Entrepreneurs who choose to incorporate as a limited liability company (LLC) may pause when they realize there is a secondary option available known as a professional LLC (PLLC).
What is a PLLC? How does it differ from an LLC? Which is the best option to incorporate a business? Let’s explore the differences between the entities and how entrepreneurs may determine which formation to choose.
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Limited Liability Company (LLC)
There are a few reasons why an LLC is one of the most popular entity formations with small business owners.
Flexibility
An LLC offers its owners (commonly known as members) flexibility in structuring the entity. Forming an LLC means choosing from one of three management structures:
- Single-member LLC. A single owner runs and operates this LLC. This is an ideal structure for LLCs that only have one member. Is there a difference between a standard LLC and a single-member LLC? Yes. Standard LLCs are treated as a partnership on the federal level. Single-member LLCs, however, are not considered to be a partnership. As a result, a single-member LLC must maintain proof of being able to run their business like a standard LLC, such as drafting a single-member LLC operating agreement.
- Member-managed LLC. An LLC that has several members may decide to form a member-managed LLC. This structure ensures each member is equally involved in running the business and shares the same amount of responsibilities.
- Manager-managed LLC. Not all members of an LLC wish to be involved in running the business. This is where it may be helpful to choose a manager-managed LLC structure. This allows a board of managers to take more control and responsibility over the business instead of referring to its members.
Tax benefits
Entrepreneurs who form an LLC receive tax savings for incorporating as this entity formation. The other additional benefit to forming an LLC is that the entity is taxed as a pass-through entity.
Being taxed as a pass-through entity means that the profits of the business can “pass through” to the owners. This means profits and losses are reported only on individual tax returns for the owners and not at the business level, allowing the business to avoid double taxation. An LLC may also deduct other relevant losses or operating costs of the business on personal tax returns, which helps offset other income and makes it easier to file taxes.
Maintenance ease
LLCs differ from more structured entities like corporations in that they are easier to maintain. Overall, an LLC has fewer compliance requirements.
That being said, it is still a good idea that members draft an LLC operating agreement. This helps set rules and regulations among members for how to run the LLC.
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Professional LLC (PLLC)
A professional limited liability company (PLLC) is a specialized version of an LLC. It shares similarities with an LLC in that a PLLC provides small business owners with limited liability protection. What a PLLC does is work to limit personal liability for claims related to negligence, errors and malpractice of partners for individuals in specialized professions.
Who qualifies for a PLLC?
To incorporate as this entity, the owner must work in a specialized profession. This profession requires state licenses and offers professional services to its customer base.
Here are a few examples of individuals who qualify to form a PLLC:
- Lawyers and attorneys.
- Marriage, family and child counselors.
- Nurses, physical therapists, chiropractors, acupuncturists, optometrists, podiatrists, pharmacists and physician assistants.
- Psychologists.
- Social workers.
- Dentists.
- Engineers.
- Accountants.
- Architects.
Is incorporating as a PLLC the same process as it would be for an LLC? There are a few differences that individuals in specialized professions must take into account before applying.
1. You must be a licensed professional.
First, incorporating as a PLLC requires proof that the individual is a licensed professional.
The application process will require sharing more information about their current occupation and services. Licensed professionals may be required to share proof of their profession when filing as a PLLC, such as providing proof of a state license.
2. Determine state authorization.
While an LLC may be the standard across all states for incorporation, the same cannot be said for PLLCs.
Not every state provides PLLC legislation. If you find you are in a specialized profession and you want to form a PLLC, check with the local Secretary of State. Determine if your desired state of incorporation and where you plan to conduct business has authorized PLLCs. If not, you may need to consider filing to incorporate as a PLLC in a state where there is PLLC legislation.
LLC and PLLC: Which is right for me?
Ultimately, the answer to this question lies in your profession. An individual in a specialized profession is likely to incorporate as a PLLC while a more general entrepreneur will pick an LLC structure that best suits their business.
If you have additional questions about the filing process or incorporating as any other entity formation, it’s best to ask a legal professional or tax adviser for extra guidance and assistance.
