Are you looking to form a business entity in Arizona for people who are licensed to provide professional services? If so, you may be interested in starting a professional limited liability company (PLLC).
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 Arizona 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 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 Arizona, realtors are the only professionals that are required to form PLLCs rather than standard LLCs, and even then, they can still form regular LLCs if they don’t mind having their commissions paid directly (only PLLCs allow Arizona realtors to have their brokers pay commission to separate entities).
The state of Arizona is very strict regarding PLLC membership, especially when compared to some other states. In many states, people who aren’t licensed professionals can still be members of PLLCs, but in Arizona, only individuals “who are licensed by law in Arizona or another state to render a professional service described in the articles of organization” are allowed to join PLLCs. The only exception is the unlicensed spouse of a licensed professional, but even then, the unlicensed individual has no voting rights in the PLLC.
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 an Arizona Professional Limited Liability Company
Each state has its own method for forming PLLCs, as there is no uniform nationwide formation process. In Arizona, 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. Arizona requires that the name of every PLLC registered in this state must contain the words “Professional Limited Liability Company” or the abbreviations “P.L.L.C.” or “PLLC,” and must indicate whether one or more licensed professionals own the business. If the PLLC is registered for a designated broker, the business’ name is only allowed to include the broker’s full or last name and an indication that it is a PLLC.
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 Corporation Commission’s website. If you’d like more information about business name searches in Arizona, check out our guide.
Step 2 – Designate a Statutory Agent
Every PLLC operating in the state of Arizona is required to have a statutory agent (referred to as a registered agent in most other states) who acts as a middleman between your business and the state. The statutory 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 statutory agent in this state. You can hire a statutory agent service, designate a trusted friend or family member, or even serve as your PLLC’s own statutory agent yourself. However, we typically advise against serving as your own statutory 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 statutory agent service for free. If you’re interested in this option, we recommend Northwest Registered Agent, our favorite service for forming a PLLC.
Step 3 – File Your Articles of Organization
Among the information you’ll need to complete this form is an indication that you’re forming a PLLC rather than a standard LLC, the full name of your PLLC, a description of the professional services your PLLC will provide, the name and address of your statutory agent, a copy of the Statutory Agent Acceptance form, the PLLC’s Arizona principal address, an indication of whether the business will be managed by a manager or by its members, your signature, printed name, and the date.
When you’re ready to file these forms, you can submit them to the Corporation Commission online, by mail, or in person, along with your $50 filing fee. Turnaround times in this state vary depending on how many orders the state is processing at any given time, but you can always check the state’s handy processing times page to see how long you should expect your order to take.
At the time of this writing, standard processing took 17-19 business days, but you can expedite your order for $35, in which case it will be processed in 7-9 business days if filed by mail or the same day if filed online. If you choose to upload your completed document instead of filling it out online, expedited processing takes 3-5 business days.
The state also has a few other expedited options ($400 for two-hour service, $200 for same-day service, $100 for next-day service), but we doubt these options are all that popular considering the state’s excellent (and affordable) processing speeds for online filings.
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 Arizona 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 Arizona’s list of state agencies to figure out who to contact regarding which licenses you’ll need. Additionally, the state recommends contacting your city or town’s local office to see if they have any further requirements regarding licensing.
In some states, you also need to sign up for state income taxes, but that’s not the case in Arizona. In this state, income taxes work just like they do at the federal level, so there’s no need to do any prep work in this regard. However, you should check with the Department of Revenue to get more information about the state’s Transaction Privilege Tax (also known as sales tax) and withholding tax requirements.
This state doesn’t have initial or annual reports, so the process of maintaining your PLLC has one fewer step than it does in most states.
Forming a professional limited liability company in the state of Arizona 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 Arizona.
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 PLLC in a compliant fashion that allows your business to thrive for many years to come.