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When it comes to business structures, there are several options from which to choose, one of which is a limited liability company (LLC). But within that structure are two common types from which you can choose: a limited liability company and a professional limited liability company (PLLC). Both LLCs and PLLCs offer limited liability protection for their owners, but clear sets of criteria and features set them apart. To help you determine what structure will be beneficial to your particular business, we’ve detailed the similarities and differences that every business owner deciding between a PLLC vs LLC should know. Let’s get started!
What is an LLC?
Unlike a sole proprietorship or a partnership, a limited liability company separates the business owners from the business itself. Structured as separate legal entities, LLCs shelter owners from their business’s debt, lawsuits, and tax implications. Though your business is treated as a separate entity, you can still be held liable for debts and lawsuits up to the amount you’ve invested in the business. Corporations also limit liabilities for business owners but have stricter rules for management, record-keeping, etc.
LLCs can have one owner or multiple owners. However, in an LLC that has more than one owner, all the owners are equally liable. So, if your partner is sued for negligence, you’ll also be named in the lawsuit.
What is a PLLC?
A professional limited liability company is another type of LLC. This type of LLC offers the same limited liability protections. However, as the name implies, this type of limited liability company is specifically for professionals who require a license to operate. Only certain individuals qualify for PLLC formation: doctors, dentists, lawyers, accountants, and other licensed professionals.
PLLCs generally require more than one owner. But unlike an LLC, there are restrictions about who can be an owner in a PLLC. For example, all members generally need to share the same license. Here are some examples of professionally licensed industries that may qualify for a PLLC:
- Accountants & tax professionals
- Healthcare providers, like dentists, optomistrist, podiatrists, etc.
- Physicians, nurses, and medical practices
- Law offices & attorneys-at-law
- Psychologists, marriage, & family therapists
- Engineers & architects
- Chiropractors, acupuncturists, and massage therapists
- Physical therapists
- Clinical social workers
Most states that offer PLLCs only allow licensed professionals to be an owner or require a specific number of licensed professionals to maintain a minimum level of ownership. As well, PLLC owners generally need to carry malpractice insurance to cover claims made against them personally. Finally, PLLCs are more expensive and complex to set up than traditional LLCs, with more rigid management structures.
LLC vs PLLC: Understanding Similarities and Differences
If you’re weighing a PLLC vs LLC, below details some of the most important similarities and differences between the two. First up: similarities!
Professional LLC vs PLLC similarities
While there are several differences, comparing a PLLC vs LLC reveals many similarities, too. Here are a few:
- Formed by filing out the articles of organization with their state of formation
- Offer limited liability protection to owners
- Taxed as pass-through entities
- Allow owners to elect corporate status for tax purposes
- Include the same structural flexibilities
Difference between LLC and PLLC
In regards to LLC vs PLLC, an LLC is less complex to establish, more flexible to manage, and easier for multiple owners to supervise. Technically, an LLC could be the owner of another LLC—not so with PLLCs. Finally, PLLCs can only offer goods and services related to their professional license. There are no such restrictions with an LLC.
When examining a PLLC vs LLC, the biggest difference you’ll find is the way liability protections are offered to owners. Let’s say you’re opening a dermatology clinic with three other dermatologists. The four of you decide to form an LLC. If one ever gets sued for medical malpractice, all four dermatologists are held liable. However, if you decide to form a PLLC, only the dermatologist responsible is subject to the lawsuit. In sum, the actions of one PLLC owner don’t impact the liability of other owners of a PLLC.
Advantages and Disadvantages of an LLC vs Professional LLC
Whether an LLC or PLLC is better for your business depends entirely on your specific needs and goals. In terms of its initial formation, many find the initial launch, ongoing administration, and management structure of an LLC simpler and less complex. However, for those who qualify and appreciate PLLC benefits, the added steps and complexity is well worth it.
