COMPARING LLCS AND PLLCS
What is an LLC?
A limited liability company (LLC) is a registered business entity that offers owners the limited liability protection of a corporation and the pass-through taxation of a sole proprietorship or partnership. LLCs give business owners flexibility to shape the company, its profit allocation, and its tax structure to fit a variety of needs and goals.
Unlike a sole proprietorship or a partnership structure, LLCs offer personal asset protection in the event that your business is sued. Furthermore, unlike corporations, LLCs are a simpler structure that doesn't run the risk of double taxation.
What is a PLLC?
While licensed professionals of all kinds, such as doctors, lawyers, architects, and accountants can form businesses with all the benefits of an LLC, an alternative structure exists for these industries. This is the professional limited liability company (PLLC). This structure is specifically designed for businesses that require professional licensing to operate.
PLLCs have their own requirements that vary by state, and some states do not even offer PLLC formation. States that do offer PLLC formation often require proof of licensing and member approval from the state licensing board. Certain industries may also have their own regulations.
LLC vs PLLC: Similarities
LLCs and PLLCs are almost identical when it comes to how they are formed, structured, taxed, and regulate. They mirror one another in the following ways:
- Both are formed by filing Articles of Organization with their state of formation.
- Both offer limited liability protection to their members.
- Both are taxed as pass-through entities.
- Both allow members to elect corporate status for tax purposes.
- Both include the same structural flexibilities.
LLC vs PLLC: Differences
While at the most basic levels an LLC and a PLLC are the same, there are some important distinctions. When forming a PLLC, most states will require proof of professional licensing before approval your articles of organization. There are also important considerations when it comes to the scope of limited liability protection.
- Malpractice: A PLLC does not protect members from malpractice claims related to their own professional actions. PLLC members do, however, retain protection from claims resulting from malpractice by other company members.
For example, if you’re a doctor in a medical PLLC and a patient sues another doctor in the practice, your personal finances remain protected. Only the finances of the business, including the percentage you own, will be at risk. However, PLLC members will generally need to carry malpractice insurance to cover claims made against them personally.
- Personal guarantees: Because of the increased risks associated with my PLLCs, lenders may be more likely to require a personal guarantee before approving loans. This can subject PLLC members to more personal liability than LLC members.
STATE GUIDELINES FOR PLLCS
As with all LLCs, state regulations regarding PLLCs vary across the country. The majority of states allow for the creation of PLLCs by licensed professionals, a handful of states require this structure for certain businesses, and some don’t offer the option at all. Regulations also vary in terms of what types of businesses are required or permitted to form a PLLC and how many PLLC members must be licensed.
For more state-specific information, Northwest Registered Agent provides a detailed list of state requirements surrounding PLLCs.
PLLC vs. LLP
A limited liability partnership (LLP) is another business structure available to companies that require licensed professionals. LLPs require at least two members and offer the same limited liability protection as PLLCs. Unlike PLLCs, LLPs are available in all 50 states.
LLPs are taxed like partnerships, with profits passing through to their members. They do not offer the option to elect corporate taxation status like an LLC.
Should I Form a PLLC?
PLLCs and LLCs are essentially the same business structure. However, anyone looking to form a business that provides professional services will need to consider which structure is best for them. While only three states require licensed professionals to form a PLLC, at least thirty states offer the option.
The specific requirements in your state will play a big role in helping determine if a PLLC is the right structure for your business. Consider your specific industry, the level of risk associated with your work, and the number of members required to hold licenses.
Since PLLCs will also usually require a bit more effort in terms of organizing and drafting your operating agreement, the amount of work needed to remain compliant may also be an important factor in your decision.
No matter what structure you choose, be sure you fully understand all legal requirements before registering your business.