Making tough decisions is an everyday occurrence as a small business owner or entrepreneur. One of the most important decisions you will make when forming your business is the type of business entity you want your business to be. This will set your business up for short- and long-term success.
To help you make the right decision for your business, we've broken down the difference between an LLC and PLLC below.
What Is an LLC?
A Limited Liability Company (LLC) is a type of business entity that offers the tax benefits of a sole proprietorship while still offering the liability protection of a corporation by separating out your personal and business assets and finances.
An LLC is a popular business choice for small business owners, startups, freelancers, and entrepreneurs. It allows more flexibility in operational structure than a corporation while providing the option of pass-through taxation (where you don’t have to file completely separate taxes for the business).
What Is a PLLC?
A Professional Limited Liability Company (PLLC) is a specialized type of LLC used by certain licensed professionals, such as those providing legal advice, medical care, accounting, etc. Let’s dive into more detail about what a PPLC is, how it differs from a standard LLC, and what's involved in forming a PLLC.
Who Can Form a PLLC?
A PLLC is reserved for specific professions that require a state license to offer their services. Some of the most common professions that can form a PLLC include:
Real estate agents
Each state will typically provide a list of occupations that can form a PLLC. If your state of incorporation does not specify, check with your Secretary of State.
What Are the Similarities Between LLCs and PLLCs?
There are several similarities between PLLCs and LLCs, including that they both have the same structure and they both allow business owners to keep their personal assets separate from those of the company. This effectively limits their own liability when it comes to company debts and responsibilities.
What Are the Differences Between LLCs and PLLCs?
The main difference between a PLLC and an LLC is that the PLLC has restrictions on who may be a member and the limitation of liability of the members.
This means that, unlike an LLC, a PLLC is only for professionals recognized in a state through licensing, thus making it a popular choice for medical practitioners, real estate agents, lawyers, CPAs, chiropractors, architects, and more.
When it comes to filing and documentation, a PLLC will require a few extra steps. Rules for filing a PLLC vary by state, but it's typically required to provide proof of licensing for each member, such as a certified copy of the professional license. You also may need to get member approval from your state licensing board before or after filing the Articles of Incorporation, which you wouldn't need to do for an LLC.
Benefits and Downfalls: PLLCs and LLCs
While an LLC and PLLC both provide personal limited liability protection, a PLLC will not protect you from claims of malpractice or wrongdoing.
However, a benefit of a PLLC is that the wrongdoing of one individual member does not create liability for other members. Therefore, if you are entering into a PLLC with multiple members, know that you are protected if one of them is accused of wrongdoing.
One downfall of a PLLC is that there may be increased risks associated, which can make lenders feel uneasy about approving loans. This can subject PLLC members to more personal liability than LLC members. Also, PLLCs will usually require more effort in terms of organizing and drafting your operating agreement, which may be seen as a downfall to those who want to get up and running quickly.
A benefit of an LLC is that anyone can be a member or owner of the LLC. However, with a PLLC, some states only allow licensed professionals to be members or owners, or they require that a specific amount of members must be licensed professionals, such as 50%.
Which States Allow PLLC Formation?
States that allow PLLC formation include 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, and West Virginia.
If you don't see your state listed above, you may have to consider filing as a professional corporation or standard LLC instead of a PLLC.
Tax Specifications for PLLC vs. LLC
The Internal Revenue Service does not recognize either LLCs or PLLCs for tax purposes. This means that you need to decide if you want to be taxed as an individual, a partnership, or an S Corp.
If there is only one member of an LLC or PLLC, it's called “disregarded status.” The IRS has a form (Form 8832 – Entity Classification Election) that owners are required to fill out. Without this form, you may be put into the wrong category. So be sure to fill out the appropriate forms when filing for your taxes so that you are in compliance.
PLLC or LLC?
It all comes down to the protection either a PLLC or an LLC provides. As common knowledge, liability protection and protection from debts is the main reason why many small business entrepreneurs go for the LLC structure. Although the same is true for a PLLC too, however, there are a couple of factors that might affect your decision to go with either:
A PLLC does not protect its members from their individual malpractice suits but protects them from each others' suits. In such a scenario, it becomes imperative that each member of the PLLC carries their own malpractice insurance.
As a PPLC owner, you are personally responsible for any debts guaranteed to you by the banks.
Deciding between forming an LLC vs. a PLLC can be a difficult decision to make, given that there are benefits and downfalls to each. At the end of the day, no matter what structure you choose, be sure you fully understand all legal requirements before registering your business. Do your research at both the state and national levels in order to get a deeper understanding of requirements and regulations.
Also, keep in mind that in most cases, you can amend the Articles of Organization of an LLC and change to a PLLC if you would like or if your business goals have changed.
At Incfile, we can help you form an LLC. You can start your business today for as little as $0 plus state fees.
Lisa Crocco is a marketer for an international food manufacturer by day and a freelance writer/marketer for startups and small businesses by night. She's written for outlets like USA Today College, Career Contessa, CloudPeeps and Fairygodboss.