Choosing the appropriate legal entity type for your business can be daunting unless you know the requirements and restrictions for each business structure. If the services you plan on offering require a certification or license, then a professional LLC, referred to as a professional limited liability company or PLLC, may be required by your state. If not, a limited liability company (LLC) may be the most suitable option for your business type. The following guide will help you understand the differences between PLLCs and LLCs.
|Professional limited liability company||Offers personal liability protection of professionals, so that personal assets are protected from the company’s debt, judgments and malpractice suits.||Taxed as sole proprietorships for single-member PLLCs and partnerships for multi-member PLLCs.||Must file relevant tax returns, annual reports and renew licenses and permits.|
|Limited liability company||Provides personal liability protection so that members are only responsible for debts, losses etc based on the financial investment they’ve put into the company.||Liable for income and self-employment taxes. Considered “disregarded entities,” income taxes are passed-through to members.||Must file Articles of Organization, relevant tax returns, annual reports and renew licenses and permits.|
|S corporation||S corps have limited liability and are protected from claims arising against the company.||S corps are pass-through entities, and they do not pay income tax at the corporate level.||Requirements for S corps are stricter, and they must have a board of directors, file annual reports, and tax returns and take minutes of all meetings held between owners.|
What is an LLC?
An LLC is a limited liability company which is a type of business entity. LLCs can have one or more owners, also known as members. Ultimately, an LLC ensures its owners or members are not liable for the company’s financial debts and losses.
Limited liability companies combine aspects of corporations and partnerships. While they benefit from the limited liability status of corporations, they also enjoy the flexibility of pass-through taxation stemming from partnerships and sole proprietorships.
- More lenient compliance requirements: Forming and maintaining an LLC is much easier than other business structures like corporations. Additionally, you’ll have to adhere to fewer filings and ongoing compliance requirements when it comes to keeping the business in good standing.
- Liability protection: One of the reasons for starting an LLC is the liability protection afforded to members. All this means is that in the event of a lawsuit or the business incurring debt or losses, members’ personal assets may not be used to pay creditors.
- Membership flexibility: LLCs can be owned by trusts, partnerships, corporations, and individuals. Additionally, there’s no limitation or restriction on how many people can be members of the LLC.
- Credibility with clients: An LLC is seen as more of a formal business entity and therefore has more credibility with suppliers, lenders, and clients than other business structures like a sole proprietorship or partnership.
- Management structure: LLCs can be managed by the members. Alternatively, the members can nominate an individual from outside the business to manage the LLC’s daily operations.
- Flow-through taxation: The income and expenses of an LLC are passed through to the members, who report them on their personal income tax returns. Therefore, LLCs are not subject to corporate taxes but individual taxes.
- Higher costs involved: It’s costlier to form and maintain an LLC than to form and maintain a sole proprietorship. Aside from the formation fees, ongoing filing fees, annual reporting fees, and taxes will need to be submitted.
- Transfer of ownership: An operating agreement must be drawn up outlining what can and cannot be done within the LLC. This is because if you would like to bring on new members or change the percentage of ownership of current members, you’ll need the consent of all members before being allowed to do so unless the operating agreement specifically makes room for this.
Read more about LLC types.
What is a PLLC?
PLLC stands for professional limited liability company. It’s a business entity offering personal asset protection for business owners in licensed occupations such as law or medicine. However, you should note that PLLCs are only recognized in some states and are subject to the same rules and regulations as ordinary LLCs.
Additionally, in a PLLC, each owner’s professional license must be verified before the Articles of Organization are approved for the PLLC.
States like Arizona, Arkansas, Florida, Kentucky, Massachusetts, Mississippi, Pennsylvania, Utah, and Washington recognize PLLCs, while states like Alabama, Alaska, California, Nebraska, New Jersey, Wisconsin, and Indiana do not recognize PLLCs as legal business entities.
- Compared to other business structures, PLLCs are far easier to form since they are more cost-effective and have fewer compliance requirements.
