What Is a Professional LLC (PLLC) & Should You Form One?
If you are a professional and want to protect your personal assets, then a Professional LLC may be what you are looking for.
As a leading authority in the LLC business, I have collaborated with a team of legal experts in LLC formation to provide comprehensive research on PLLCs and understand their unique advantages and suitability for various professionals.
I also spent countless hours analyzing legal statutes and real-world case studies to provide accurate insights.
This article presents a comprehensive guide, shedding light on the benefits and considerations associated with PLLCs.
Quick Summary
- A professional LLC is a special type of limited liability company specially designed for licensed professionals.
- Any professional LLC must be registered with the state licensing board.
- According to recent data from Statista, the professional and business services sector contributes to 13.1% of the total US GDP, making it a significant player in the economy, second only to the finance, insurance, real estate, rental, and leasing sectors with 20.2%.
- I found the detailed steps for forming a PLLC particularly insightful, emphasizing the need for legal and financial consultation to navigate the complexities of PLLC formation and compliance.
What is a Professional LLC?
A professional LLC can be described as a particular type of limited liability company designed for various licensed professionals.
Reflecting a broader entrepreneurial trend, data from the US Small Business Administration indicates that between March 2021 and March 2022, 1.4 million US establishments were opened, highlighting the vibrant landscape for new businesses, including PLLCs [1].
Professional service providers may include:
- Doctors
- Lawyers
- Accountants
- Engineers
- Architects
These professionals can use this type of LLC because it helps protect your personal assets from potential lawsuits involving business-related issues.
Who Should Set Up A PLLC?
Licensed professionals who need to limit their liability should set up a PLLC.
The State Licensing Board will likely have the list of professionals to set up a professional LLC.
Those professions that are not listed aren't allowed to conduct a professional business service in the state. If so, business owners can still form LLCs but will be treated as general LLCs.
Professional LLC is not like other business structures:
- It has to be registered with the State Licensing Board
- It must file an LLC annual report (in some states) to maintain its existence
- Only licensed professionals can form PLLCs
It is essential to consult with legal and financial experts to ensure compliance with specific regulations and requirements for establishing a professional limited liability company.
How to Form a PLLC?
The most common way to form a professional LLC is by filing Articles of Organization with the Secretary of State (or equivalent governmental agency) where your company will be located.
The process can be complex, requiring certain steps to be followed for a PLLC to become official.
For the most part, the same rules apply to a professional LLC as a traditional LLC, with the main difference being that you will need a professional license to conduct business.
1. Obtain The State License
A state license is a document you must obtain for your professional limited liability company to comply with the state's laws.
"A PLLC can only practice within its state and cannot cross over into another state without obtaining that state's license, regardless of how many members are located there."
-Jon Morgan, Co-Editor & Co-Founder of Venture Smarter
A PLLC can operate nationwide if they have obtained all the licenses and permits required by the state where its business practices occur.
Due to this fact, you should always double-check the licensing requirements before forming or operating a professional limited liability company.
It’s recommended to comply with the stated laws on setting up a professional limited liability company to avoid legal consequences.
Contact your State Licensing Board and inquire about the necessary licenses for your specific profession [2].
2. Pick a Name for Your PLLC
Choosing an appropriate name for your professional LLC is vital for establishing a credible and trustworthy image.
Choose a name that reflects your expertise, industry, or specialization to attract potential clients and partners. Avoid generic terms and prioritize originality to distinguish your business from competitors.
A lot of states require that your PLLC's name contains some variation of the term "professional limited liability company," whether it is "PLLC," "Professional Limited Liability," and so on.
Your state's rules and statutes will also have restricted terms you can't use in your PLLC's name, such as "Insurance."
Most states (if not all of them) have their Name Search Database. Contact the state's office and inquire where you can search for the business name.
3. File PLLC Articles Of Organization
You should submit Articles of Organization to complete the formation of your Professional LLC.
LLC Articles of Organization represent the official formation documents of your business entity.
This document contains formation information, including:
- The name of the LLC
- Address
- Registered agent's contact info (the registered office)
- Potentially formation purpose statement if the state's business law requires it
- Some states will probably require that you also provide a license number
When the articles are completed and submitted to a state agency for filing, you have successfully created your PLLC business entity.
