LLC (Limited Liability Company) and PLLC (Professional Limited Liability Company) are popular among small businesses because they offer limited liability protection to the owners of the LLC.
A PLLC offers this same protection but is only available to professionals such as doctors, lawyers, accountants, or other service providers who provide professional services.
You must understand what type of LLC or PLLC business structure best suits your needs before deciding on a company name and registering with the state.
PLLC vs. LLC: The Differences
Limited liability companies are LLCs that specialize in providing limited liability protection to the owners of the LLC.
LLCs are popular among small businesses because they offer their owners limited liability protection from lawsuits.
While PLLCs and LLCs both provide this same benefit, there is one significant difference between them that you should understand before deciding on a company name and registering with your state.
LLC stands for limited liability company, and PLLC is the acronym for professional LLC or Professional Limited Liability Company.
PLLCs are designed specifically to provide protection from lawsuits to those who offer professional services, such as doctors, lawyers, accountants, or other service providers that provide a "professional" service.
LLCs, on the other hand, are designed to provide limited liability protection for profit-seeking business owners. LLCs can be owned by individuals, corporations, or other LLCs.
What to Expect if You Form an LLC
Many business owners set up an LLC because they believe it will protect them from lawsuits.
LLC owners are not personally liable for the business debts and obligations, so if your LLC is sued, only your LLC can be held responsible for paying any damages or court fees.
The Advantages of an LLC
An LLC is a business entity separate from its owners, and it provides liability protection for LLC members.
LLCs are also flexible in that they offer their own taxation scheme similar to a partnership or sole proprietorship.
If you want limited liability protection but don't have the time or desire to run your business yourself, an LLC may be the right choice for you.
A standard LLC is easy to set up and run, so if you're looking for a way to protect yourself without too much hassle or time commitment, an LLC may be suitable for your business.
The pass-through taxation of the Limited Liability Company allows all profits and losses to flow directly through to their respective owners' personal tax returns.
This can significantly benefit LLC owners because pass-through taxation is often more advantageous than other business structures.
The Disadvantages of an LLC
While an LLC has a lot going for it, there are some drawbacks as well. One major drawback is that you must file specific documentation with your state and pay a fee in order to form an LLC.
You will also have to create an LLC operating agreement and articles of organization, which is the document that sets out each member's rights, responsibilities, and duties in relation to other members.
What to Expect if You Form a PLLC
If you want to form an LLC as a licensed professional, you can expect a few things.
For example, you will be required to complete specific LLC paperwork and provide licensed professional identification numbers from the state where you work.
In addition, your LLC may have to maintain certain licenses or certifications and comply with rules of professional ethics depending on the nature of the services it provides.
Certified professional services are licensed in most states for multiple service categories like architecture, engineering, or law services.
If you want to form an LLC with only licensed professionals (PLLC), you can expect more responsibilities and rules to follow depending on the state of your business location.
The Advantages of a PLLC
When you form a PLLC, you will have the same protections as other business entities such as an LLC and S Corporation.
The advantages of a PLLC also include business liability protection, business tax deductions, and other savings.
In addition to the benefits of a PLLC mentioned, you will also have access to professional malpractice insurance coverage for every member of your business.
This type of policy can protect all members from any mistakes or negligence made during service provision. In turn, this added security may help you attract business.
The Disadvantages of a PLLC
A PLLC is a licensed business that has to follow certain rules and regulations set forth by the state where it is located.
This means you can expect:
- Increased tax filing requirements (LLC vs. PLLC)
- Additional continuing education courses for licensed professionals with clients receiving services from their company
- Annual reports, State board meetings/annual fees, and other costly maintenance requirements
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.
Liability and Risks: LLC vs. PLLC
A small business owner who forms an LLC or a PLLC can expect liability and risk to accompany their business structure but not to a great extent.
Regardless of the type of small business you form, an LLC or PLLC will provide personal liability protection from small claims against your company that are usually associated with personal injury cases.
In addition, small businesses also protect owners from incurring financial damages resulting from a lawsuit filed by another party for actions that involve some sort of negligence or mistake.
However, small businesses are not immune to lawsuits that result from breach of contract claims.
That means small businesses have to follow contracts and agreements with clients or customers no matter what small claims are filed against them.
