Making tough decisions is an everyday occurrence as a small business owner or entrepreneur. You are required to make decisions on everything from the logo design to marketing strategy. 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.
What Is a PLLC?
One of the most popular business entities for over 80% of businesses is a limited liability company (LLC). However, there is another similar option, called a PLLC — Professional Limited Liability Company. A 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.
PLLC vs. LLC: Similarities
At their core, both a PLLC and LLC have the same structure. 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. An LLC is often compared to a hybrid between a corporation and a sole proprietorship because it allows your personal assets to remain separate from your business assets. Therefore, legally and financially, your risk is limited to the amount that is invested in the LLC — and your personal assets beyond that are protected.
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).
PLLC vs. LLC: Differences
When it comes to management flexibility and taxation, a PLLC has the same advantages as an LLC. 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. State laws will determine the appropriate rules and regulations for both types of formation. However, some states may also have a particular licensing agency dictate their own rules and guidelines when forming a PLLC.
Forming a PLLC or LLC requires documentation, such as the Articles of Organization, to be filed with the state agency. Forming a PLLC will, however, 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 may need to get member approval from your state licensing board before or after filing the Articles of Incorporation.
LLC vs. PLLC: Benefits and Downfalls
While an LLC and PLLC provide personal limited liability protection, a PLLC will not protect you from claims of malpractice or wrongdoing. However, a benefit 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.
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%.
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.
Which States Allow PLLC Formation?
Not all states recognize PLLCs. If your state does not, you may have to consider filing as a professional corporation or as a standard LLC. The states that don't offer a PLLC include 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, and Wyoming.
The states that do allow PLLCs 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.
Who Can Form a PLLC?
A PLLC is reserved for specific professions that require a state license to offer their services. 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. In general, some of the most common professions that can form a PLLC include:
- Social workers
- Real estate agents
Tax Specifications for PLLC vs. LLC
There are no real tax differences between an LLC vs. a PLLC. 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.