To conduct a business in the US, you need to give your business a legal structure. Formal structure is vitally needed for any venture to operate lawfully and eligibly on the market and provide a more organized status for your activity. Recently, a limited liability company has become one of the most popular forms for all types of business activities, be it a small family firm or a bigger enterprise. More than that, an LLC is a good legal form to choose for a more specialized professional activity belonging to a specific field. If you are a licensed professional in search of a proper entity type for your private venture, you’ll hit the spot with a professional limited liability company. If you wonder what a PLLC is and want to know it inside out, we’ll come up with the answers.
Understanding the PLLC
To make it clear from the start, a professional limited liability company is an LLC type specifically meant for licensed specialists operating in such spheres as medicine, law,
finances, social and other services. Notably, PLLCs are not recognized in all US states, and those states that do allow this type of entity usually either require that all company owners have professional licenses or accept up to 50% professional membership.
Normally, PLLCs are qualified to deliver only a single type of services within their major occupation and are prohibited from operating different operations under the umbrella of the same PLLC. The main reason why experts seeking to start their private business choose this very entity type is to legally separate from the company and make use of the limited liability shield along with flexible taxation pertinent to limited liability companies. PLLCs really bring most of the LLC benefits, yet with certain nuances that you shouldn’t disregard.
As we’ve already mentioned, PLLCs are not allowed to combine different types of services. Thus, a physician cannot also serve as a real estate agent or an engineer. To be more specific, you can combine those activities in practice, yet, get ready that one of them will be considered by the state beyond your PLLC shield and should be reported separately from PLLC taxes.
Meanwhile, though, some states have laws that enable providing various services from related spheres. For example, a dentist could also deliver orthodontic services while most doctors are entitled to run a pharmacy.
Limited Liability With Limitations
Personal asset protection against business debts and legal problems is the biggest LLC advantage that has made this legal structure so much popular and attractive for all types of entrepreneurs. With a PLLC, you’ll get the benefit of that unique protective shield as well but with some peculiar aspects. Thus, you will be not liable under any sues against the enterprise as a legal person and won’t have to settle business debts using your own assets. However, the PLLC won’t keep you exempt from personal liability in case of professional mistakes or problems caused by your malpractice or negligence. In this case, you are responsible for any negative impact or consequences resulting from your professional misbehavior, and your personal assets are at risk to be claimed as satisfaction for any related lawsuits.
The good news is that, unlike with partnerships, within a PLLC, you’ll be liable only for your individual misconduct. If you run a business with another specialist or several professionals, you are not responsible for their actions.
Filing PLLC Taxes
Professional limited liability company taxation is the only aspect that is similar to that of LLCs. It means that PLLCs benefit from “pass-through” taxation when business incomes are payable on personal tax returns of business owners. This way, you skip double taxation and will be able to pay income taxes under more favorable individual rates. Besides, PLLC owners get the advantage of Pass-Through Deduction. Members whose income is below $160.000 per annum are entitled to cut down taxable business income by 20% on their personal reports accordingly.
The other plus is that PLLCs are also allowed to choose the tax status for their future business activity. Initially taxed as disregarded entities, they can elect an S-Corp or C-Corp status for taxation purposes.
Who Can Form a PLLC?
The rule of thumb for PLLCs is that at least one member should own a professional license. Some states, though, require that all PLLC members were licensees within the same occupation.
What does a “professional” mean in this concern? Normally, it refers to occupations ensuring services to the public. And since those services could impact human health and well-being both in a positive and in a negative way, those occupations require state licensing in certain jurisdictions. These are such professions as:
- Doctors (physicians, therapists, pediatricians, chiropractors, dentists, veterinarians);
- Lawyers and attorneys;
- Financial consultants and accountants;
- Designers and architects;
- Social workers, etc.
As noted, some states ban PLLC formation and offer specialists to set up LLCs instead while other states have limited lists of occupations eligible for PLLC establishment. Hence, before you delve into the business incorporation process, first, check with your state department what professions are on the approved list for setting up a PLLC in your locality.
PLLC vs LLC: What Is the Difference?
Despite the fact that PLLCs and LLCs are basically regulated by the same state statutes, these two entity types have a number of differences that set them apart. Thus, enjoying pass-through taxation and “corporate veil” protections, a PLLC is an LLC sub-type. Yet, the key aspect that distinguishes PLLC from LLC is the personal liability that license holders are exposed to. While not responsible for company debts and business-related lawsuits of any type, PLLC members are personally liable for malpractice and negligence that might take place. More than that, their individual assets are also put at risk in case personal liability occurs.
Yet another difference between PLLC and LLC is that a “professional” LLC status requires special membership to be established. It means that one or all company members should be professionals in a certain field and hold specific state licenses to lawfully conduct business. More than that, providing a copy of the license is a compulsory prerequisite to officially register a PLLC.
Finally, unlike LLCs entitled to ensure services in various fields, PLLCs are mostly required to deliver only one type of service within a specific occupation.
Forming a Professional LLC: Steps to Follow
Principally, the PLLC filing process doesn’t differ much from that of an LLC. Business legalization is still governed by the state statutes. However, given that a professional limited liability company is reserved for licensed professionals, you’ll have to contact a licensing agency as well. Thus, overall, the PLLC establishment is a bit more involved and complicated. To make it clearer, let’s consider the steps you’ll have to take:
- Get a License: To run a professional LLC, make sure you have an appropriate valid license in place giving you the right to practice your occupation in the state;
- Receive the Licensing Board Approval: In many states, to submit registration documents to the state department, you first need to get written approval from the state licensing board for that;
- Choose a Name and Registered Agent: This is where a basic LLC filing process usually starts. A distinguishable business name and a registered agent are a must for PLLCs as well. Noteworthy, some states might require that a business name contains one of the owners’ names;
- Submit Formation Documents to the State: File the Articles of Organization along with the Licensing Board Approval or a certified copy of your professional license (depending on what current state rules require) with the Secretary of State. And don’t forget to pay a state fee;
Draft Business Bylaws: Since PLLCs are operated pretty much like LLCs, writing and signing an Operating Agreement will never go amiss, especially if you share your business with partners.