Are you looking to form a business entity in Pennsylvania for people who are licensed to provide professional services?
If so, you may be interested in starting a professional limited liability company (PLLC) — commonly known in this state as a restricted professional company.
The PLLC is a popular choice for licensed entrepreneurs looking to start businesses with fellow doctors, attorneys, accountants, engineers, or other professionals, thanks to its ability to reduce each professional’s personal liability while also providing a host of other benefits.
In this article, we’ll walk you through the steps required to form a professional LLC in Pennsylvania in compliance with state and federal laws. Let’s get started!
What Is a Professional Limited Liability Company?
For the most part, professional limited liability companies are quite similar to standard LLCs, and they share many of the same benefits.
In Pennsylvania, the term “professional limited liability companies” isn’t used very often. Instead, this state typically refers to these entities as “restricted professional companies.” It’s important to note that these terms mean the exact same thing, so we’ll use them interchangeably throughout this article.
In general, an LLC is a business entity type that brings together some of the most popular attributes of casual entities, like sole proprietorships and general partnerships, with the formality of corporations. The resulting entity is one that is highly flexible and customizable, while also providing some great benefits to its owners.
The factor that differentiates a PLLC from a standard LLC is that the PLLC is strictly for licensed professionals to operate their businesses with other licensed professionals. In Pennsylvania, the types of professionals who form PLLCs include chiropractors, dentists, lawyers, doctors, surgeons, optometrists, osteopaths, podiatrists, public accountants, psychologists, and veterinarians.
The state of Pennsylvania is very strict regarding who can be a member of a restricted professional company. You must be licensed in the same profession as the PLLC was formed to practice in order to serve as a member or manager of any restricted professional company in this state.
Let’s discuss a couple of the attributes that make the PLLC such a popular option for these professionals.
A big benefit of a professional limited liability company is its ability to provide personal asset protection to its owners/members. Let’s say you operate a general partnership instead of a PLLC. If your business is sued, your creditors can pursue your personal assets to satisfy the lawsuit. This means your house, car, personal bank accounts, and personal possessions are all fair game.
However, for PLLC owners, this isn’t the case. Instead, creditors can only pursue the assets of your actual business. It’s important to note that this doesn’t defend your PLLC from malpractice suits. For example, if you are a member of a PLLC for doctors and you botch a surgery, the PLLC will not protect you from the patient filing a malpractice suit.
One of the main benefits of the PLLC is the fact that it gives its owners some options regarding how they want to be taxed. While a professional corporation also gives you choices regarding taxation, to an extent, the PLLC is much more flexible in this regard.
You can choose to have your PLLC taxed as a pass-through entity (similar to sole proprietorships or general partnerships), which means that your PLLC itself will not owe taxes. Instead, your profits and/or losses will “pass through” your PLLC to your owners, who will then pay taxes on that money on their own personal returns.
Another option is to be taxed like a C corporation or an S corporation. C corporation taxation is the most common form of taxation for corporations, but as this tax structure leaves its owners subject to double taxation (wherein the same money is taxed both at the corporate level and the individual level), it’s not a popular option for PLLCs.
The S corporation is a similar form of taxation to the pass-through method but avoids the self-employment taxes that come with partnership or sole proprietorship-style taxes.
While this can save you some money because you won’t have to pay both the employer and employee portions of Medicare and Social Security, people who choose this form of taxation should be careful to ensure they’re still paying enough into Social Security to be able to draw from this entitlement when they retire.
How to Form a Pennsylvania Restricted Professional Company
Each state has its own method for forming PLLCs, as there is no uniform nationwide formation process. In Pennsylvania, the formation process for a PLLC is nearly identical to the process for a standard LLC, but there are some crucial differences.
Step 1 – Name Your PLLC
The first step is to choose a business name. Pennsylvania doesn’t have very specific naming regulations for restricted professional companies, as these businesses follow the same naming laws as traditional LLCs. This means that the name of your restricted professional company must include the words “company,” “limited,” or “limited liability company,” or any abbreviation of these terms.
In addition to the legal requirements, there are also some practical applications to discuss. Generally speaking, your business name should indicate what your PLLC does. For instance, if you operate a PLLC for attorneys, you should probably have either the words “attorneys” or “lawyers,” or the phrase “law office” in your business name.
