Starting your own business can be a challenging task, especially if you are a licensed professional trying to decide on the best entity structure. There are several possibilities out there to choose from, which is why it is important to understand all your options and make an informed decision about your business type.
In this article, we will give you the basics of a professional limited liability company, also known as a PLLC. We will discuss everything you need to know about this business, in addition to some pros and cons and a basic guideline on starting up your very own PLLC.
The Basics of a PLLC
A professional limited liability company is similar to a traditional LLC, except it is run by licensed professionals, such as lawyers, accountants, or medical professionals. A PLLC offers certain tax benefits and liability protections, including the protection of members from the malpractice of another member.
In general, PLLCs are liable to pay pass-through taxes on their business, which means that while members may not be subject to separate business taxes, each member will likely have to pay self-employment taxes on any business income earned. However, this is subjective on the individual tax structure you have set up for your PLLC, and you should meet with a professional accountant if you have any tax questions.
Any PLLC you form can have multiple members or just one member, and you can decide if you want your PLLC to be member-managed (decisions are made collectively among all members) or manager-managed (one member or an outside individual is responsible for major operating decisions).
You should also remember that to form and legally operate your PLLC, those providing services through your business must meet state and federal licensure requirements and stay up to date with all licensing requirements. This can change on a state-to-state basis, so be sure that you understand what is required of you before establishing your PLLC.
Who Can Form a PLLC?
Any individual who has a legal, up-to-date license in a certain profession can establish a PLLC. Depending on state-specific rules, other members of the PLLC may be required to have licenses in the same profession. It may also demand that the individual with the license is the only owner, while employees without licenses can be hired to help run the business.
Additionally, some states only allow certain professionals to form a PLLC. If you search your state’s government websites and find that your professional license type is not on the list of approved PLLC professions, then you may need to choose a different entity type for your business.
Below, you can find a list of professionals that are generally eligible to form a PLLC in states that allow the formation of a PLLC:
Many states do not allow you to combine services under the same PLLC (for example, if you were licensed as a therapist and a dentist, this could not be combined), but there are certain exceptions for closely related professional fields, such as combining a physician’s practice with a pharmaceutical practice. You need to check your state’s statutes to find out what is allowed of your PLLC.
Understanding State Rules for PLLCs
As we mentioned above, states have different rules for forming PLLCs. While some states allow PLLCs, others require that you form professional corporations or provide services through a traditional LLC structure. It is important to consult with your state’s statutes and business services information to figure out which type of entity you can form.
Below, we list the states that don’t recognize PLLCs. In these states, your options will likely be limited to traditional LLCs or professional corporations, but you need to double-check with the state-specific rules to be sure.
- New Jersey
- New Mexico
- Rhode Island
- South Carolina
Should You Form an LLC or a PLLC?
In states that allow the formation of both traditional LLCs and PLLCs, you may be faced with a choice of which business type to start. That said, LLCs and PLLCs are similar in terms of the protections they offer and the taxes that they are liable for. Both LLCs and PLLCs do offer liability protection, meaning that in the case of a lawsuit or business debt, the owners of the business are not personally responsible for paying that debt out of their own assets.
The main difference between an LLC and a PLLC comes into play during cases of malpractice or professional negligence. The PLLC structure does not provide liability protection against any type of malpractice suit filed against an individual, and the individual is responsible for settling any type of malpractice judgment against them. Therefore, malpractice insurance is a worthwhile investment for those starting a PLLC.
You should also note that in multi-member PLLCs, if one individual is facing a malpractice claim, they are the only one to deal with that claim; other members or managers of the PLLC are not liable for issues arising out of the individual’s malpractice (keep in mind that this is different from a professional partnership, in which both partners would be responsible for the malpractice, regardless of who committed it).
Pros and Cons of a PLLC
Below is a chart of pros and cons that can help you decide whether forming a PLLC is the best type of business entity for you.
|Members are not liable for other members’ malpractice claims
|PLLCs are not eligible for formation in all states
|PLLC members are not personally liable for general business debts or lawsuits
|Certain professions cannot form PLLCs, dependent on state rules
|PLLCs are easier and less expensive to set up than a corporation
|PLLC earnings are subject to federal self-employment taxes and other state taxes
How to Form Your PLLC
Forming your PLLC is very similar to the steps that you would take to set up a regular LLC in any state. The difference in setting up a PLLC is that you need to meet certain state and federal licensing requirements and may be required to turn in a different set of paperwork that identifies your business entity as a PLLC.
