file the articles of the organization with the state (In Nevada, you would also need to file an initial list/report). Moreover, the management structure is much more flexible in nature than the corporation. The LLC owners are called the members, and the LLC can be managed daily either by the members (called Member-managed LLC) or by the non-members (called manager-managed LLC). For the professional service businesses, the advantages of the LLC help a lot.
Nonetheless, as per some of the states, professional services, including accountants, tax services, legal advice, medical care, and others that need licensing by the state regulatory board, are restricted by law from using the LLC entity structure. Instead, these people have to choose the PLLC entity structure. The PLLC has a lot of the same characteristics as the LLC. So, the PLLC protects its owners and members from personal liability in case of judgment or debt.
What is PLLC?
With that said, a PLLC is a type of limited liability company. It works like a partnership but has the liability protection of a corporation. A few of the states do not allow certain kinds of professionals to form the LLC. So, they would instead have to form a PLLC. Normally, the members of the PLLC have to belong to a profession that requires a license. For example, this includes professionals like architects, chiropractors, attorneys, or CPAs. Additionally, they must only offer services under their specific profession.
What are the differences between PLLC and LLC?
Although most of the basic things between the PLLC vs LLC are the same, they are some distinctions as well. When you are about to form a PLLC, a lot of the states would require proof of professional licensing before they approve your articles of organization. There are also some critical considerations when it comes to the scope of the limited protection. Here are the main differences between the PLLC vs LLC:
- Personal guarantees: Due to the licensed risks associated with the PLLCs, lenders may be more likely to require a personal guarantee before they approve any loan. This subjects the PLLC members to more personal liability as compared to the LLC members.
- Malpractice: A PLLC does not protect its members from malpractice claims related to their own professional actions. However, the PLLC members do have protection from lawsuits resulting from malpractice by the other company members. For instance, if you are a doctor in a PLLC and the patient sues another doctor who is practicing with your company, your personal finances would be protected. The finances of the business, including the percentage that you own, would be at risk. Moreover, the PLLC members also need to carry malpractice insurance that would cover the claims made against them personally.
Requirements of a PLLC & Forming a PLLC
Requirements and rules for the PLLC licensed owners are different and vary in every state. A few of the states need all the company members to hold specific licenses for the services offered. The other states allow you to form a PLLC that has as low as 50% professional ownership. Just like a corporation, the LLC is considered an entity that is separate from the owners. So, even after the owners retire, leave or die, the business would still exist.
But when it comes to the PLLC, since it is a professional service company based on the members’ licenses, this type of business would not have any continuity if the members leave, retire or die. Moreover, if you are in a state where all the members of the PLLC have to hold their own licenses for the services they offer, transferring ownership would also get restricted. And when the licensed member leaves or dies, the PLLC would have to be reformed or dissolved.
How do I form a PLLC?
When you are ready to form a PLLC, you will need to go to your state government office and find out the information about forming it. Your state licensing board and State Secretary would be able to tell you what kind of information you need to file. Usually, you would have to begin the process by obtaining your state’s licensing board to approve your PLLC’s articles of organization. (This is an additional step that LLCs don’t have to deal with).
The approval requirements would vary based on the state and your profession. In most of the states, you will also have to share proof that every member is licensed in your business profession. And you will also have to make at least one of the licensed professionals sign the company’s article of organization. Once you receive the state licensing board’s approval, you will need to file the articles of organization and the other required documents with the Secretary of State’s office. As soon as your PLLC is formed, your state might also ask you to add PLLC after the company’s official name to designate it to others appropriately.
The IRS does not recognize either LLCs or PLLCs. So, it does not matter if you choose the LLC or the PLLC. At the end of the day, you will have to choose the way you want your business to be taxed from the options: C corporation, S corporation, partnership, or sole proprietorship. A lot of these options treat the business as a “pass-through” entity unless they decide to have their company taxed as a corporation.
This means that the business owners report their share of their profits and losses on their personal income tax returns. The members of the PLLC are also allowed flexibility in allocating profits or losses in proportion to the amount of ownership interest each member has. The members of the PLLC can only be investors, just like in an LLC. Moreover, the member can have as little or as much say in running the business as they choose. But all this has to be noted in the operating agreement. And the PLLC investors, just like owners, also have to report their share of the company’s profits and losses on their income tax returns.
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