Starting a business by any licensed professional should be well-planned and initiated. One of the major decisions facing a business establishment is selecting the appropriate business entity. The US is home to a large number of licensed professionals, such as doctors, lawyers, accountants, architects, and many others. They may be called upon to organize certain types of business entities to conduct legal operations and protect personal assets. The two typical entities that are formulated to meet the needs of licensed professionals are the Professional Limited Liability Company (PLLC) and the Professional Corporation (PC). These organizations differ from general LLCs or corporations in that their rules address special requirements related to professional licensing and liability.
The choice between a PLLC and a PC affects the critical aspects of a business, such as liability protection, taxation, compliance, and administrative requirements. State laws in the United States vary widely, which can affect the types of entities that are allowed or required for licensed professionals. Therefore, it is incredibly crucial to understand the differences between a PLLC and a PC. If you are wondering which states allow PLLCs or who can own one, then this article is a panacea for you. We will learn in detail about the entity types and their differences. This article also lists the states that allow, require, or prohibit PLLCs and PC.
The Basics of Professional Corporations (PCs) for Licensed Professionals
A Professional Corporation (PC) is a special type of corporation that is formed exclusively by licensed professionals to provide professional services to its customers. PCs are utterly different from general corporations. They are specifically designed to meet the legal and regulatory needs of licensed occupations. This enables them to comply with regulations and avoid potential fines.
A professional corporation acts as a separate legal entity from its owners. It can hold property, enter into contracts, and take loans in its name. It protects shareholders from being personally responsible for the liabilities of the company. However, individual malpractices remain a personal exposure that is not covered by the entity. PCs operate under state-specific laws that govern the business practices of licensed professionals within the US. Before formation can be completed, there is usually a need to obtain approval from the professional licensing boards. PCs must comply with the provisions and regulations of professional licensing boards to avoid legal consequences. The rules set by these boards ensure that only licensed individuals can be shareholders, directors, and officers of the PC.
How to Form a Professional Corporation
A common question that arises in the minds of professionals is how to form professional corporations. The formation process involves a series of steps that must be followed correctly.
- Choose a unique business name that is not already in use by any other entity and includes the term PC or Professional Corporation.
- Then you need to obtain approval from your state’s professional licensing board.
- After the approval, you are required to file Articles of Incorporation with your state’s Secretary of State or equivalent office.
It is essential to remember that PCs require additional documentation or certification from the appropriate professional licensing board to prove that the incorporators are licensed. The company is required to draft bylaws that would contain its governance framework. Moreover, the professional corporation is also required to appoint a board of directors, hold regular meetings, and maintain corporate records to comply with the regulations and run the business smoothly.
Understanding the Professional Limited Liability Company (PLLC)
A Professional Limited Liability Company (PLLC) is a specialized form of LLC explicitly created for professions requiring state licensure, including doctors, lawyers, accountants, and many others. A PLLC offers licensed professionals the flexibility of an LLC, combined with practice-specific compliance. A PLLC is quite different from a general LLC. It is often restricted to individuals who hold a valid professional license in the state where the PLLC is formed.
Benefits of a PLLC
A PLLC offers a wide range of benefits to its members. It facilitates its members with liability protection, which allows them to avoid personal exposure to firm debts and other members’ malpractices. It also provides a more flexible management structure in comparison to corporations. Members can operate the business themselves or appoint a manager for the operations. Furthermore, the PLLC is a pass-through entity, which implies that the income from the company is reported on the personal returns of the members.
Licensing Requirements for PLLC Owners and Members
Just like a professional corporation, all owners and members of the PLLC are required to hold valid professional licenses in their relevant field, as mandated by state law. Owners or members who don’t have a valid license in the relevant field may be prohibited from being a part of the professional limited liability company. Professionals should also keep in mind that not every state allows PLLCs. The eligibility, formation rules, and requirements to form and operate a PLLC may vary depending on the state of formation. Therefore, business owners need to check state-specific regulations to comply with all the laws and rules.
Key Differences Between PLLC and PC
While both PLLCs and PCs serve licensed professionals and provide liability protection, they differ significantly in formation, taxation, management, and compliance. This section covers the key differences between PLLC vs. Professional Corporation in detail.
1. Formation & Compliance
The formation procedures of a PLLC are simpler compared to a professional corporation. While PLLCs have fewer ongoing formalities, PCs generally have detailed formalities. These compliance differences can affect administrative burdens and costs for the company.
2. Taxation
PLLCs offer flexible tax treatment options. The default tax treatment option for PLLCs is pass-through taxation. However, they can elect to be taxed as an S corporation, which can reduce self-employment taxes. On the other hand, PCs by default are taxed as C corporations, which can lead to double taxation. However, they can elect the S corporation status if they are eligible for that. These tax distinctions can significantly impact take-home income and business expenses.
3. Liability Protection
Both PLLCs and PCs protect members and shareholders from personal liability for business debts and other professionals’ malpractice within the entity. However, none of them protects an individual professional from liability for their malpractice or negligence.
4. Management Structure
PLLCs allow flexible management structures with fewer formal governance requirements. Members can either manage the organization themselves or appoint a manager. On the contrary, PCs require a formal board of directors, officers, and adherence to corporate governance protocols for management. This can make the management more rigid and hierarchical.
Which States Allow, Require, or Prohibit PLLCs and PCs?
US states vary widely in how they recognize and regulate professional business entities for licensed professionals. Some states in the US allow the formation of Professional Limited Liability Companies (PLLCs) while others allow Professional Corporations (PCs). There are some other states that allow both entities, and there are also a few that do not recognize PLLCs at all. Depending on the profession and state laws, certain states even require licensed professionals to form a PLLC rather than a PC or other entity type.
- States allowing PLLCs: Arizona, Florida, New York
- States not recognizing PLLCs: California, Alaska, Delaware.
- States where PCs are commonly used or required: California, Delaware, New Jersey
Such variances may affect how the professionals organize their business and how they adhere to the requirements of licensing in various states. It is recommended to consult your state laws or licensing boards to find out which entity types are allowed or required in your field.
IncParadise: Your Partner in PLLC and PC Business Formation
Choosing the right entity is vital for a variety of reasons. It is a critical decision that can affect liability, taxes, and compliance. Thankfully, IncParadise is with you on this journey. IncParadise is a highly trusted and affordable service provider that simplifies the PLLC and PC formation across all states in the US. IncParadise’s expertise in PLLC formation, registered agent services, and easy online process can help you establish your business easily. Use IncParadise for efficient and compliant business setup to avoid penalties and save money. Contact IncParadise to launch your professional firm today.
