Choosing the appropriate business structure for your company is complicated. For attorneys, physicians, accountants, architects, and some other licensed professionals, there are extra factors to consider. Professionals who want liability protection and flexibility may feel drawn to the Limited Liability Company (LLC) structure. However, in many states, professionals whose jobs require licensing by the state aren’t legally allowed to form an LLC. Instead, they may have to form a Professional Limited Liability Company (PLLC).
In this article, we’ll consider the LLC vs. PLLC, looking at the similarities and differences between them so that you gain a basic understanding of these structures as you explore your business entity options.
An Overview of the LLC and PLLC
A Limited Liability Company (LLC) is a popular business structure that combines the liability protection offered by incorporation while retaining some of the tax advantages of a partnership or sole proprietorship. Owners of an LLC are called “members,” and an LLC may have one member (single-member LLC) or multiple members (multi-member LLC). An LLC is relatively easy to form and maintain, with fewer startup and ongoing compliance formalities than a C Corporation.
For some types of professional services businesses, the advantages of an LLC are easy to see. However, in some states, professionals providing medical care, legal advice, tax services, accounting, or other services that require licensing by state regulatory boards, are restricted by law from using the LLC entity structure. Instead, they may be able to form a Professional Limited Liability Company (PLLC). Like the LLC, the PLLC protects its members from personal liability from judgment and debt without the strict formalities required of a corporation.
| LLC | PLLC | |
|---|---|---|
| Ownership Options | Individuals, Corporations, Other LLCs, and Foreign Entities | Varies by State and Often Requires a Professional License |
| State Recognition | All States | Varies by State |
| Ownership Reference | Member Managed or Manager Managed | Member Managed or Manager Managed |
| Liability Protection | Business Judgements, Debts | Business Judgements, Debts |
| Taxation | Pass-Through Basis | Pass-Through Basis |
| S Corp Election for Taxation | Allowed | Allowed |
| C Corp Election Taxation | Allowed | Allowed |
| Profit Allocation | Very Flexible | Very Flexible |
| Business Formation | File Articles of Organization With the State | File Articles of Organization With the State |
| Maintain a Registered Agent | Required | Required |
| Obtain an EIN | Required | Required |
| File Annual Tax Returns | Required | Required |
| Maintain Separate Bank Accounts | Required | Required |
| Maintain Professional Licenses | Not Required | Required |
| File Annual Report | Varies by State | Varies by State |
| Perpetual Existence | Allowed | Varies by State |
Legal Considerations
LLC Owner Liability Protection
Business owners often choose the LLC structure because it offers the same protection from personal liability as a corporation, without all the onerous formalities, ongoing paperwork, and annual filings required to keep a corporation in good standing.
Obtaining protection from personal liability for the businesses’ judgments and debts is a major reason many business owners choose the LLC structure. Under most circumstances, an LLC member is not personally responsible for the business’s liabilities (including those caused by other members or the LLC’s employees). The members may lose money they invested in the LLC, but their personal assets are not at risk.
However, an LLC member is responsible for their own negligence or illegal actions. And if an LLC member personally guarantees a loan for the business, that individual may be held personally liable if the LLC cannot pay the debt. Also, if an LLC fails to fulfill its business compliance responsibilities, a court may decide the “corporate veil” of personal liability protection has been pierced. That puts members’ personal assets at risk of being used to settle debts or damages in lawsuits.
PLLC Owner Liability Protection
In general, PLLC members have the same legal protections as members of an LLC. While the PLLC protects members from each other’s malpractice suits, it does not protect individual members from their own malpractice suits. Each member is responsible for their own malpractice suits, so it may be helpful (possibly required) that each member carries their own malpractice insurance.
Ownership
Who Can Own an LLC?
Most states have flexible rules for who may own an LLC. Typically, members may include individuals, corporations, other LLCs, and foreign entities. LLCs can continue to exist after a member retires or leaves the business according to the rules for continuation detailed in the LLC operating agreement.
Who Can Own a PLLC?
Rules and requirements for PLLC owners vary from state to state. Some states require all the members to have specific licenses for the service offered. In other states, a PLLC can have as low as 50 percent professional ownership.
While LLCs can usually continue to exist after a member retires or leaves the business, a PLLC may face some difficulties due to members’ professional licensure requirements.
Members may have to dissolve or re-form the PLLC if the PLLC operating agreement does not have a provision for perpetual existence allowing the PLLC to continue when individual members lose their licensing, leave the company, or pass away.
Generally, occupations with professional license requirements that may have to form a PLLC include:
- Attorneys
- Accountants
- Architects
- Chiropractors
- CPAs
- Dentists
- Engineers
- Psychologists
- Physicians
- Real estate agents
- Social workers
- Veterinarians
It’s important to understand that not all states recognize the PLLC structure.
States that recognize PLLCs:
- Arkansas
- Arizona
- Colorado
- District of Columbia
- Florida
- Idaho
- Iowa
- Kentucky
- Maine
- Massachusetts
- Michigan
- Minnesota
- Mississippi
- Montana
- Nevada
- New Hampshire
- New York
- North Carolina
- North Dakota
- Oklahoma
- Pennsylvania
- South Dakota
- Tennessee
- Texas
- Utah
- Vermont
- Virginia
- Washington
- West Virginia
States that don’t recognize PLLCs:
- Alaska
- Alabama
- California
- Connecticut
- Delaware
- Georgia
- Hawaii
- Illinois
- Indiana
- Kansas
- Louisiana
- Maryland,
- Missouri
- Nebraska
- New Jersey
- New Mexico
- Ohio
- Oregon
- Rhode Island
- South Carolina
- Wisconsin
- Wyoming
In California, professionals cannot form an LLC or PLLC; instead, they may form a Professional Corporation or Limited Liability Partnership. In other states that don’t recognize the PLLC structure, professionals must choose an entity structure per the state’s specific rules for licensed occupations.