- PLLCs also have the choice of being taxed as a corporation or a flow-through entity.
- In the event of business debts and obligations, PLLC members are not held personally liable.
- In the case of malpractice or negligence by another member of the PLLC, the other members cannot be held responsible, which is a huge advantage over sole proprietorships in general partnerships.
- PLLC income is subject to self-employment taxes.
- In many states, the eligibility to form a PLLC is limited to certain licensed professions.
- PLLCs are not recognized as legal business entities in all states in the US.
At a glance: How is a PLLC different from an LLC?
- Limited liability companies are recognized as legal business entities in more states than PLLCs.
- In some states, professionals who want to provide services related to legal advice, medical care, accounting, tax services, and so on are required by state regulatory boards to form a professional limited liability company (PLLC).
- Regarding malpractice claims against the company, PLLC owners are protected from personal liability for losses and business debts and are not liable for malpractice committed by their partners.
- However, PLLC owners may be held liable for malpractice claims brought against them for their malpractice.
- A few additional steps are involved in forming a PLLC compared to an LLC. The licenses of all professionals operating the PLLC need verification before the Articles of Organization are approved.
- The Articles of Organization must be signed by a licensed member of the PLLC and will then be submitted to the licensing board before approval.
Should I start a PLLC or LLC?
The type of LLC you decide to form will depend on the services you plan to offer. Limited liability companies are a more flexible business structure requiring a minimum of one business owner or shareholder. PLLCs, on the other hand, are intended for licensed professionals wanting to offer types of professional services related to attorneys, veterinarians, accountants, physicians, chiropractors, dentists, architects, etc. However, as mentioned earlier, the requirements and restrictions associated with each entity type must be understood for you to make an informed decision.
Read more about PLLCs.
PLLC taxes vs. LLC taxes
When forming different types of business structures, you need to consider factors like ownership, management, and taxes. This is because how different business entities are taxed may differ from one entity type to the next or from one state to the next. Let’s take a closer look at how PLLCs vs. LLCs are taxed.
- PLLCs are taxed by default as sole proprietorships if forming a single-member PLLC or partnership when it’s a multi-member PLLC. In this case, all the profits and losses of the business are passed through to the owner’s personal income tax returns. This is referred to as pass-through taxation.
- Additionally, PLLCs are subject to Medicare and Social Security taxes. However, as with an LLC, PLLC members may choose to elect S corporation status. In this case, S corps are also treated as pass-through entities; however, Social Security and Medicare taxes are only incurred via their owner’s wages and salaries.
- Therefore, owners are not subject to taxes on profits paid as profit distributions. Alternatively, PLLCs may be treated as C corporations for tax purposes if they find this structure more advantageous.
- LLCs are considered the same tax-paying entities as their owners or members, so income taxes are passed-through.
- LLCs are not required to pay business income tax or file a business tax return. However, the profits and losses of the LLC must be reported by the members on their personal income tax returns, and taxes must be paid at the relevant individual tax rates.
- LLC members do not receive paychecks, so they are also liable for Medicare and Social Security tax on their portion of the business’s profits.
- If an LLC meets the Internal Revenue Service’s eligibility criteria, members may opt to be taxed as an S corporation. S corporations are also considered pass-through entities; however, members of an S corporation work in the company and go on the company payroll.
- These members are only liable for Medicare and Social Security taxes on their salaries and wages from the company but not on income taken as distributions.
PLLC vs. LLC: Formal requirements
There are several differences between the formal requirements of PLLCs and LLCs. Let’s take a closer look at them below:
Formal requirements for PLLCs
- If you choose to go with the PLLC entity type, then the process of PLLC formation may vary based on state law. This is why you must check with the Secretary of State’s office and your state licensing board to find out what forms or information must be filed.
- To form a PLLC, your request for formation must be approved by the state’s licensing board by approving the PLLC’s Articles of Organization. This is one of the additional steps that the standard LLCs do not have to go through.
