LLC vs PLLC | What’s The Difference?
LLC (Limited Liability Company) and PLLC (Professional Limited Liability Company) are popular among small businesses.
Before you form a limited liability company, you must understand the difference between an LLC and a PLLC to determine which company structure is best suited to your line of business.
As a Mergers and Acquisitions specialist who has assisted several entrepreneurs with business formation, I'll share my insights on how the two companies compare based on membership, licensing requirements, taxation, and liability protection.
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
A Limited Liability Company is a popular choice among small business owners since it benefits from personal asset protection, pass-through taxation, and a flexible management structure.
"A big business starts small."
- Richard Branson, British Business Magnate
A professional limited liability company, or PLLC, is a specific type of LLC formed by certain licensed professionals in specialized industries such as the medical or legal fields.
The business format offers personal asset protection, flexible management and operating structure, plus taxation benefits.
However, PLLCs are not recognized in all states, and in those that do, only certain licensed professions are eligible to form such a company.
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 [1]. 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.
What are the Advantages and Disadvantages of a PLLC?
If you want to form a PLLC, consider the following pros and cons:
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
- Not all states allow the formation of PLLCs.
- Only certain licensed professions qualify to form a PLLC.
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
Can You Convert an LLC to a PLLC?
You can convert an LLC to a PLLC depending on the state where your business is formed. If the state allows the conversion, you must file a certificate of amendment to change the name and purpose of your LLC.
Is PLLC the Same as a Professional Corporation?
A PLLC is not the same as a Professional Corporation. If the state does not allow the formation of PLLCs, you have the option to form a Professional Corporation.
References:
- https://www.irs.gov/businesses/small-businesses-self-employed/limited-liability-company-llc