A Professional Limited Liability Company (PLLC), although similar to an LLC, is a unique business structure available only to licensed professionals in certain states.
Read the following important information to help determine if a PLLC is the right business structure for you:
- PLLC meaning
- PLLC vs LLC
- How to form a PLLC
- Advantages of a professional LLC
- Professional limited liability company
PLLC meaning
What does PLLC stand for? PLLC stands for “Professional Limited Liability Company”.
What is a PLLC?
A PLLC is a type of limited liability company owned and operated by individuals holding the same professional licenses in the same state. By definition, a PLLC can only provide services that are associated with the owners’ licenses. For example, three licensed dentists may start a PLLC, but they can’t offer services outside of dentistry or operate in other states.
The owners of a PLLC are referred to as “members”.
PLLC vs LLC
In some states, licensed professionals aren’t allowed to form a limited liability company (LLC). Instead, they’re required to form a PLLC.
In California, professionals providing a service are permitted to form Registered Limited Liability Partnerships (RLLP) or Professional Corporations (PCs), but not LLCs or PLLCs. Alaska and Alabama are among the states with no legislation regarding the creation of a PLLC.
LLCs and PLLCs are popular business structures that offer liability protection for their owners’ assets and a flexible tax structure.
The main difference between an LLC vs PLLC is that all members of a PLLC must be licensed practitioners in the same profession. Otherwise, a PLLC functions in similar ways to an LLC.
How to form a PLLC
The requirements of forming a PLLC vary by state. But, in general, for licensed professionals to form a PLLC they need to:
- Comply with their state’s filing requirements: PLLCs must file articles of organization with the secretary of state. Some states require an LLC operating agreement or single-member LLC operating agreement be filed with other formation documents.
- Provide member’s licenses: prove that the PLLC members hold all valid and necessary licenses.
- Sign documents: At least one member must sign the articles of organization document.
- Obtain Authorization: The state licensing board for your profession must authorize the formation of your business.
Members will also need to decide on a management structure for the company. As with LLCs, a PLLC can be member-managed or manager-managed.
There are many parallels between forming an LLC and a PLLC.
Who can be a member of a PLLC?
States govern which professions can create a PLLC, therefore who can be a member of a PLLC is varied. However, the following licensed professionals are permitted to create PLLCs in most states:
- Doctors
- Lawyers
- Engineers
- Accountants (CPA)
- Architects
- Chiropractors
- Dentists
- Optometrists
- Podiatrists
Some states require only half of a PLLC’s members to be licensed professionals.
How is a PLLC taxed?
A PLLC shares the flexible tax structure of an LLC, as it can choose to file as one of three types of tax entities:
- Pass-through
- S-Corporation
- C-Corporation
Pass-through taxation
Unless a PLLC chooses to be taxed as a corporation, the company’s profits and losses “pass-through” the business and are recorded on the members’ personal tax returns. The PLLC is not required to pay federal income taxes as an entity.
A multi-member PLLC is taxed as a partnership. Members declare their allocated share of the company’s profits and losses on their personal income tax form.
Members report their portion of a PLLC’s earnings as self-employment income generated by providing a service to the company. The self-employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare taxes).
A single-member PLLC is taxed as a sole proprietorship, which allows the same “pass-through taxation” afforded to partnerships.
S-Corporation
A PPLC can file Form 2553 to change its tax status from a partnership or sole proprietorship to an S corporation. The PLLC files a Form 1120S which reports members’ earnings as wages or dividends, depending on their percentage of ownership and work, which are taxed as personal income.
C-Corporation
If a PLLC wants to pay regular corporate taxes, it can file Form 1120 Corporate Income Tax Return. Members are taxed on earnings received as salaries or shareholder’s dividends.
Advantages of a professional LLC
A PLLC provides the following advantages for its licensed professional members:
Liability protection
PLLC members are protected from personal liability for the judgments and debts of the business, but individual members aren’t protected against malpractice suits.
Although no member is personally liable for another member’s malpractice suit, you’re responsible for defending any suit brought against you. To protect yourself, you need to take out malpractice insurance in your state.
Another liability consideration for PLLCs is that banks may request a personal guarantee to lend money to your business. If you are the guarantor, you remain personally liable for any debts you guarantee.
Exists in perpetuity
PLLCs and LLCs both continue to operate in perpetuity, meaning they continue to operate after the death or departure of a member. For example, if one member of your dental clinic needs to move to another state, you don’t need to dissolve and reform your business with the remaining members.
Professional limited liability company
A PLLC allows licensed professionals to form a business with the benefits of an LLC.
Now that you understand what PLLC means, you can determine if you’re able (or required) to form a PLLC in your state.
The next step is to have your state licensing board approve your members’ licenses and file your PLLC’s business formation documents with the secretary of state.
