While there are various business structures that budding entrepreneurs may choose to form, if you’re a professional, you should contemplate forming a PLLC or professional limited liability company. In the following guide, we’ll take a look at who should form a PLLC, how to create one, as well as the advantages and disadvantages of this business structure.
What is a PLLC?
PLLC is an abbreviation for professional limited liability company. Essentially it’s similar to a limited liability company or LLC. However, licensed professionals in the same industry are responsible for running it. The owners of the PLLC are referred to as members, and the operating agreement oversees how the members of the PLLC work together.
A PLLC is more or less a hybrid business structure that combines the tax benefits of a partnership with the personal liability protection of a corporation in much the same way as an LLC. Additionally, limited liability companies are very similar to corporations since they are separate legal entities where members are not liable personally for the business’s debts.
They are also similar to a partnership because they are more flexible and economical than a corporation. Professional limited liability companies have all these benefits but are intended only for professionals like doctors and lawyers, etc.
The primary reason why a PLLC is one of the most beneficial options for professionals is that some states don’t permit individuals with professional licenses to create LLCs.
Who should start a PLLC?
Any individual who requires a registration, license, or certification from the state to practice a profession has the eligibility to create a PLLC. Some of these professionals include physicians, law firms, etc. In most states, such as Minnesota and Colorado, you will come across a specific list of professions that are ineligible to create PLLCs.
One of the prerequisites for starting a PLLC is that all owners involved in the business structure must be licensed. Additionally, when starting a PLLC, you may strictly offer services directly related to your profession as opposed to forming an LLC which can transact in any business it wishes as long as it is legal.
Furthermore, the only individuals that may have ownership in a PLLC are professionals that can provide the professional services that require the license. Multiple owners are usually involved in the PLLC business structure, and they are referred to as members of a PLLC. However, it’s also possible to have a single-member PLLC with only one owner. The PLLC may be managed collectively on a day-to-day basis by members.
In this case, it is referred to as a member-managed LLC. Alternatively, one member of the PLLC may be appointed or one individual may be hired from outside of the PLLC to serve as a manager. This is called a manager-managed LLC. So if you’re a professional, then the PLLC business structure is ideal for you.
Advantages of a PLLC
If you select the PLLC business structure, it comes with a set of advantages. Let’s take a closer look at the advantages of the PLLC:
Personal liability protection
One of the major advantages of forming a PLLC is that it is a separate entity, thereby protecting professionals from many types and forms of personal liability, much like a regular LLC.
Ultimately, this means that in cases of business negligence, malpractice, business debt, and the like the PLLC only is held responsible and accountable and not individual owners. In other words, while creditors are allowed to make claims against the company assets and bank accounts, they cannot go anywhere near the property or personal assets of the owners of the PLLC, as they have limited liability protection.
And because members are not liable for the debts of the company, a PLLC won’t need business insurance or malpractice insurance in most cases. All you need to do is keep good records and clearly and firmly separate business finances from personal finances.
Pass-through tax status
Another major financial benefit of this business type is the possibility or option to elect for the pass-through tax status. What this basically means is that it allows the PLLC to pass taxes directly to its members. This ultimately prevents dual or double taxation, which regular corporations and other types of business structures must endure. However, with PLLC, taxes are required at a personal rate and not at a corporate rate.
When compared to starting other types of business structures, such as corporations, this business structure is significantly easier and cheaper as well as very flexible to get up and running, and manage than other types of business structures. Additionally, they provide worthwhile retirement plans for employees that come with contribution limits that are relatively higher when compared to partnerships or sole proprietorships.
Flexible percentage allocations
When compared to shareholders in S-corporations, the shareholders in PLLC are allowed to have custom percentage allocations of profits and losses.
The operating agreement
In a PLLC, the professionals or owners have much more flexibility through an operating agreement. The operating agreement, if properly prepared, defines the rights and obligations that may be achieved in the business, along with bylaws. The operating agreement also covers the sale and transfer of any membership interest, payment terms as well as methods for valuing an interest.
Disadvantages of a PLLC
While PLLCs have many advantages, they do have some disadvantages as follows:
When compared to business structures such as partnerships, PLLCs tend to have stricter requirements in terms of the paperwork that needs to be filed and ongoing maintenance.
Not recognized in certain states
The sad reality is that there are quite a few states that don’t recognize PLLCs as true business structures. So if you live in one of those states, you may want to consider relocating to a different state or opting for a different business structure.
Limitations in terms of services offered
In terms of the services that you may offer, you can only provide services that fall under your professional license. This is a bit of a restriction in terms of what you can do when forming a PLLC.
Perceived as high-risk
Lots of financial institutions, banks, and moneylenders are of the view that PLLCs are at higher risk.
Read more about LLC types.