Taxation
How Is an LLC Taxed?
The IRS will consider an LLC a “disregarded entity” by default. It considers the Limited Liability Company the same tax-paying entity as its members, so income taxes are on a pass-through basis. The LLC itself does not file a business tax return or pay business income tax. Instead, the LLC members report the LLC’s profit and losses on their personal income tax returns and pay tax at the applicable individual tax rates. LLC members don’t receive paychecks, so they must also pay Social Security tax and Medicare tax (self-employment taxes) on their portion of the company profits. Generally, LLC members pay their income and self-employment taxes each quarter.
If an LLC meets the IRS’s eligibility criteria, its members may opt to be taxed as an S Corporation. An S Corporation is also a pass-through entity. However, in an S Corporation, members who work in the company go on the company payroll. Those members only pay Social Security and Medicare taxes (FICA) on their wages and salaries from the business but not on income taken as distributions. This may help some individuals lower their overall tax burden.
LLCs also have the option of being treated as a C Corporation for tax purposes. In that case, the company pays income taxes and must file its own returns. Some profits get taxed twice with corporate tax treatment — something referred to as “double taxation.” It’s called that because the business must pay income tax on its profits, and then any profits paid as distributions to the business owners get taxed again at the individual income tax level.
How Is a PLLC Taxed?
Just as the IRS, by default, treats an LLC as the same tax-paying entity as its owners, the same goes for a PLLC. By default, it will be taxed as a sole proprietorship (if a single member PLLC) or a partnership (if a multi-member PLLC), with all business profits and losses passed through to the owners’ personal income tax returns. The profits are also subject to Social Security and Medicare taxes.
Alternately, just as with an LLC, PLLC members can elect to be taxed as an S Corporation. S Corp tax treatment is also on a pass-through basis, but only the owners’ wages and salaries incur Social Security and Medicare taxes. Profits paid as profit distributions are not subject to those taxes.
PLLCs also have the option of being treated as a C Corporation for tax purposes if they determine it will be more advantageous.
Tax matters can get complex, so it’s helpful to enlist the help of a tax advisor for guidance on which option will yield the most favorable outcome.
Profit Allocation
How Does an LLC Distribute Profits Among Members?
Members of an LLC have flexibility in allocating profits and losses among themselves. They do not have to split them according to each member’s financial investment (as is the case with some other business structures). For example, let’s consider the scenario of a two-member LLC where one member has put forth 75% of the money to start the company, but the other is doing most of the work running the business. In that case, the members may agree to split profits and losses 50-50 vs. 75-25. The flexibility to split business income this way allows for business owners to be compensated more fairly based on not only their financial contributions but also their time and effort.
How Does a PLLC Distribute Profits Among Members?
PLLC members also enjoy flexibility in allocating profits and losses as they wish rather than on financial investment in the company alone. And, like an LLC, a PLLC can have passive members who invest financially and others who take an active role in running the business. It’s essential that the PLLC operating agreement documents each member’s role, responsibilities, and allocation of profits and losses.
Business Formation
How Do I Form an LLC?
LLCs must file Articles of Organization with the state, but the management structure is much more flexible than the corporation. LLC can be managed day-to-day either by its members or by nonmember managers. This differs from a corporation, where the owners need to elect a separate board of directors, issue shares, and hold annual shareholder meetings and directors’ meetings recorded with minutes in the corporate records.
Other tasks involved in forming an LLC include designating a registered agent, obtaining an EIN, opening a business bank account, registering for payroll taxes (if hiring employees), and possibly other state or local government requirements.
How Do I Form a PLLC?
The process for forming a PLLC may vary by state. Business owners should check with their state licensing board and the Secretary of State office to determine what forms and information they must file. Typically, it starts with getting the state’s licensing board to approve the PLLC’s articles of organization. This is an additional step that an LLC does not have to deal with. Requirements for approval will vary depending on your profession and the state. In most states, however, professionals must provide proof that every member is licensed in the profession and have at least one of those licensed professionals sign the company’s articles of organization.
Like an LLC, a PLLC must appoint a registered agent, get an EIN, and establish a business bank account. The state and local governments may have additional requirements that PLLCs must fulfill to legally register and operate in their jurisdictions.
After approval from the state licensing board, articles of organization for the PLLC and any other required documents must be submitted to the Secretary of State office. Once the PLLC is formed, the state may also require the owners add “PLLC” after the company’s official name.
Ongoing Compliance Responsibilities
LLC Business Compliance Tasks
An LLC must fulfill some ongoing requirements to maintain its entity and the legal protections it provides. The rules may vary depending on the state. Here’s a list of commonly required tasks and responsibilities.
- Always retain a registered agent
- File tax returns and pay taxes
- Keep business and personal accounts and transactions separate (no comingling of funds)
- Renew required business licenses and permits
- File an annual report
PLLC Business Compliance Tasks
A PLLC has ongoing compliance requirements similar to those that an LLC faces.
- Always retain a registered agent
- File tax returns and pay taxes
- Keep business and personal accounts and transactions separate (no comingling of funds)
- Renew required licenses and permits
- Renew members’ professional licenses
- File an annual report
Get the Help!
Deciding on the right business legal structure for your company is a time-consuming process. It’s critical to understand your options, so consider asking qualified legal and tax professionals for guidance.
After deciding on a legal entity type, the filing process requires yet more time and precision. That’s why so many business owners — including those in licensed occupations — depend on CorpNet to ensure their forms and documentation are completed accurately and on time.
We’re here to help you, too. Contact our team of filing experts to get started!
