LLC vs PLLC | What’s The Difference?
An LLC and a PLLC are state-law entity forms used in different circumstances. A PLLC is generally designed for one or more licensed professionals providing a regulated professional service, while an ordinary LLC can be used for many other businesses. The exact ownership and licensing rules are state-specific.
Start with our LLC formation guide, then check the professional-entity statute and licensing board.
Quick Summary
- Anybody could be a member of an LLC, whereas only licensed professionals in certain fields are eligible to form a PLLC.
- All states allow the formation of LLCs while PLLCs are only recognized in certain states.
- As of 2021, there are 32.5 million small businesses in the United States, 21.6 million of which are LLCs, according to the U.S. Small Business Administration.
- I inform my professional colleagues that personal liability protection does not apply to malpractice lawsuits.
At a Glance: LLC and PLLC
Compare the state’s entity statute, professional licensing law, name rules, ownership limits, management requirements, annual reports, and tax treatment. Do not assume that a PLLC is available for every profession or that every state treats it the same way.
Key Differences
To help you understand LLCs and PLLCs, we had compiled a list of their primary features to help you determine the difference between the two business entities.
1. Membership
To form an LLC, membership is not limited to professionals. Anybody could be a member of an LLC – individuals, corporations, other LLCs, and foreign entities.
Generally, only licensed professionals in specific fields are eligible to form a PLLC. Most states include physicians and surgeons, dentists, veterinarians, lawyers, accountants, architects, engineers, and counselors.
Since the eligibility varies from state to state, it would be advisable to verify if your profession is qualified to form a PLLC.
2. Licenses and Permits
Most states do not require LLCs to obtain a general business license.
Requirements often vary depending on the line of business and location, that's why I always inquire which licenses and permits are required at the federal, state, city, or county level.
To illustrate, a client of mine was required to get a Sales Tax permit to sell products at retail or wholesale prices.
To form a PLLC, the members have to be licensed professionals in specialized fields such as law or medicine.
Aside from the Secretary of State, you may need to file documents with the licensing agency governing your profession.
3. Taxation
Limited liability companies can either be taxed as a pass-through entity or a corporation. According to IRS statistics, approximately 95% of LLCs opt for pass-through taxation to avoid double taxation and streamline their financial processes.
An LLC taxed as a pass-through entity does not pay taxes on its corporate profits, instead, each member will report and file taxes on their personal income returns.
When a client opted to be taxed as a corporation, she had to pay taxes on the corporate level and on her individual return. This is referred to as double taxation.
PLLCs are taxed the same way as LLCs, that is, the company benefits from pass-through taxation.
4. Liability Protection
Limited Liability Company
LLCs protect members from personal liability, which means the owners are not personally accountable for business debts and obligations. The company is a separate entity from its owners.
Professional Limited Liability Company
Members of a professional limited liability company benefit from the same personal asset protection extended to LLC owners.
Their property may not be used to settle judgment against company liabilities such as debts, outstanding loans or any lawsuit directed at the PLLC.
However, the business structure of a PLLC cannot be used to protect the members from malpractice claims.
Once a member is sued for malpractice or professional negligence, the personal assets of the individual may be used to settle the lawsuit.
I always remind clients that a legal action against one member will not involve the company or other members, and that a professional liability or malpractice insurance will protect them from the eventuality.
What are the Advantages and Disadvantages of an LLC?
A limited liability company has the following benefits and disadvantages:
1. Advantages
- LLCs allow all profits and losses to flow directly to the members' personal tax returns, which means owners are not subject to double taxation.
- An LLC is a separate business entity from its owners, as such, members' personal assets cannot be used to settle the company's debts and obligations. While this is true, I advise clients to open a separate business bank account to avoid any complications.
- The company may opt to allow members to collectively manage the company, appoint an owner, or employ an independent service to run the LLC.
2. Disadvantages
- Before an owner is allowed to resign their position or leave the company, all the members of the LLC have to approve the transfer of ownership.
- Once the purpose of the business has been fulfilled, the members can voluntarily choose to dissolve the company.
PLLC Advantages and Disadvantages
A PLLC may align the entity with a professional licensing regime and make ownership clearer for the regulated practice. The tradeoffs can include restricted ownership, additional board approvals, professional naming rules, and limits on the services the entity may provide. Confirm the current requirements with the state board and filing office.
1. Advantages
- The personal assets of PLLC members are protected from business-related liabilities such as debts, losses or other legal action against the company.
- A PLLC is taxed as a pass-through entity, but may opt to be taxed as a corporation.
- PLLCs are less complicated to launch and have fewer compliance requirements.
2. Disadvantages
Form an ordinary LLC when the activity is not subject to a professional-entity requirement. Use a PLLC only when the profession and state law support it. A filing provider cannot override licensing restrictions; keep the entity’s compliance records with the professional license records.
These costs can add up over time. However, licensed professionals will benefit from a PLLC because it holds them accountable for their actions within the company.
In this regard, clients receive more protection when they decide to work with licensed professionals associated with a licensed service firm or business structure like a PLLC.
FAQs
Is a PLLC the same as an LLC?
It is a related state-law entity form, but the name, ownership, services, and licensing rules can differ.
Can anyone own a PLLC?
Not necessarily. Many states restrict ownership to licensed professionals or impose other conditions.
References:
- https://www.sba.gov/business-guide/launch-your-business/choose-business-structure
- https://statutes.capitol.texas.gov/Docs/OC/htm/OC.301.htm
I know pass-through is the usual option, but are there situations where PLLCs might actually benefit more from corporate tax rates?