Steps to starting a PLLC
Starting a PLLC is more or less like starting an LLC, however, the forms will differ. The following steps will help you form a PLLC:
1. Decide on your PLLC’s name
While deciding on a name for your PLLC may seem like the simplest part of the process, the reality is that the requirements for business names differ from state to state. The name of your PLLC must be significantly different from the name of other entities in the state in most cases.
Additionally, when forming a PLLC, the name of your company must end with “professional limited liability company,” “PLLC,” or “PLLC.”
Reach out to your Secretary of State’s office to find out if there are any other additional naming requirements including how to reserve a name for your business entity.
2. File Articles of Organization
When forming a PLLC, you must file the Articles of Organization with the Secretary of State’s office. For faster processing, complete the Articles of Organization and submit them online.
The Articles of Organization which is also referred to as the Articles of Formation, involves completing a form for PLLCs that may be different from the form that you would use if you were forming an LLC.
Thereafter, your Articles of Organization will be reviewed and approved by the licensing board for your profession. Thereafter, the state will give it a stamp of approval, and you’ll receive a copy of the filed Articles of Organization to store along with the rest of your corporate documents.
3. Designated registered agent for your PLLC
It’s compulsory to designate a statutory resident agent in every state. The registered agent may be an individual or a company that is willing to accept service of process and official legal documentation for your business.
State licensing boards often send official notices to professional businesses, so it is important that you designate a registered agent to fulfill this role. If you’re not sure who to nominate as your statutory agent, reach out to a company offering registered agent services.
4. Obtain business licenses
The professional license is the mandatory and primary business license for your PLLC. Only the state licensing board for your profession is able to grant this license. In order to practice the specific profession, your PLLC must be licensed to practice.
Additionally, you may need to secure additional zoning and business licenses prior to being able to legally operate your PLLC. Feel free to reach out to your county or city to find out what licenses you may need.
5. Create an operating agreement
Many states, such as New York and California, require both LLCs and PLLCs to create operating agreements. Even if it’s not required in your state, it’s a good idea to have one, especially if you are intending to have multiple owners in the PLLC.
Ultimately, this document is a blueprint for your PLLC and provides guidelines for daily operations while summarizing each owner’s contributions to the business and their share of the profits. Without this agreement, your business could easily fall victim to disagreements among owners.
6. Comply with tax and filing requirements
Like LLCs, PLLCs are pass-through entities for tax purposes both at the state and federal levels. Therefore, each member of the PLLC will pay personal state and federal income taxes on their share of the company’s profits.
However, federal income tax is not required of the LLC itself. Instead, your LLC can elect to be taxed as a corporation and pay corporate tax on profits. Some states charge annual franchise tax, or they may charge gross receipts tax based on the company’s revenue.
PLLCs that have employees may be obligated to pay payroll taxes as well.
Lastly, many states require PLLCs to file an annual report with the registered agent information as well as the business’s current address.
7. State and federal regulations compliance
Your PLLC may have to comply with additional federal and state regulations. For example, if you have employees, multiple business owners, or are taxed as a corporation, then you need to apply for an EIN, which is also called an Employer Identification Number, to remain compliant with state laws and federal laws. Additionally, workers’ compensation insurance is required by every single state, with the exception of Texas.
Additionally, if your professional limited liability company is going to have employees, then you need to withhold taxes from your employee’s wages and pay federal payroll taxes.
It’s also important that you preserve the limited liability for members of the PLLC. You may do so by structuring your business as a separate legal entity. Therefore, you need to obtain a separate credit card, business bank account, and so on for business purposes and ensure that you are tracking your business finances separately from any of the member’s personal finances.
When you form a PLLC, you file Articles of Organization with your state; however, when you create a professional corporation, you file Articles of Incorporation. PLLCs have operating agreements in place; however, it is not usually required by the state. One of the differences between PLLCs and professional corporations is that with professional corporations, bylaws are absolutely mandatory to establish the governing rules of the business. Lastly, professional corporations are also more highly regulated than PLLCs.
Both professional LLCs and professional corporations are business entities that licensed professionals form. However, if you want flexible taxation options as well as tax benefits, then the PLLC business structure is the better business type to create. Some states allow professionals like dentists, veterinarians, and chiropractors to form limited liability partnerships, while others encourage professionals to create professional corporations.
While malpractice claims cannot be brought against the individuals or owners of the PLLC due to the personal liability protection afforded to PLLC members, there’s nothing stopping a malpractice claim from being brought against individual members for their own malpractice.
Operating agreements are not mandatory for LLCs. However, considering the fact that disputes between members or owners of a PLLC are inevitable somewhere down the line, an operating agreement will help to put down some ground rules for everyone involved, irrespective of the type of limited liability company you’re forming.
In order to form a PLLC, you’ll need proof of licensing. This means that everyone involved in the company will need to have a current professional license in order to legally operate the business.