If you are a licensed professional such as a physician, attorney, or architect, you could decide to establish your own company. Besides obvious concerns like capital and location, you will likely grapple with the best form of business to start. Should you open an LLC or PLLC? Is there a difference between the two, and how will either choice affect your operations?
The question of opting for a limited liability company or a partnership or corporation requires serious consideration. This article will help get you closer to a decision by focusing on LLC Vs. PLLC: What’s the Difference?
Limited Liability Companies
LLC stands for Limited Liability Company and is a business structure. The owners of an LLC, also called ‘members,’ are required to file articles organization with the state but generally enjoy more freedom in the formation and running of the company. For example, the day-to-day management of an LLC can be handled by the members (the owners) or non-member managers.
Unlike in LLCs, the owners in a PLLC must appoint a board of directors, attend yearly meetings, and issue ownership shares. It is no surprise that many businesses prefer LLC structured companies to corporations. LLCs comes with the same personal liability protections as a corporation but without all the formalities, filings, and paperwork required for smooth operation.
That said, not every state allows professionals to use the LLC structure. Some laws restrict accountants, attorneys, doctors and other professionals to the PLLC structure.
Note: California laws do not recognize PLLCs and LLCs, and professionals can only form liability partnerships o professional corporations.
Professional Limited Liability Companies
A professional limited liability company (PLLC) is a specialized form of business structure for professionals. Unlike LLCs, where anyone can be a member or owner, there are strict restrictions about ownership and membership in a PLLC. Most state laws dictate that only licensed professionals can establish a PLLC or that a specified number of licensed professionals must make up the membership.
In a PLLC, one member’s malpractice charges can extend liability to other members, and the company itself cannot protect its members from liability. This is different from the LLC structure, where the company’s liability can have no effect on individual members.
LLC Vs. PLLC (Advantages & Disadvantages)
The main distinctions between an LLC and PLLC lie in each structure’s formation, ownership, taxation, and liability protections. These distinctions can provide advantages of one system over the other, as you will see below.
The LLC structure holds significant benefits over PLLCs regarding personal liability protections over debts and judgments. An LLC is considered a different entity from its members and owners, and any debts or claims held by the business do not apply to the individual members. When borrowing money for the company, banks will also only consider the business’s financial records.
In contrast, a PLLC protects its members from the malpractice liability of another member but does not shield members from their own suits. Every member can be held individually liable for a malpractice suit and should get a personal malpractice insurance cover to protect themselves. Banks also consider PLLC owners’ personal guarantees when processing loans.
If the business has a debt, it is considered a debt of the company in an LLC but can appear on members’ records in a PLLC structure.
The licensing board in a state will usually outline the information and requirements involved in establishing a PLLC or LLC. The process is pretty much the same expect PLLC owners must get their articles of organization approved by the board, which is not a requirement for LLCs. Additionally, PLLC members must present proof that the membership consists entirely of licensed professionals or contains at least the required number. This is unlike LLCs, where no such proof is required.
By definition, an LLC is considered a separate entity from its owners, meaning it can continue to run after the owners or members leave the company, sell it, retire, or die. A PLLC, on the other hand, offers limited continuity past its owners. If your state requires that PLLC members be licensed, the death or exit of an owner can lead to the dissolution or reformation of the entire company.
In some states, all the members of a PLLC must be licensed in the specific service provided by the company for the company to be registered. This number can drop to as low as 50 percent in other states. In contrast, anyone can be a member or owner of an LLC.
Taxation is the one area where PLLCs and LLCs are virtually indistinguishable. Unlike state laws, the IRS does not tax business as LLCs or PLLCs as a company can only be taxed as a partnership, sole proprietorship, C corporation, or S corporation. With the exception of corporations, these options require that the owners report the business’s profits and losses on their income tax returns.
Every owner must report only on their share of the profits and losses. When allocating shares, the owners are not restricted to the proportion of ownership interest and can share them as they wish.
LLC Vs. PLLC (Key Differences)
|Any person can be a member or owner.||Some states require that all the members be licensed professionals, but the number can be as low as 50 percent.|
|Non-member managers can oversee the day-to-day management activities.||The owners must appoint a separate board of directors to run the company.|
|The company’s liability in a malpractice suit does not apply to the members, i.e. the company can be sued as a separate entity.||The company cannot shield its members from liability in a malpractice suit but can protect other members from one member’s liability.|
|The approval of articles of organization is not a requirement for formation.||The state licensing board must approve the articles of organization during formation.|
|The company can continue to exist after the death, retirement, or resignation of its members or owners.||The company may need to be reformed or dissolved after the death, exit, or retirement of a licensed professional owner.|
As you can see, the formation, ownership, and running of a PLLC is more complex than that of an LLC. An LLC also offers its members more liability protection from malpractice suits and debt. Nonetheless, PLLCs also offer licensed professionals a myriad of benefits. The ultimate decision of which to choose will come down to the laws in your state and the type of business you would like to run.