Fact checked for accuracy by Janet Berry-Johnson, CPA.
When entrepreneurs start their businesses, one of the first crucial decisions they must make is how to incorporate their new company. It can be an overwhelming first step with many options, including C corporation, S corporation, LLC, PLLC, and more.
LLCs (Limited Liability Companies) are one of the most common designations for startups, small businesses, and other new companies. Many proprietors prefer LLCs because they are relatively easy and inexpensive to establish, and the tax codes governing them are simple to understand and navigate. However, they still provide essential protections for owners and investors.
PLLCs, or Professional Limited Liability Companies, are a type of LLC. But what makes a business “professional”? Can anyone establish a PLLC? Why would you want a PLLC instead of a regular LLC?
This article addresses all of those questions by examining both types of business entities and then comparing and contrasting them. That way, entrepreneurs can make the most informed and sound decisions for their new business.
What Is an LLC?
An LLC, or a Limited Liability Company, is a fully legal and independent entity recognized as a business by local, state, and federal governments. By establishing an LLC, proprietors create a new entity apart from themselves.
The company is subject to taxes, laws, and other matters separate from the owners. However, ownership and control can (and usually does) remain in the hands of the founder or founders (unlike some corporate structures).
One of the most important advantages of establishing an LLC is that it protects the owners’ personal property if a lawsuit, bankruptcy, or other catastrophic event faces the business. When a company has set itself up as an LLC, the courts treat it separately from the proprietors, especially in terms of finances.
An LLC is also popular with new businesses because it is relatively simple to set up, and the fees are comparatively low. That being said, it is wise to seek counsel on the process from a competent attorney.
LLCs are also very flexible entities and can be customized depending on the company’s nature or the business itself. They carry the option to either pay taxes as a corporation (similar to a C corporation) or to bypass corporate taxes by being taxed as a partnership or S corporation (in this way, they become what’s known as a “pass-through” entity).
You can also set them up as a single-member LLC (taxed like a sole proprietorship) and convert to other types of business entities down the road if the need arises.
As is apparent, an LLC offers flexibility and opportunity for growth and change. Furthermore, virtually any type of business or company in almost every industry imaginable can be set up as an LLC. For more, read our pros and cons of an LLC guide.
What Is a PLLC?
A PLLC – or Professional Limited Liability Company – is very similar to an LLC, with one key difference. Unlike an LLC, which virtually anyone can establish, a PLLC is the purview of professionals only.
To understand this key difference, we have to define “professional” in the same way governments define it to determine eligibility for a PLLC. While it can vary slightly from state to state, professionals (in this sense at least) hold licenses and receive specific, often government-regulated training.
Another way to understand it is that professionals have titles preceding or following their names in most cases.
People who are eligible to establish PLLCs include (but are not limited to):
- Accountants
- Architects
- Chiropractors
- Dentists and orthodontists
- Engineers (computer, mechanical, chemical, and so on)
- Medical doctors and physicians’ assistants
- Nurses and nurse practitioners
- Pharmacists
- Physical therapists
- Psychologists and therapists
- Veterinarians
One of the keywords to take into consideration with PLLCs is liability. For example, a doctor who has established a PLLC for their practice is often still practicing medicine, in addition to running their business. If they do something that directly or indirectly causes harm, both they and their practice, the PLLC, will be held accountable.
In addition to limited availability in terms of necessary qualifications, PLLCs also carry other differences, especially regarding asset protection. If someone brings a lawsuit against a PLLC, some of the owners’ or proprietors’ assets might be “up for grabs,” so to speak. In most cases, this is limited to assets (predominantly liquid assets) directly from the company.
To more fully understand the differences between the two types of companies and which is best for your business, we’ll compare and contrast PLLCs and LLCs in the following two sections.
Main Similarities Between a PLLC and an LLC
Because PLLCs are technically a specific type of LLC, there are many similarities between the two, though most fall within the following four categories.
Taxation
One of the most significant similarities between PLLCs and LLCs is taxation and the tax laws that govern them. In almost all cases, you have the power to decide how the government will tax your business.
You can choose to pay corporate taxes, similar to a C corporation, or you can use the LLC or PLLC as a pass-through and pay taxes as part of your income taxes.
You should (and likely will) make this decision primarily based on the company’s size and how you structure it, rather than the type of industry.
Management
Both PLLCs and LLCs afford flexibility in terms of how you will manage your company. You can either leave management in your own hands or those of someone within the company or bring in outsiders to run the business for you.
Bringing in outside management can be especially appealing to professionals who have expert skills in their particular fields but may not necessarily have experience running a company.
The downside? You have to decide which type of management you plan to use when filing documents to form the business. That being said, you can change the structure down the road.
Asset Protection
Even though the owner of a PLLC is more likely to be held personally liable than non-professionals, both LLCs and PLLCs protect owners’ personal assets that they own separately from the business.
Flexibility
LLCs and PLLCs don’t differ very much in the amount of flexibility they offer. You can still structure your business as you see fit. You also have the ability to control contributions and distributions. Not everyone has to put in the same amount of money, and you can also arrange shares of profits and ownership however you like.
Main Differences Between a PLLC and an LLC
At the same time, distinct differences between PLLCs and LLCs also exist, and as you evaluate the options available for your business, it’s crucial to understand both.
Qualifications for Formation
The most apparent difference between a PLLC and an LLC is qualifications for forming one or the other. Virtually anyone has the legal right to form an LLC, but you must hold one of several specific professional titles or designations to start a PLLC. Those designations and titles can vary from state to state, but there’s a reasonably comprehensive list above.
Nationwide Recognition
All 50 US states recognize LLCs, but many states do not recognize PLLCs. These include Alaska, Alabama, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maryland, Missouri, Nebraska, New Jersey, New Mexico, Ohio, Oregon, Rhode Island, South Carolina, Wisconsin, and Wyoming.
Liability
Liability works a little bit differently for PLLCs, in part because of the nature of liability when it comes to many types of professionals in the first place. For most non-professionals, LLCs provide a kind of “fix it and forget it” liability situation. In other words, as long as members of LLCs abide by laws and regulations, they’re protected.
Many professionals need additional levels of protection, such as malpractice insurance. PLLCs will not protect you or your business if you face a malpractice suit in either civil or criminal court. That being said, PLLCs do protect you from liability if one of your partners faces a malpractice suit.
The Last Word: Should You Form a PLLC or an LLC?
The decisions that you make early on in your business can have lasting effects on the future of the company. That’s why it’s so critical to make the right choices now carefully. If you’re not a ‘professional,’ this one’s easy; go with an LLC. If you are a professional, you still have a choice to make.
One significant factor to consider is whether you have any plans or hopes to expand into a state that does not recognize PLLCs. For example, someone opening a counseling center in the Virginia and Washington D.C. area may also have plans to open offices in nearby Maryland. If so, they may want to opt for an LLC since Maryland doesn’t formally recognize PLLCs as separate entities.
At the end of the day, you and your partners know your business better than anyone else. You’re also intimately familiar with the hoped-for future of it. Weigh the similarities and differences in this article carefully and perhaps seek the counsel of an experienced attorney. Thinking about starting an LLC? Check out our research on the best LLC services to get started.
Filed under: Advice Columns