When you’ve come up with a name you like (we suggest making a list of 3-4 name ideas, in case your first choice is already taken), you should perform a name search on the Department of State website. If you’d like more information about how to search for business names in Pennsylvania, check out our guide.
Step 2 – Designate a Registered Agent
Every PLLC operating in the state of Pennsylvania is required to have a registered agent who acts as a middleman between your business and the state. The registered agent’s role is to accept important document deliveries from the state — especially service of process — inform you of the delivery, and then forward the materials on to your business.
There are quite a few options when it comes to who can serve as your registered agent in this state. You can hire a registered agent service, designate a trusted friend or family member, or even serve as your PLLC’s own registered agent yourself. However, we typically advise against serving as your own registered agent because you would need to be available during all standard business hours in case the state needs to make a delivery.
If you choose to use an online formation service to create your PLLC, you may be able to get a full year of registered agent service for free. If you’re interested in this option, we recommend Northwest Registered Agent or IncFile, our two favorite services for PLLC formations.
Step 3 – File Your Certificate of Organization
Next, you’ll need to fill out a formation document known as the Certificate of Organization.
Among the information you’ll need to complete this form is the official name of your business, the address of your registered office in this state, the names and signatures of your company’s organizers, the effective date of your formation, the professional service your restricted professional company will provide, an indication of whether or not your business is a public benefit company, and the date.
Once you’ve finished filling out this form, you can submit it online, by mail, or by hand to the Department of State. You will also need to include your $125 filing fee. You can expect the state to take 7-10 business days to process your filing, although there are expedited options available as well: same-day service for $100, three-hour service for $300, or one-hour service for $1,000.
Step 4 – Create an Operating Agreement
An operating agreement is a crucial part of any PLLC, as this internal document outlines your company’s financial structure, as well as how the business will be managed. You don’t actually need to submit this document to the state, but it is still strongly recommended that you have one because it can help you avoid conflicts between your member/owners down the line.
What information should be included in your Pennsylvania operating agreement? It’s up to you to determine what you want in your company’s agreement, but we recommend the following sections:
- Ownership interests
- The rights and responsibilities of the members
- Voting rights
- Profit/loss allocation
- Management by a manager or by members
- Guidelines for voting and holding meetings
- Plans for replacing a member, if necessary
Step 5 – Obtain an EIN
A federal tax ID number — also known as an Employer Identification Number (EIN) — is essentially the business equivalent of a Social Security number. It’s a nine-digit number that serves as an identifier for your specific business entity.
If you operate a PLLC, you should absolutely get an EIN for your business, as this will help you pay taxes, hire employees, open business bank accounts, and more.
Thankfully, acquiring an EIN is a painless process, and it’s also entirely free of charge. All you need to do is head over to the EIN Assistant on the IRS website and fill out the form. It’s just that easy — once you finish the form, the IRS will provide your EIN immediately.
Step 6 – Apply for Licenses, Taxes, and Income Reports
At this point, your PLLC has been successfully created, but that doesn’t mean the process of getting your business off the ground is complete. You still need to acquire any applicable business licenses that may apply to your PLLC.
Depending on the nature of your business, your professional licenses will vary, so you should check out the state’s convenient business licensing website to figure out which licenses you’ll need.
You will likely need to apply for sales and use tax, withholding tax, and unemployment compensation tax. Pennsylvania also makes this process quite simple, as you can register for all of these taxes on the Department of Revenue website.
One final important note is that, while traditional LLCs only need to file a decennial filing every ten years, restricted professional companies need to file a Certificate of Annual Registration each year. Of course, you won’t need to worry about this until the year after you form your business, but it’s worth taking note of this fact now so that you don’t forget.
Forming a restricted professional company in the state of Pennsylvania requires quite a bit of information, and there can be a significant amount of legwork involved in forming one as well. Still, the process is certainly simpler than the process of forming a professional corporation, which is the other popular option for certified professionals in Pennsylvania.
As long as you follow the steps in this guide — and seek advice from a reputable attorney if you run into any questions or concerns — you should be able to form your new restricted professional company in a compliant fashion that allows your business to thrive for many years to come.