- In most cases, when starting a PLLC, the state will check that every member is licensed in the profession and that at least one of those licensed professionals files the company’s Articles of Organization.
- PLLCs must appoint registered agents, obtain EINs, and open a corporate bank account.
- Banks usually require a personal guarantee when granting loans to PLLCs.
- After formation, PLLC businesses fulfill compliance tasks such as filing tax returns, filing annual reports, renewing members’ professional licenses, renewing licenses and permits, and keeping business and personal accounts and transactions separate.
Formal requirements for LLCs
- LLCs must file Articles of Organization with the state.
- However, the advantage of LLCs over PLLCs is that the management structure is much more flexible. LLCs may also be managed by nonmember managers or members of the LLC itself.
- LLCs also need to designate registered agents, get EINs, and open a business bank account.
- They must also file the relevant tax returns and annual reports and renew licenses and permits.
Your LLC is required to retain a registered agent, renew licenses and permits, submit annual reports, and file and pay taxes on time to remain in good standing with the state. Additionally, PLLCs are required to renew their professional licenses, renew other licenses and permits, retain a statutory agent, and file and pay taxes timeously.
PLLC vs. LLC: Management
In terms of management structure, PLLCs and LLCs are the same.
Both business entities are allowed to have a member-managed or non-member-managed company.
When members are permitted to conduct day-to-day business operations, it’s referred to as a member-managed structure.
However, appointing or hiring a manager from outside the company is referred to as a manager-managed structure.
PLLC vs. LLC: Ownership structure
While the ownership structure between PLLCs and LLCs are similar, there are a couple of differences:
- Depending on the state of formation, the rules and requirements of PLLC formation may vary.
- PLLCs may only be owned by the licensed professionals that will be offering the services that require the license. In some states, all members of the PLLC must obtain specific licenses for the services offered.
- PLLC owners must have at least 50% professional ownership in some states.
- PLLCs may encounter challenges due to members’ professional licensure if a member chooses to retire or leave. This means that if a member of a PLLC chooses to leave, members have to re-form or dissolve the company unless the operating agreement makes provision for perpetual existence in cases like these.
- Most states do not impose restrictions on who may start an LLC. Therefore, LLCs may be owned by corporations, foreign entities, individuals, trusts, and other LLCs.
- There is also no limitation on the number of members involved in an LLC.
- Certain states permit single-member LLCs which only have one owner.
- LLC owners enjoy the privilege of protection from personal liability for any debts and obligations incurred in the company.
- LLCs can continue or exist even if a member retires or leaves the limited liability company.
Once fully aware of what’s required and how you will be restricted with each business type, deciding to form a PLLC or start an LLC is easy.
The selected structure depends on the types of services offered and the state.
Each state has specific rules and regulations pertaining to both PLLCs, and LLCs, so ensure that you check with the relevant state agencies to make sure you know what’s required of you, irrespective of which business structure you choose.
Suppose you’re thinking of forming a professional corporation. In that case, one of the standard rules is that every business owner should have a valid license to provide the services they are offering. So, for example, if you’re forming a law firm as a professional corporation, then each owner in the company must be a licensed attorney.
Members of a PLLC may be personally liable for any type of malpractice or negligence. This is why each professional in the PLLC must have malpractice insurance, which protects licensed professionals against patients or clients filing malpractice suits against them.
In states such as California, professionals are not allowed to form PLLCs or LLCs; however, they are allowed to form a professional corporation or limited liability partnership. This is because PLLCs are not generally recognized as legal entity structures in these states. Limited liability partnerships are another option available to businesses requiring licensed professionals.
Many small business owners find the LLC business structure quite appealing because it offers the same personal liability protection or limited liability protection as corporations but leaves out the strict formal requirements involved in creating and running a corporation.
Double taxation is when a company, such as a corporation, is taxed on the corporate level, and then the owners are taxed at the individual level. Pass-through taxation is when the profits and losses of the business are passed through to the owners to be reported on their personal income tax returns.