If you are a professional and want to protect your personal assets, then a Professional LLC may be for you.
A professional limited liability company (PLLC) is formed specifically for people whose profession requires specialized licenses or certifications.
This article will discuss what a Professional Limited Liability Company is, how it differs from regular limited liability companies, and offer some reasons why PLLCs may be better suited for your needs.
What is a PLLC?
A professional LLC represents a business entity that is specifically formed to provide services or goods to customers.
Professional service providers, including doctors, lawyers, accountants, engineers, and architects, can use this type of LLC because it helps protect your personal assets from potential lawsuits involving business-related issues.
What Are the Benefits of Pllcs?
All LLCs provide limited liability protection, and so do PLLCs. One of the most significant benefits of PLLCs is that the PLLC owners are not personally responsible for the LLC's debts or legal liabilities.
This protection is provided to PLLCs because they follow specific state laws that protect members from being held liable for other members' actions/decisions.
Additionally, filing fees and annual reports are much less expensive than those required by corporations.
Still, some advisors recommend forming your Professional Limited Liability Company as a Sub-chapter S Corporation.
This is because you can avoid self-employment taxes and still have the limited liability protection benefits of an LLC – all while utilizing pass-through taxation treatment for federal income tax purposes (e.g., your business does not pay its own corporate tax at the entity level).
What Are the Drawbacks of PLLCs?
In some instances, professional limited liability companies don't offer the same liability protection as regular LLCs do. This is particularly true in malpractice claims.
Malpractice claims usually involve a claim against an individual and not the LLC so that a particular member can be held personally liable for the malpractice.
This is why malpractice claims are often brought against individual members of professional limited liability companies that behave negligently or even intentionally harm their clients.
On the other hand, Own malpractice involves the owner's own malpractice instead of having it done by other owners or members of the PLLC.
Own malpractice cases usually occur when someone sues for negligence in his/her personal capacity instead of suing through their business entity (which would be necessary if they were part of a regular LLC).
Who Should Set Up a PLLC?
Not every business owner needs to form a PLLC. For specific professions – such as lawyers, physicians, and dentists – it is a common practice. However, every business owner must seek specific legal advice for their particular circumstances.
Licensed professionals who need to limit their liability should set up a PLLC. State Licensing Board will likely have the list of professions that can set up a professional LLC.
Those professions that are not listed aren't allowed to conduct a professional business service in the state. If that's the case, business owners can still form LLCs; only they will be treated as a general LLC.
Professional LLC is not like other business structures:
- It has to be registered with State Licensing Board.
- It must file an annual report (in some states) to maintain its existence.
- Only licensed professionals can form PLLCs.
The simplest way to form a professional limited liability company is to file Articles of Organization with the Secretary of State in your state. Most states also require an LLC Operating Agreement that details how the organization will function internally. You may have other steps, such as naming all members/managers, preparing minutes from organizational meetings, etc. – but these are common procedure items required by most states.
How to Form a PLLC?
Professional business entities are formed in different ways depending on which state you are forming your LLC in.
However, the most common way to form an 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, and it requires certain steps that need to be followed for a PLLC to become official.
For the most part, the same rules apply to a PLLC as that of a traditional LLC, with the main difference being that you will need a professional license to conduct business.
Obtain the State License
A state license is a document you will need to obtain for your LLC to comply with the state's laws. A PLLC is only allowed to practice within its own state, and it cannot cross over into another state without obtaining that state's license as well, regardless of how many members are located there.
It is possible for a PLLC to operate nationwide if they have obtained all necessary licenses and permits required by the state where their business practices take place.
Due to this fact, you should always double-check the licensing requirements before forming or operating a professional limited liability company.
Failure to do so can result in severe legal consequences such as fines and jail time.
Every state has its own laws that govern PLLCs. In some states, all PLLC members must be licensed to provide the professional services offered by the PLLC. In certain states, there is no such requirement.
The same may be said for managers, who in some states must also be licensed professionals.
Contact your State Licensing Board and inquire about the necessary licenses for your specific profession.
Pick a Name for Your PLLC
Naming your PLLC is not like naming your business. In some states, you cannot name it after yourself, and some require that your business name includes one of the PLLC members' names.
It goes without saying that you cannot use the same business names as other companies in your area. A lot of states require that your PLLC's name contains some variation of the term "professional limited liability company," whether it is "PLLC," "PLLC," "Professional Limited Liability," and so on.
Your state's rules and statutes will also have restricted terms that you can't use in your PLLC's name, such as "Insurance."
The majority of states (if not all of them) have their Name Search Database. Contact the state's office and inquire about where you can perform the business name search.
File PLLC Articles of Organization
You should submit articles of organization in order to complete the formation of your Professional LLC.
Articles of Organization represent official formation documents of your business entity. This document contains formation information, including:
- The name of LLC
- 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 the filing process, it means that you have created your PLLC business entity successfully.
Keep in mind that the formation of PLLC is not complete until you file Articles of Organization with the state's secretary and pay a filing fee. Different states require different filing fees, and some can be quite expensive (up t $500).
You should have the articles drafted up by an attorney or a law firm that specializes in information documents, as they will protect you from possible future claims against your business name.
Create a PLLC Operating Agreement
Operating agreements are necessary to protect your business and its operating business structure.
They ensure that the owners of a PLLC are on the same page in terms of how they want their company to run, which includes things like taxation (how profits will be divided), management (who is responsible for what), and ownership shares (what percentage does each person own).
Operating agreements also serve as proof of an existing contract between partners if ever needed - such cases can arise when one or more members try to sell his/her share back into the business at a higher price than was originally agreed upon.
Hire a Registered Agent
PLLCs need a registered agent the same way regular LLCs do. A registered agent is the business representative that is 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 from time to time.
The basic requirements for a registered agent in many states are that they must be a real person (not an entity) who is at least 18 years old and must own or rent office space in the state where they are registered.
What Personal Liability Protection Does a PLLC Provide?
PLLCs offer the same benefits regular LLCs do. That means business debts are separate from business owners' personal finances. However, a PLLC can't protect you against professional negligence. In case of your own malpractice, the business won't be your shield, and you are personally liable for the malpractice. Still, in case other LLC members face malpractice claims, another licensed member can't jeopardize your personal liability.
What Is PLLC Malpractice Insurance?
A PLLC malpractice insurance is a policy that covers the costs of malpractice claims, which include defense and settlement costs.
Choosing the right insurance company is crucial when choosing your PLLC's coverage.
You want to ensure you select an insurer with experience in this field and excellent financial stability. Your registered agent or your attorney will be able to provide you with the financial advice that best suits your needs and circumstances.
Is a PLLC Considered a Corporation?
A PLLC might be considered a corporation. The only difference between a professional corporation and other business structures is that it isn't taxed as other pass-through entities (sole proprietorship, LLCs, or partnerships).
However, you have the liberty to elect S Corporation as your taxing option and avoid double taxation.
Can a PLLC File as a Partnership?
Yes. A professional limited liability company can file as a limited liability partnership, provided that it has more than one member. Each licensed professional has to report their income on a personal tax return.
Can a PLLC Have Employees?
Yes, PLLCs can hire employees, although the only members (owners) of a PLLC can be licensed professionals. If you're a PLLC with employees, you'll need to acquire an employer identification number from the IRS, withhold taxes from workers' salaries and pay federal payroll taxes.
Forming a PLLC is not an overly complicated process.
However, every state has its own requirements for licensed professionals who want to form PLLCs.
For this reason, it pays to work with someone who can guide you through these different rules because many things could go wrong if done incorrectly.