There are many options to consider when determining the most appropriate business structure for your new enterprise. However, an LLC or PLLC could be the best option if you and your business partners want to shield your assets from business debts and lawsuits.
PLLC vs LLC – Both types of LLCs offer that protection, but there are important distinctions between them that may make one a better fit for your business. To help you make the best choice for your company, we’ll explain how a PLLC differs from an LLC and how the two entities operate similarly.
What is LLC?
A limited liability company or LLC is a legal business model that separates the owners from the business itself. The owners of an LLC are not personally liable for the debts, legal actions, or tax consequences of the business, in contrast to a sole proprietorship or partnership. Although the company is regarded as a separate legal entity, owners are still liable for any debts or legal actions up to the amount they have invested in the business. However, there are fewer restrictions on management and record-keeping for LLCs compared to corporations.
LLCs may have a single owner or more owners or “members.” All members of an LLC with multiple owners are jointly and severally liable. Although some states might not permit licensed professionals in fields like medical care or accounting to form an LLC, LLCs are a common choice for new businesses in the nation due to their flexible management structure, tax options, and liability protection.
It’s important to note that LLCs can choose their tax treatment, allowing owners to save on taxes potentially. Despite the advantages of setting up an LLC, individuals in licensed professions may find that a professional limited liability company (PLLC) is a better choice in some situations. Location-specific availability of PLLCs varies.
What is PLLC?
A professional limited liability company, or PLLC, is a business entity created with licensed professionals like doctors, lawyers, accountants, and architects in mind. Since these companies must have a professional license to operate, the PLLC structure was developed to meet their unique needs. State laws governing the creation of PLLCs may differ; for example, some states may demand documentation of licenses and consent from the state licensing board. A few industries might even have their own set of rules.
The person must hold an appropriate license to conduct business in their industry in order to form a PLLC. A PLLC can only be created by people who must have professional permission to practice their trade. A PLLC won’t be an option for you if you’re starting a company in a field that doesn’t call for a professional license, like a restaurant or web design company.
PLLCs may provide only professional license-related services. For instance, a law firm with a PLLC registration is only permitted to provide legal services. A PLLC’s members, individuals who hold ownership in the company, can be either a single person or a group.
PLLC vs LLC
Formation of Business
LLC
Compared to corporations, LLCs are thought to be a more adaptable type of business. This is so that either company members or nonmember managers can take care of day-to-day management. Unlike corporations, owners do not have to elect a board of directors, issue shares, or hold annual shareholder and director meetings.
The first step in creating an LLC is submitting the Articles of Organization to the state. The next step is to designate a registered agent, acquire an EIN, open a company bank account, sign up for payroll taxes (if you plan to hire employees), and possibly satisfy other conditions imposed by the local or state government.
PLLC
A PLLC can be formed differently in different states, so you must check with the Secretary of State’s office and state licensing board to find out what paperwork you need to submit. Typically, it begins with getting the PLLC’s articles of organization approved.
An LLC does not have to go through this extra step. Different criteria will need to be met for approval depending on your profession and the state you’re in. Most often, you’ll need to show documentation of each member’s license and have one of them sign the company’s organizational documents.
A PLLC must do the same things as an LLC, including designating a registered agent, getting an EIN, and opening a business bank account. For PLLCs to be able to register and operate in a particular jurisdiction legally, the state and local governments may have additional requirements.
Ownership
LLC
Flexible rules in most states often regulate the ownership of an LLC. As a result, a wide range of members, including corporations, individuals, other LLCs, and even foreign entities, can join. The continuation provisions outlined in the LLC operating agreement allow the LLC to continue after a member retires or leaves the company.
PLLC
The requirements for PLLC ownership change significantly depending on the state. In some states, all members must possess a specific license to provide their services, whereas, in others, a minimum of 50% professional ownership is required.
While a member’s departure typically does not affect an LLC’s longevity, the same cannot be said for a PLLC. A PLLC’s ability to continue operating depends heavily on the professional licensure of its members. If a PLLC operating agreement does not provide for perpetual existence, the members may be required to dissolve or re-form the business if a member leaves, loses their license, or passes away.
Taxes
When it comes to filing taxes as an LLC or PLLC, choosing how to be taxed is critical. Because the IRS does not recognize LLCs or PLLCs as separate tax entities, you must decide whether to file as a sole owner, partnership, S, or C corporation.
If you choose to go as an LLC sole proprietorship or partnership, you will be considered a “pass-through” entity. Each member’s share of the company’s profits and losses will be reported on their personal tax return.
The same holds for PLLCs. Members of a PLLC can participate in business operations to varying degrees, as specified in the company’s operating agreement. During tax season, they must report their share of the company’s profits and losses on their personal tax return.
PLLc vs LLC – Which one is your best choice?
Recognize Your Risks and Liabilities
The risks and liabilities associated with LLCs are straightforward. The company is regarded as a separate entity, and you will only be liable for debts and lawsuits up to the amount you invested.
However, it is important to note that LLCs do not protect you from personal liability for any negative actions or wrongdoings related to your licensed service, such as negligence or malpractice. During a lawsuit, your personal assets may still be at risk.
It’s worth noting that all partners in an LLC are liable for malpractice suits, which means that if your partner is sued for negligence, you will also be held accountable. In contrast, each member of a PLLC is personally liable for their malpractice suits.
Furthermore, many banks and lenders regard PLLCs and licensed professional services as risky investments. As a result, lending money to your company may require a personal guarantee. Unlike a traditional LLC, where individual warranties are less common, you would be personally liable for any debts guaranteed in this case.
Check Your State’s Eligibility Requirements
If you’re thinking about forming a PLLC, you should check to see if it’s legal in your state. Although not all states recognize PLLCs, you can quickly check your eligibility by visiting your Secretary of State’s website or conducting a quick Google search.
A reputable LLC service provider can also help you determine whether the structure you want to create is legal in your state.
If PLLCs are available in your state, you should be aware of any eligibility requirements that may apply. PLLCs are generally available to licensed professionals such as psychologists, chiropractors, dentists, medical practitioners, optometrists, physical therapists, podiatrists, accountants, and attorneys.
Only professional license holders can own shares in a PLLC in some states. Furthermore, in some states, only the professional license holder is permitted to sign the organizational documents, which means that a private company cannot form the business on your behalf.
Management Structure
When forming an LLC, you must also choose between a member-managed and a manager-managed structure. This choice will have an impact on how votes are cast and how business decisions are made.
Traditional LLCs with silent partners—investors who do not participate in daily decision-making but make investments in the company—are more likely to be managed by a manager. It is less typical for PLLCs, where unlicensed professionals are typically not allowed to own a stake in the company.
A professional corporation (PC), which offers comparable professional liability protections to a PLLC but is treated as a corporation, is another entity structure to take into account. This implies that the ownership and management structures are different, with owners owning stock in the company instead of being members and electing the board of directors. PCs also have more operational and management requirements, like regular shareholder meetings.
A PLLC might be a good choice if you’re starting a small practice with one or two other licensed professionals. A PC might provide a better management structure for larger organizations with many licensed professionals.
Conclusion
Choosing between a PLLC and an LLC is a critical decision that can affect your company’s future. Understanding the similarities and differences between the two allows you to make an informed decision supporting your business goals while protecting your personal assets.
Whether you choose a PLLC to meet licensing requirements in your industry or an LLC for its flexibility and simplicity, remember that you’ll take a step toward safe and sustainable growth for your company. So, take a deep breath, research, and make an informed decision – your company’s future depends on it!
