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Are you a lawyer or doctor looking to start a business offering your services? Before starting as a sole proprietor, you may want to form a professional LLC.
Professional LLCs offer more protection than some business structures without being too complex. Keep reading to learn how to form a professional LLC and if it’s right for you.
What Is a Professional LLC?
A professional LLC is a type of LLC (limited liability company) for business owners that provide professional services. These include services requiring a license from the state, including legal services, medical services, or something similar.
Like a regular LLC, a PLLC can have one member or multiple members. However, all members must have a license in the state where the LLC is.
Professional LLCs help with safety and regulation for the business and its clients. Since some services come with more risk, states want to ensure business owners are careful. PLLCs aren’t required in any state, but you should always look at your state’s laws for any exceptions or required licensing.
Who Should Form a Professional LLC?
Anyone who wants to operate a business that provides professional services should consider forming a professional LLC. It doesn’t matter if you want to run your business alone or with one or more partners.
If you do have partners, each of you will need a license for the service you want to provide. Then, you can form a professional LLC with your state government.
Consider more specific examples of when you may need to form a professional LLC.
Various healthcare professionals should consider forming a professional LLC to run a business. A few examples of professions include:
Clinical social workers, chiropractors, and physical therapists should also look into a professional LLC. The business structure can provide you with the protection you need as you treat patients.
If you have partners, the structure can also protect you if a partner commits malpractice. You should all still follow regulations, but the extra protection is comforting.
Outside of Healthcare
While healthcare professionals can benefit from a professional LLC, you don’t have to work in the industry to form this type of business. Accountants and lawyers provide professional services with peoples’ finances or legal concerns.
If you have either type of business, you should form a professional LLC. You may also want to form a PLLC if you’re an engineer or architect. Any of these businesses run the risk of malpractice or other issues that people can sue you for.
When you have the protection of a professional LLC, you can run your business as usual. Then, you won’t have to worry about a client suing you and taking personal assets. They can only go after the business, like a regular LLC.
How to Form a Professional LLC
Step 1: Find a Name
Many of the formation steps are the same for LLCs and professional LLCs. You will need to settle on a name that another business in your state hasn’t chosen. The business name has to end with “PLLC,” “P.L.L.C.,” or “Professional limited liability company.”
Step 2: Get a Registered Agent
After you find an available name, you will need to get a registered agent. You can find websites that offer this service online, like our top picks for the best registered agent service. The registered agent accepts official business mail from your state, and you can do this yourself if you don’t find anyone else for it.
Step 3: Obtain the Appropriate Licenses
If you don’t have it already, you will need to obtain a professional license for the service you want to provide. This means you’ll need to pass the bar exam to be a lawyer or pass your board exams to become a doctor.
However, you may also need to get a zoning license or another business license. That way, you can operate your business where you want.
Step 4: Draft Your Articles of Organization
Next, you should draft your articles of organization and send them to the correct licensing board (such as the bar). The board will look at the documents and approve them, and you can send a copy to your state to officially form your professional LLC.
Step 5: Write an Operating Agreement (If Needed)
Some states also require you to write an operating agreement. This is helpful if you have a partner because you can outline what everyone will contribute. If you disagree, you can review this document to resolve the issue.
How Professional LLC Taxes Work
Professional LLCs work very similarly to traditional LLCs when it comes to taxes. The taxes will pass through the business to you and any other owners. You will pay taxes on the profits you make depending on how you split ownership.
You may also need to pay a gross receipts tax or franchise tax, depending on your state. The amount you pay will vary based on your business revenue. You can even choose to pay corporate taxes, so you don’t just have to have taxes go to you and the other owners.
Of course, like any business, you may need to pay payroll taxes if you have employees. You will withhold some of their pay, and the company will also have to pay taxes. This tax covers things such as unemployment and social security.