For licensed professionals that have the option, the advantages of forming a standard LLC would be that it’s:
- Less expensive to set up than a PLLC
- Simpler to form, with less complex filing requirements
- More flexible in terms of management structure
- Equal in how it shares liability among its members
At the same time, the advantages that a PLLC could provide are:
- Liability protection against the wrong-doing, debt, or negligence of your business partners
- The ability for each member to be responsible for their own malpractice suits
- Working within a regulated network of licensed profesionals
LLCs offer many advantages for all sorts of businesses, but that doesn’t always mean it’s the best choice for your business. Some disadvantages include:
- Owner’s equal share of liablity, including in malpractice suits
- Personal assets are not necessarily safe from exposure during a lawsuit
- Owners must include the LLC’s profits in their personal taxes
- Accurate business records must be maintained
- Seperate bank accounts from personal accounts
At the same time, a PLLC only makes sense for certain types of professionals. Carefully weigh the negatives, too. Such as:
- You’re not protected against your own personal liabilities for negligence, malpractice, or personal wrongdoings related to your licensed service
- There are more complex filing requirements that include proof of a professional license
- You can only offer services related to your professional license
- Your PLLC may not be recognized in all states
- Lenders could view PLLCs as higher risk
Are There Any Tax Differences Between a PLLC and LLC?
Technically, the IRS does not recognize LLCs or PLLCs. Instead, whether you choose an LLC or PLLC, you have to choose the way you want the business to be taxed: as a sole proprietorship, a partnership, an S corporation, or a C corporation.
By default, both LLCs and PLLCs are pass-through entities, meaning the profits and losses from the business go onto owners’ tax returns. Pass-through tax means the owners pay taxes, while the entity itself does not pay taxes. The owners claim the income on their personal tax returns. But, if they so elect, owners of an LLC or a PLLC could be taxed as corporations.
Criteria for Choosing a PLLC vs LLC
Below outlines some important criteria to consider when parsing through a PLLC vs LLC.
Your state requirements for LLC versus PLLC
LLCs can be formed in all 50 states. With PLLCs, it’s a mixed bag. Only a few states require a PLLC, instead of an LLC, in fields like medical care, legal services, tax services, accounting, and others. Meanwhile, some states don’t recognize or offer PLLCs at all. To see if you’re eligible to form a PLLC in your state, check your Secretary of State’s website.
Filing for a PLLC requires a certified copy of your professional license from your state, along with your signed paperwork and articles of organization approved by your state licensing board, all of which you send to your state’s Secretary of State. This list of documentation includes:
- Proof of licensing to demonstrate you and all owners of your PLLC hold current professional licenses
- Industry-specific regulations and your compliance with them
- Your company name that includes “PLLC,” “P.L.L.C.,” “PLC,” or “P.L.C.” (check with your state’s licensing board)
- Articles of organization as approved by your state’s licensing board
Note: If your business is currently an LLC and you want to change the structure into a PLLC, you might be able to amend your articles of organization. Some states, however, will want you to start a new PLLC from scratch.
Understand the risks and liabilities of professional LLC vs LLC
For those who plan to open their own practice, with or without any partners, there’s little difference in terms of an LLC vs PLLC. The only reason to form a PLLC would be if you’re planning to take on professional partners down the road. Meanwhile, for those who are starting a business with other professional partners, a PLLC offers limited liability protection that separates individual owners from each other, while an LLC does not.
If you’re a licensed professional, it’s important to understand that, regardless of the industry, business entity, or licensed number of partners, you are personally liable for your own malpractice lawsuits, even in a PLLC. Malpractice insurance helps cover the costs associated with lawsuits or personal liabilities due to negligence in your practice.
Consider your long-term management structure
You need to decide what type of management structure to adopt—whether a member-managed or manager-managed LLC. This decision will impact the voting rights and decision-making behind all your big business moves.
Manager-managed LLCs are more common for LLCs that want to have silent partners who might invest in the business without a say in the decisions. In PLLCs, unlicensed professionals usually can’t own a stake in the company.
Note: LLC owners are called members.
Should I Form an LLC or PLLC? Closing Thoughts
Whatever conclusion you come to in the PLLC vs LLC debate will be influenced by the industry of your business and with whom you’re embarking on this venture, as PLLCs are more beneficial to certain industries and to businesses with more than one member. Forming an LLC or a PLLC is a crucial step on your way to business ownership, after which you can begin reaping the rewards of accepting payments for the goods and services you provide your community.