Starting your business involves many different factors. Business owners have to select an adequate business structure for their new organizations. Your company’s chosen system will affect how your business operates in the future.
Professionals such as architects, accountants, physicians, and attorneys need liability protection, so they choose LLC or PLLC structures. However, people often don’t know what these structures involve and which one to choose. Here we’ll compare PLLC vs. LLC and help you to understand how they differ.
Once you understand the restrictions and requirements of these options, choosing the right type for your needs will be easy.
The basics of limited liability companies
Running a business as a partnership or sole proprietorship exposes the owners to personal liabilities, and they can quickly get into debt through their business. That’s why owners form corporations that limit liability but require some record-keeping and reporting.
An LLC company structure allows owners flexible management while providing personal liability protection similar to corporations. Limited Liability Companies are approved by states and not through federal regulations.
Owners of an LLC are called “members,” and LLC protection safeguards their personal assets. Members can’t lose them through the company’s actions and have no liability for business lawsuits or debts.
LLCs offer pass-through taxation, meaning that all LLC members are individually in charge of taxation regarding the profits and losses of the LLC that they incur. There’s no double taxation with LLCs. If you don’t want to start your organization on your own, you can find a reliable LLC service company to do all of that for you.
Professional limited liability companies explained
Professional limited liability companies are “upgraded” versions of LLCs with a professional license requirement. This company structure is for licensed professionals like accountants, lawyers, and doctors.
If an organization requires a license, certification, or registration by the state to offer services, it can probably qualify for a PLLC. Basically, you can’t open businesses such as restaurants, car wash services, web development agencies, and other similar companies under PLLCs.
A professional limited liability company can only provide services related to its professional license. In other words, you can’t open a law firm and sell cookies on the side. On the other hand, an LLC could sell clothes as well as beverages because neither kind of business requires a license.
Professional limited liability companies also have members, but there are specific restrictions on who can be an owner of this business.
Even though LLCs and PLLCs are similar, there are some critical differences between them that you must understand.
Malpractice protection
People form an LLC or a PLLC when they want to separate themselves from the business entity. In other words, these structures allow members to establish a fine line between themselves and their organizations. With both structures, members will not be individually liable for the judgments and debts of the company.
However, malpractice liability is one exception with PLLCs. Forming a PLLC doesn’t protect owners from malpractice claims happening because of their own mistakes. Many people think that being PLLC members protects them from malpractice, but it doesn’t.
Most professionals have personal malpractice insurance. On top of that, managers and supervisors are also liable for their employee’s actions, but PLLC offers team leaders protection. Simply put, PLLC protects owners from each other’s malpractice, but it doesn’t protect individuals from suits resulting from their own actions.
In practice, a PLLC can’t protect any member from a lawsuit filed for malpractice by a client. However, using a PLLC means that one member can’t be liable for any malpractice claims of another member.
Different compliance requirements
Both an LLC and a PLLC have ongoing requirements that they have to fulfill to continue operating legally and ensure general liability protection. These requirements can vary from state to state. However, there are some general requirements that you can expect.
Compliance requirements for an LLC
- You will always need to have a registered agent.
- Pay taxes on time and file tax returns.
- Manage your personal and business accounts separately, and don’t mix personal and business funds.
- Renew all business permits and licenses on time.
- File annual reports.
Compliance requirements for a PLLC
- You will always need to have a registered agent.
- Pay taxes on time and file tax returns.
- Manage your personal and business accounts separately, and don’t mix personal and business funds.
- Renew all business permits and licenses on time.
- File annual reports.
- Renew the professional licenses of all members.
Who can form them?
Different people can form LLCs and PLLCs, even though these structures are similar. Here’s what you need to know.
LLC
When it comes to LLCs, there are no specific legal or residency restrictions. Basically, as long as you are a US citizen, you can form an LLC. However, some states require applicants to be 18 years old to form an LLC.
There are exceptions in some states where people under 18 can form an LLC with consent from their parents.
PLLC
Forming a PLLC requires at least one of the members to be a licensed professional recognized by the state. Some states require all members to have the same license type from the same profession.
In those states, owners can hire professional employees to run their companies, but only people who are certified professionals can have legal ownership of the company. Licensed professionals that can form PLLCs are people who have all of the credentials to work in a specific profession as required by the state.
Here are some common professional positions eligible for PLLCs:
- Attorneys
- Architects
- Veterinarians
- Social workers
- Pharmacists
- Engineers
- Dentists
- Chiropractors
Some states don’t allow professionals to use PLLCs
LLCs are recognized and available in all US states. However, you can’t form PLLCs everywhere. The first step to starting a PLLC should be to check if you can do it in your state. You can usually find this information on the official website of your secretary of state.
If you still can’t find the information, you can check our list of eligible states below.
Keep in mind that laws and policies often change, so always visit your local government office to see if it’s possible to form a PLLC.
States that allow PLLCs:
Arizona, Arkansas, Colorado, Florida, District of Columbia, Iowa, Idaho, Minnesota, Montana, Mississippi, Michigan, Massachusetts, Maine, Kentucky, Nevada, New Hampshire, North Dakota, North Carolina, New York, Oklahoma, Pennsylvania, South Dakota, Texas, Tennessee, Utah, Virginia, Vermont, West Virginia, and Washington.
States that don’t allow PLLCs:
Alabama, Alaska, Connecticut, California, Delaware, Hawaii, Georgia, Louisiana, Kansas, Indiana, Illinois, Missouri, Maryland, New Jersey, Ohio, South Carolina, Wyoming, Wisconsin, Rhode Island, Oregon, New Mexico, and Nebraska.
Different requirements
To form an LLC, individuals must file articles of organization, find a registered agent, get an EIN, create a business account, and register the company for taxes. Some states have additional requirements, but in most cases, these are the essential steps that you have to take.
On the other hand, the process of forming a PLLC can vary widely from one state to another. There are different kinds of forms and information required by different states. In most cases, you will first need approval from the state licensing board of your articles of organization for a PLLC.
It’s vital to prove that all members have the required professional licenses. A licensed professional must sign all of the documents, including articles of organization. Forming a PLLC also requires opening a business account, tax registration, assigning a registered agent, and getting an EIN.
How are they similar?
At their core, these business structures are pretty much the same. PLLCs only add a “professional” category along with the required licenses to give credibility to different professions.
For example, the IRS considers LLCs and PLLCs “disregarded entities.” All income taxes are handled on a pass-through method, and there’s no need to pay business income tax or file a business tax return.
Instead, all members of LLCs and PLLCs report the losses and profits on their personal tax returns and pay taxes at individual rates. At the same time, both of these structures protect individuals if other members are negligent.
The costs for setting up are also pretty similar, and tax flexibility is identical. They are taxed identically and have the same management structure. The critical difference is how malpractice claims are handled since professionals are vulnerable to malpractice lawsuits, and people can go after their personal assets.
Conclusion
We hope that this post helped you to decide whether to use an LLC or a PLLC structure. No matter which one you choose, remember to keep strict documentation of your business dealings and communicate with your partners regularly to keep things transparent.
Set up an operating agreement even if it’s not mandatory in your state. All members must work together to resolve problems and decide on future business moves. Take the time to learn how to run a business entity and work with multiple partners.
