PLLC Vs LLC: Advantages and Disadvantages 2021

Regulations surrounding legal entity formation are complicated and you need to widely consult particularly when you are in a profession. In several states, the law does not allow licensed professionals to form businesses the same way as ordinary citizens. Instead, they are required to use a designated type of business entity such as a PLLC. Though forming a PLLC may be similar to an LLC formation in many ways, the former is subject to certain restrictions that make it unique in a way. 

That is why we have decided to walk you through the differences and similarities of these business types. Our comprehensive PLLC vs LLC comparison will act as a guide to every business owner or professional who is seeking liability protections.

Let’s start with a rundown of understanding what each business type means.

Limited Liability Company

Limited Liability Company (LCC) is a special business structure allowed by state statutes. It is formed and owned by members. Like corporations, there are no restrictions on ownership, and members may include one or more company owners, corporations, other LLCs, and foreigners. However, the requirements vary with the state. 

LLCs are very simple and easier to form than many structures. The main requirements are filing the articles of the organization and paying filing fees. Though you may also want to fill an agreement form, which is not a mandatory requirement but very important. LLCs don’t require the formation of a board of directors, so the agreement form will help oversee the company’s day-to-day operation just like the board of directors. 

Even though LLCs can offer protection and other benefits to professionals and ordinary citizens alike, most states will not allow you to form an LLC for professional services. Instead, a professional who is interested in limited liability benefits must form a PLLC rather than LLC.

Professional Limited Liability Company

A professional limited liability company (PLLC) is a type of limited liability company designed for the purpose of providing a professional service. A professional service [1] is any type of service that requires obtaining a license in a particular state, including services rendered by a veteran, an attorney, real estate agents, and accountants among others. As hinted before, some states don’t allow licensed professionals to form an LLC and instead offer this special business structure as an alternative.

In essence, PLLCs operate the same way as LLCs except for some small differences. For instance, to form a PLLC, you need to clear with the licensing board or state agency first.

Besides, it is limited to professionals in the same line of business. But once the requirements are met and the PLLC is formed, management and taxation are done the same way as LLCs. 

It is important to note that requirements to form a PPLC [2] vary with the state. While some states will demand all members to be licensed professionals, others will only demand 50%, while some will require at least one. Even more, some like Alabama and California don’t even recognize this business type. 

PLLC vs LLC: Advantages

LCC

  • LLC is a separate legal entity, and therefore, if a member of the organization leaves, sells his shares, or dies, the company can continue operation undisturbed.
  • LLC is great for small business owners because it is easier to set than most structures including a Professional LLC.
  • business owners are not personally liable for the company liabilities like debts, and lawsuits such as unpaid rents. 
  • There is no limitation on the number of members of professions kind needed to form an LLC. Anyone can form an LLC as long as you meet state requirements.

PLLCs

  • Members are not held liable for business losses such as debts and their assets cannot be used to repay such losses.
  • Professional LLC members are not personally responsible for the malpractices of other members. 
  • Even though members must submit a professional license during PLLC formation, it is generally easier to up than a service corporation.
  • Just like an LLC, the owners can choose to be taxed as a pass-through or as a corporation (including S-Corp).

PLLC vs LLC: Disadvantages

LLC

  • Most states that allow the formation of PLLCs forbid licensed professionals from forming LLCs.
  • All LLC earnings are subject to self-employment tax. You will not pay such taxes as a sole proprietor

PLLC

  • PLLCs do not allow business continuity. That is to say when someone leaves or joins the organization, some states may demand that the company be dissolved and reformed.
  • It is only limited to professionals in the line of the business. 
  • All PLLC earnings are subject to self-employment taxes as well.
  • Forming a PLLC involves some additional steps such as licensing. 

What’s the Difference Between a PLLC and an LLC?

Separate entities

PLLC

Professional LLC members may not have this privilege in most states, particularly where all PLLC members are required to be licensed. In such cases, the transfer of ownership will be restricted such that, if a licensed owner retires, or die, you may have to dissolve and reform a PLLC with new members. 

LLC

 A limited liability company is considered a separate and distinct legal entity from company owners. Therefore, the company can continue to operate even after a member leaves the company through retirement, death, or sell part of his investment. 

Formation

Another difference between an LLC and a PLLC comes in their formation process.

PLLC

To form a Professional LLC, you will always be required to submit your state licensing for approval before you file your articles of organization. Meaning, forming a PLLC starts from clearing with the licensing agency or licensing board. 

In some states, you will also be required to provide proof that every member is a licensed professional in the line of the business. Other states however will only need 50% of members to be licensed while others at least one professional in the line of the business. 

Once the licensing is approved, the secretary of state and the state licensing board will offer you a step by step guidance as you fill in your articles of organization and any other necessary document.

LLC

On the other hand, you don’t have to deal with the state licensing board or seek member approval when forming an LLC. Once you pick your company name and a registered agent that meets state law requirements, you can proceed to file articles of organization. 

Even though formation for each structure will vary from state to state, there are more requirements to form PLLCs than LLCs in all the states.