Does an LLC Need Licenses and Permits?
A standard LLC does not have to apply for a business license or permit in most small businesses.
However, certain small businesses will need additional licenses and permits depending on their structure.
For example, your LLC may be required to get a sales tax ID number from the state revenue department if you sell products at retail or wholesale prices when operating as an LLC.
In addition, small business owners who form LLCs may need to apply for a seller's permit from their state revenue department if they sell products in-state or out-of-state when operating as an LLC.
In this regard, small businesses should research the requirements of different states, so you will know what your company needs before opening its doors.
Does a PLLC Need Licenses and Permits?
Your state's licensing board will determine if you will need state-issued licenses and permits to practice your profession in the state.
For example, a licensed attorney who desires to open a PLLC for their law firm may not be required to obtain additional state licensing.
Still, their state's bar association typically requires them before practicing law through different business entities like PLLCs.
In addition, the state licensing board may also require licensed professionals to have a professional license or certification that is valid in their state.
This means you will need to ensure your state licensing board holds the same level of licensure as other states where you plan on offering services from your PLLC if it crosses state lines.
In this regard, a business owner should research state law before filing other documents for PLLC formation.
How is a Limited Liability Company Taxed?
Every LLC is considered a pass-through entity for state income tax purposes.
This means that the business does not have to pay state taxes on its profits, and instead, each LLC member will report their share of profit (or loss) on their personal income tax returns.
The LLC structure does not provide as many tax savings as a limited partnership (LP), but this type of business offers greater liability protection than an S corporation and C corporation.
This means that if your company gets sued, the LLCs' creditors and debtors cannot go after your personal assets.
Related Article: LLC vs Incorporation
How is a Professional Limited Liability Company Taxed?
Often PLLCs need permits and licenses to provide professional services. If state licensing is required, make sure to check with the state's board of accountancy or the state department of revenue for more information.
PLLCs follow state and federal tax laws just like C corporations and S corporations.
This means that the business is required to file a separate tax return and pay state taxes on its profit (or deduct state losses).
The PLLC structure provides several advantages over a general partnership.
In addition to limited liability, PLLCs can avoid double taxation and allow accountants or other professionals to share office space while providing state-licensed services under the same business entity.
Can a Pllc Be a Single Member?
It's possible to have a single-member PLLC, which is an LLC with just one owner.
Ownership in a PLLC can only be held by individuals who can provide the services that need the license.
The management structure of a PLLC can be member-managed and manager-managed, just like with standard LLCs.
Can a PLLC Be a Sole Proprietor?
Professional limited liability companies pay taxes in the same manner that LLCs do - based on the number of members.
A PLLC with one member is taxed as a sole proprietorship, while a PLLC with many members is taxed as a partnership.
Can You Convert an LLC to a PLLC?
Technically, yes. In most states, you'll have to amend your Articles of Organization as the first step in the process.
However, a business that can be run as a PLLC is unlikely to operate as a standard LLC lawfully.
You should consult with a reputable law firm for legal advice and evaluate the current business structure, the planned future business operations, and any available methods of reconstituting the form of a company entity.
Does a PLLC Protect You From Malpractice?
Malpractice claims are filed against individual professionals and not their companies.
Malpractice insurance is a good idea for all business owners who deal with the public in some capacity to protect their personal assets.
PLLCs offer limited liability protection to PLLC members; if one member has malpractice claims filed against them, they cannot go after another PLLC's assets.
If you own malpractice insurance, malpractice claims can be covered by your own policy.
Can a PLLC Make an S Election?
Licenses or certified professionals who form a PLLC can make an S election, i.e., they can choose to be regarded as an S corporation for tax purposes.
To change your tax status, you must complete Form 2553 and submit a Form 1120S corporate tax return to report earned income, costs, and other crucial business information.
Is PLLC the Same as a Professional Corporation?
No, a professional limited liability company and a professional corporation are not the same.
Although the requirements for forming these two business entities are rather similar, the way they are taxed differs greatly.
LLC vs. PLLC - The Verdict
LLCs and PLLCs are two types of business entities that professionals commonly use.
The main difference between an LLC and a PLLC is the type of services offered, affecting how they're taxed.
To determine which one of these two you should form, you'll need to investigate your state's laws and requirements.