Establishing a business involves making many critical decisions, perhaps chief among those being the selection of the best entity structure to use for your business. If you are a licensed professional looking to establish an entity for your practice, you may be contemplating whether to use a Limited Liability Company (LLC) or a Professional Liability Company (PLLC). These entities provide business owners with unique advantages and protections. In this blog, we will discuss the nuances of LLCs and PLLCs, exploring their differences, benefits, as well as the processes involved in organizing them.
What Is a Limited Liability Company (LLC)?
An LLC combines elements of both corporations and partnerships, allowing business owners, referred to as “members”, to enjoy the liability protection offered to corporations while maintaining a more straightforward or intuitive organizational structure, such as a partnership, as opposed to one with numerous formalities, such as a traditional C-corporation. An LLC is owned by its members and offers a flexible structure for both ownership and management. Members can hold unequal shares and are not required to be involved in the company’s operations.
What Is a Professional Limited Liability Company (PLLC)?
A Professional Limited Liability Company (PLLC) is a specialized form of the traditional LLC. It is designed for licensed professionals such as doctors, lawyers, accountants, and others. The creation of a PLLC allows these professionals to enjoy the benefits of limited liability while conducting their practice. Unlike LLCs, members are personally liable for their own professional negligence but are not responsible for the malpractice of other members.
Differences Between LLCs and PLLCs
Business Formation:
To form the entity, both LLCs and PLLCs require the filing of “articles of organization” with the respective state. PLLCs typically have additional criteria that must be met, related to the professional-licensing requirements that each member is obligated to possess. The specific details for both LLCs and PLCCs vary by state, so it’s crucial to research and adhere to the regulations in your jurisdiction.
Ownership or Membership:
The ownership structures of LLCs and PLLCs are similar. In both LLCs and PLLCs, the owners of the company are called “members.” Members’ interests are usually outlined in an operating agreement. Unlike LLCs, PLLCs commonly require all members to hold the necessary professional license in a particular field of practice that the PLLC wishes to do business in.
Profit Sharing:
LLCs and PLLCs share similarities in terms of profit-sharing. Members of both entities can decide how profits are distributed among themselves. This flexibility can be a significant advantage, especially for businesses with diverse ownership structures.
Taxation:
One key advantage for LLCs and PLLCs compared to other structures is taxation. Single-Member LLC’s and PLLC’s are commonly considered disregarded entities. A disregarded entity is a single-owner business entity that the IRS disregards for federal income tax purposes. The owner pays the business taxes on their own personal returns. Multi-Member LLCs are typically considered pass-through entities for tax purposes. This means that profits and losses flow through to the members’ personal tax returns. Multi-Member PLLCs also follow this pass-through taxation model, but they are often subject to additional regulations related to the professional services they provide, which vary by state. Alternatively, multi-member LLCs and PLLCs can elect to be taxed as an S-corp instead. Business owners should consult their lawyers and accountants before selecting how they are to be taxed.
Liability Protection:
Both LLCs and PLLCs can offer limited liability protection, which can shield a member’s personal assets from business debts and legal liabilities of the company. The only exception happens when a member gives a personal guarantee. However, PLLCs can offer an additional layer of protection in some cases by limiting personal liability for suits arising from the professional services rendered. Members are personally liable for their own malpractice claims but are not responsible for the malpractice of other licensed professionals within the company.
Compliance:
LLCs and PLLCs must adhere to state & Federal regulations regarding compliance and reporting. This includes the filing annual reports, updating membership changes, and reporting beneficial ownership information. PLLCs, being tailored for licensed professionals, generally face additional compliance requirements linked to their professional licenses as prescribed by the laws of their specific jurisdiction. Along with the company’s filings, each member of a PLLC must keep their licenses current. Any member or manager whose license expires is prohibited from practicing through the PLLC. Noncompliance with these regulations can result in fines or even criminal charges for practicing without a valid license.
Is a PLLC right for me?
Determining whether you should use an LLC or PLLC for your business hinges, primarily, on your profession and the nature of your services. If you’re a licensed professional such as a doctor, lawyer, or accountant offering specialized services, opting for a PLLC might be a prudent choice. It’s crucial to consider the specific regulations in your state, as they may require a PLLC for certain licensed professions. Consulting with a business attorney who understands the intricacies of professional licensing and business structures can guide you in making an informed decision tailored to your unique circumstances.
Can I dissolve an LLC or PLLC?
Dissolving an LLC or PLLC involves more than just closing the doors. Business owners must follow state-specific procedures, including filing dissolution paperwork, settling debts, and distributing assets. Properly dissolving a business is crucial to avoid any future legal complications.
Contact Our Experienced Business Attorneys
Navigating the intricacies of forming, operating, and dissolving an LLC or PLLC requires legal expertise. Our experienced business attorneys are here to provide guidance tailored to your specific needs. Whether you are a seasoned business owner or a professional looking to form a PLLC, we have the knowledge and skills to assist you. Contact us today.