Ownership

PLLC

A professional limited liability company is formed and owned by licensed professionals and the ownership varies with the state. For instance, Colorado [3] allows architects, accountants, chiropractors, attorneys, dentists, optometrists, engineers, Land surveyors, physical therapists, podiatrists, professional chancellors, physicians & surgeons, as well as veterans to form professional service companies. Your state will list the professions that can form PLLCs, so always confirm with your state. 

Most states require that the company members be licensed in the profession of the business and have the credential to offer their services in that particular state. For instance, if it is to be formed by an attorney, the company owner must be that particular state-licensed lawyer. 

LLC

On the other hand, you don’t have to be licensed to form an LLC; anyone can form it (including foreign investors). Besides, there are no limitations on the number of members required.  

PLLC vs LLC: The Similarities

Liability Protection

Personal liability protection is the main reason for forming PLLC vs LLC. Limited liability companies create a separation between your business assets and personal entities. Meaning, in an event of lawsuits against business debts or any other losses caused by the company, you are guaranteed personal assets protection (your personal assets such as cars, or house cannot be used as collateral to repay the losses unless you signed a personal guarantee).

Another aspect of personal liability protection offered by these two entities is a case where an owner makes a mistake or an act of negligence. You cannot be held personally liable for your partner’s mistake. For health care professionals, you will have to equip yourself with malpractice insurance. This is in contrast to limited liability partnership where one managing partner is responsible for the liability for the partnership action.

Tax Flexibility

Whether you form a limited liability company or a professional limited liability company, you will have to choose the way you want your company to be taxed because the IRS doesn’t recognize them. You can choose to be taxed as a sole proprietorship, a partnership, a C-corporation, or an S-Corporation.

Generally, a one member standard LLC or professional LLC is treated as a sole proprietorship. On the other hand, two or more members standard LLC or Profession LLC is treated as a partnership for tax purposes. That is to say, both one member and multiple members LLC are subject to ‘pass through’ taxation.

However, members are considered self employed and all their earnings are subject to self employment tax. To avoid this, LLCs or PLLCs can choose to be taxed as corporations. But the best is to be taxed as S-corporation which is not subject to double taxation.

Should I Form a PLLC?

One of the main reasons for forming a professional limited liability company is that it creates a separation between you and your business entity. Meaning, once you form a PLLC, you will not be personally liable for organization’s liabilities such as debts or any lawsuits against the company.

In addition, once you form a PLLC, you will not be personally liable for the malpractices of other partners. For instance, if a doctor who is your fellow PLLC member messed up during surgery and the patient sued him, the patient will only hold the doctor personally liable.

In terms of taxation and management, a PLLC is just similar to an LLC. Meaning, PLLCs can also choose to be taxed as a pass-through entity or a corporation and enjoy S-corporation tax benefits. 

But it is required by law in some states that a licensed professional who needs liability protection should form a PLLC. 

Conclusion

Professionals usually prefer to go into business together but fear of lawsuits or malpractice claims always discourages them. For that reason, business entities like professional limited liability companies are designed to protect them. Think of a PLLC is a sub-category of an LLC designed for licensed professionals in some states. 

With that said, PLLC vs LLC has the same management, taxation, and just a slight difference in information process and ownership. To be on the safe side, always know your state law requirements before you embark on forming an LLC or PLLC.

Hopefully, our PLLC vs LLC comparison has equipped you with enough information. Feel free to share with us your experience with either of the two entities.

Frequently Asked Questions

Do I need a PLLC or LLC?

That will depend on the state where you want to carry out your business. Some states require that licensed professionals don’t use a similar structure as ordinary citizens. In such states, you will need a PLLC; otherwise, LLC is more versatile and is the best.

What’s the purpose of a PLLC?

A PLLC is a structure designed for the purpose of providing professional services. This legal entity offers liability protections and tax benefits to individuals with various occupations such as accountants, lawyers, doctors and even real estate owners.

Who Can Own a PLLC?

A Professional LLC can only be owned by licensed professionals. Even though some states may not be that strict, a licensed professional must be the organizer and sign the necessary organization documents.

How Is a Professional LLC Taxed?

A single-member PLLC is given a pass-through taxation treatment just like a sole proprietorship. A multiple-member PLLC is treated as a partnership for tax purposes. For that reason, unlike PC shareholders, PLLC members are not subject to double taxation.

What is the difference between a PLLC and a PC?

The differences between a professional limited liability company and professional corporation are more like the differences between ordinary LLCs and corporations. Professional corporations are subjected to federal tax while PLLCs are treated as a ‘pass through’ entity. In addition, PC shareholders own stocks in the business while PLLC members invest in their businesses.

Which legal business structure is best for your company?

LCC will be ideal for most businesses since it is the most versatile structure. There are no limitations on the number of members needed, offer taxation flexibility than corporations, guarantee strong protection, and are the easiest to form and maintain than any other structure.

Which is better: a CP or PLLC?

PC shareholders are subject to double taxation while PLLC members are subject to a pass-through taxation. Besides, professional corporation formalities require a lot of paperwork. Though Professional corporations have some advantages over PLLCs as well, the latter outweigh the former when it comes to benefits and I would recommend it.

Do I need a registered agent to form a Professional LLC?

You are always required to have a registered agent when forming a company with LLCs and corporations. Registered agents help in receiving tax and legal documents from the government and can offer legal advice services if he/she is a lawyer.

Leave a Comment