Remember that the PLLC formation is incomplete until you file Articles of Organization with the state's secretary and pay a filing fee. Different states require different filing fees; some can be quite expensive (up to \$500).
You should have the articles drafted by an attorney or law firm specializing in information documents, as they will protect you from possible future claims against your business name.
4. Create a PLLC Operating Agreement
LLC Operating agreements are necessary to protect your business and its operating business structure.
They ensure that the owners of a professional LLC are on the same page regarding how they want their company to run.
This includes things like taxation (how profits will be divided), management (who is responsible for what), and ownership shares (what percentage each person owns).
Operating agreements also prove an existing contract between partners if needed - such cases can arise when one or more members try to sell their share back into the business at a higher price than originally agreed upon.
5. Hire a Registered Agent
PLLCs need a registered agent in the same way regular LLCs do. An LLC registered agent is a business representative officially registered with your state.
The agent accepts official legal documents on behalf of the company and will act as an intermediary between you and any government agencies or other entities you may need to interact with occasionally.
The basic requirements for a registered agent in many states are that they must be a real person (not an entity) at least 18 years old, and own or rent office space in the state where they are registered.
6. Other Important Steps
You will also consider other steps as below:
- Apply for a federal Employer Identification Number (EIN) with the IRS, which is necessary for tax purposes and opening bank accounts.
- Register for a state tax identification number to fulfill state tax obligations if applicable.
- Comply with ongoing filing requirements, such as annual reports and fee payments, as the state of formation mandates.
- Acquire necessary liability insurance and ensure compliance with all relevant professional regulations.
- Open an LLC business bank account to separate PLLC finances from personal finances.
- If hiring employees, follow federal and state hiring requirements, withhold taxes, and provide necessary benefits.
What Are the Benefits of PLLCs?
The benefits of PLLCs include limited liability protection, which helps shield personal assets from business debts and lawsuits.
This protection is provided to PLLCs because they follow specific state laws that protect members from being held liable for other members' actions/decisions.
PLLCs also offer flexibility in management structures, allowing professionals to control the company's operations.
Additionally, forming a PLLC can provide tax advantages, as it allows LLC pass-through taxation similar to partnerships. This business structure may aid in attracting and retaining top talent by offering equity incentives and fostering a sense of ownership.
For healthcare and legal professionals, PLLCs may help establish credibility, as they are designed specifically for licensed practitioners, ensuring a legitimate and specialized business approach.
PLLCs are much more affordable when it comes to filing fees and annual report fees when compared to other corporations. Still, some advisors recommend forming your Professional Limited Liability Company as a Sub-chapter S Corporation.
Overall, PLLCs offer a strategic and protected framework for professionals to operate and grow their businesses.
What Are The Drawbacks Of PLLCs?
The drawbacks of professional limited liability companies include potential legal complexities and liability concerns.
As specialized professional entities, PLLCs must adhere to strict regulations and licensing requirements, increasing administrative burdens.
Additionally, members may be personally liable for their own malpractice, limiting liability protection for others in the firm.
Financially, forming a professional LLC may involve higher startup costs due to specific state filing fees and professional insurance.
Furthermore, a professional LLC could face challenges in attracting investors or converting to other business structures.
Careful consideration and expert legal advice are essential before establishing a professional LLC to navigate these potential drawbacks effectively and safeguard professional interests.
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FAQs
What Is PLLC Malpractice Insurance?
PLLC Malpractice Insurance is a crucial professional liability coverage for PLLC practitioners. It safeguards against financial losses resulting from alleged negligence, errors, or omissions in their professional services. This policy aids in protecting their practice and clients' interests, providing peace of mind and financial security.
Can a PLLC File as a Partnership?
Yes, a PLLC can file as a partnership if it has two or more members. The Internal Revenue Service acknowledges this option and can be a legitimate tax choice for qualified PLLCs. Each licensed professional has to report their income on a personal tax return.
Can a PLLC Have Employees?
Yes, a PLLC can have employees, as it is a legitimate business structure that allows licensed professionals to work together while enjoying limited liability. Hiring employees in a PLLC can aid in the smooth operation of the practice and enhance service offerings, promoting growth and efficiency within the organization.
References:
- https://advocacy.sba.gov/wp-content/uploads/2023/11/2023-Small-Business-Economic-Profile-US.pdf
- https://www.adams.edu/online/professional-licensure/
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