Pros and Cons of a Professional LLC
When choosing the best business structure, you should consider the pros and cons of forming a professional LLC. A professional LLC can be an excellent business structure for some law firms or medical offices.
However, you may find the disadvantages outweigh the advantages. Either way, you should know the positives and negatives you can expect.
One of the most significant benefits of a professional LLC is the legal protection it offers. If someone sues your business, they can’t go after your personal property. You won’t have that protection if you operate a sole proprietorship or general partnership.
No one wants to mess up and have someone sue them, but things happen. It can be all too easy for something to go wrong. Without the protection of an LLC, a lawsuit could ruin your personal life.
Professional LLCs also protect you in case your partners mess up. If you’re a doctor and your partner commits malpractice, any resulting lawsuit can’t attack you. Even if you trust your partners, it’s nice to have some protection against what others do.
Meet Legal Requirements
A professional LLC has more legal requirements than other business structures, but that can help when you offer certain services. You may need to obtain a professional license if you don’t have one already. This can help you prove to potential clients that you’re a reputable service provider.
After you form the business, you will have to comply with federal and state regulations. For example, you may need to purchase workers’ compensation insurance. However, filing for a professional LLC can help you meet the requirements and stay on top of everything.
If you’re new to running a business, you may choose to start as a sole proprietor. You can always change structures later when you have the time or money. That way, you can make sure to stay in compliance as you run your professional LLC.
Longer Filing Time
One drawback to filing for a professional LLC is that it can take longer than other business structures. Because you need to obtain licenses and send your articles of organization to a board, you can’t just file for a PLLC in an hour.
You may have to spend a few days gathering copies of any licenses you and your co-owners need. Then, it could take a while for your state’s and profession’s licensing board to review your articles of organization.
Of course, you only have to deal with that timeline once. However, you will need to maintain a registered agent and file an annual report with your state. Either way, you may need to spend a lot of time or money to keep up with all of your legal requirements.
Not Always Recognized
California doesn’t allow professionals to form an LLC, and it doesn’t recognize professional LLCs as a business structure. Other states that don’t recognize professional LLCs include:
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
If your state doesn’t recognize a professional LLC, you may need to find another business structure. You may want to look at forming a corporation so that you can have some legal protection while filing for a business in the state of your choice.
Professional LLC vs. LLC
The most significant difference between an LLC and a professional LLC is who can form one. Any business owner can form an LLC, and you can file for one with or without a business partner. All states recognize the traditional LLC as a business.
However, you need to be a licensed professional that offers a service to form a professional LLC. The strict requirements can also make it take longer to file for the professional LLC initially. Also, you can’t file for a professional LLC in all states.
Whether you’re a lawyer, doctor, or accountant, a professional LLC offers many of the same protections as an LLC. Both structures can protect your home, car, and other personal assets. If someone sues your business, it will only affect your LLC, regardless of the type.
In either business, you will need a registered agent and articles of organization. You can have as many LLC members as you wish. But in a professional LLC, all members need a professional license.
Professional LLC vs. Professional Corporation
A professional LLC differs from a professional corporation when it comes to taxes. Like a regular LLC, you will pay taxes on the profits you take home on your personal tax return. However, if you have a professional corporation, the business will owe taxes.
You can choose between a C corporation or an S corporation, but you must follow tax rules for the type of corporation you select. Also, you will be an owner of the corporation rather than a member like in an LLC. You’ll own stock in the company.
The corporation will need to have a board of directors. Owners and board members must run shareholder and director meets.
However, more states recognize professional corporations. If you want the protection of a business and want to provide professional services, you may need to start a professional corporation if a PLLC isn’t available in your state.
The Last Word
A professional LLC can be an excellent business structure for doctors, psychologists, and anyone in between. Before you file for this type of business, consider if it’s even an option where you live.
Then, you can organize your documents to make filing much more manageable. Once you file, you’ll be able to enjoy the protections of an LLC while also following regulations for your profession.
Filed under: Advice Columns