Choose a Business Name
One of the most important steps in forming your PLLC is to choose a name that meets state requirements and gives customers a good idea of what service you are offering. In most cases, you need to include the phrase “professional limited liability company” or one of the abbreviations “PLLC” or “P.L.L.C.” into your name.
You can also search through your state’s business entities, typically via the Secretary of State’s website, to find out if the PLLC name you want is available. If it is, some states allow you to reserve it ahead of filing to establish your business for a fee.
Designate a Registered Agent
In almost every state, your PLLC (or regular LLC, depending on state rules) is required to appoint a registered agent responsible for receiving government documents, both federal and state, and collecting notices of lawsuits.
Typically, you can appoint any member of your PLLC to be your registered agent, but you may be able to appoint outside individuals or an authorized business in your PLLC’s operating state to act as your registered agent.
Some states provide information on reputable commercial registered agents in the state; you can usually find this information on the Secretary of State’s website. If you are having trouble deciding whether to appoint a commercial registered agent for your PLLC, you can read more information about the pros and cons of this here.
Meet Licensing Requirements
Another important step to take when forming your PLLC is to ensure that every owner of your business has a license for the professional services you offer. Of course, this requirement can change based on state rules, but in general, every individual providing part of the business’s professional service must have a valid license.
You may be required to meet state or federal licensure requirements as you set up your PLLC or on an ongoing basis. You can check licensing information on your state’s government website, through a national licensing board, or by accessing federal licensure requirements through the U.S. Small Business Administration.
Be sure to keep in mind that certain localities, including cities and counties, require you to obtain certain licenses and permits. You can check with your county Clerk’s Office to find out more information.
File Organizational Paperwork
The final step to officially establishing your PLLC in a state is to file the appropriate organizational paperwork. This typically includes your Articles of Organization, but some states may call this by a different name or require additional paperwork. You may also find that when establishing a PLLC, the Articles of Organization must be reviewed by the appropriate licensing board before they can be submitted and accepted by the state.
Additionally, some states require your PLLC to draft important internal documents, such as an operating agreement that sets clear guidelines for how your business is to be managed. This can come in especially helpful during a lawsuit or when closing your PLLC’s operations.
You may also find that certain states, such as Arizona, have publication requirements that you need to meet upon the filing of your Articles of Organization. These requirements are usually listed clearly on the Secretary of State’s website, so be sure to double-check this information to avoid missing an important step.
Meet Additional Requirements
Depending on the state you file your PLLC in, there are additional requirements that your business may need to meet. One of the most prominent is filing annual reports with your state’s Secretary of State. These reports typically come with a fee and are required if you want to keep your business in good standing.
You may find that you also need to meet certain permit or licensing requirements to ensure that your license stays valid; consult with the applicable licensing board for further information.
Other requirements may include obtaining an EIN (tax ID number) from the IRS, opening separate business bank accounts, or tracking business finances separately.
After your PLLC has been officially established in your state, you must keep up with both federal and state taxes. Most PLLCs are taxed as pass-through entities, meaning that the members of the PLLC are liable to pay business income taxes on their individual state and federal tax returns. However, you may be able to have your business taxed as a corporation, which requires your PLLC to file a separate corporate tax return on both a federal and state level. More information on this can be found here.
Additionally, PLLCs that have employees can be required to pay state employer taxes, and professional businesses that provide goods or services may need to pay sales and use taxes. Depending on the state your business is operating in, there may also be a general business tax that you need to pay each year.
Keep in mind that if you have to pay self-employment taxes with your PLLC, you are required to make quarterly estimated tax payments depending on how much income you make. This can be required for both state and federal taxes. More information can be found here.
A PLLC for All Your Business Needs
The decision to form a PLLC is not the easiest one, especially if you are unsure whether this business type is the best for your professional needs. With the help of our article, you should be able to better understand how a PLLC works, the benefits it provides, and the potential drawbacks of forming a PLLC, so you can make an informed decision about forming this entity and meeting all your business needs.