PLLC vs LLC: How Do They Differ?
If you’re looking to create your own limited liability company, you should know that there are some specialized versions of the LLC that are meant for certain types of businesses. Known as a professional limited liability company (or PLLC for short), this business entity is reserved for licensed professionals who provide products and services that align with a specific profession requiring certification.
How do you know whether your line of business requires a professional LLC? How does the process of forming and maintaining a PLLC differ compared to an LLC? In this article, we’ll answer these questions and more, as we walk you through all the major similarities and differences between the PLLC and the LLC. Let’s get started!
What Is an LLC?
A limited liability company (LLC) is a business entity that’s less formal than a corporation, but more organized and official than a sole proprietorship or a general partnership. The LLC has simple setup and is relatively easy to maintain as well. The main selling point of the LLC is the personal asset protection provided by this business structure.
With this limited liability protection intact, you as an individual are shielded from some of the potentially catastrophic financial effects of a lawsuit. If someone successfully sues your business, or reaches a settlement with you, the LLC prevents them from pursuing your house, car, personal bank accounts, and other personal assets. They are still able to come after your business assets, but their access to your own possessions and finances is limited to the amount you’ve invested into your company.
What Is a Professional LLC?
A professional limited liability company (PLLC) is a type of LLC that operates based on specialized regulations due to the company’s nature of business. A PLLC is necessary for a pretty wide variety of professions, and the exact professions included vary by state. Still, in general, the following business types need to pursue a professional LLC:
- Medical doctors
- Psychologists and therapists
In many states, businesses operating in these professions have the option of forming a professional LLC or a professional corporation. These two business entities have a lot in common, but the biggest differences are in taxation and asset protection. In our opinion, the PLLC has an advantage in both of these areas.
Professional corporations have to pay taxes at the corporate rate, currently at 21%, although the company’s ability to take advantage of deductions for life and health insurance mitigates that a bit. The other issue is asset protection, which is less straightforward than it is for regular corporations and LLCs.
With a professional corporation, a creditor who sues the business could end up earning a degree of control over the company, because they can pursue the shares in your company owned by their debtor. The PLLC avoids this issue by restricting creditors to the pursuit of the debtor’s net income from the company. It should be noted though that neither of these business structures protect you from malpractice or other issues related to your profession.
How Are the PLLC and LLC Similar?
There are several important areas where the professional limited liability company and the regular LLC have a considerable amount of overlap. Let’s quickly run down these similarities, before we switch gears to take a look at their differences.
- Personal Asset Protection: We already discussed this a bit, so at this point we’ll simply mention that both the LLC and the PLLC enjoy limited liability protections.
- Taxation: The LLC and PLLC are both allowed to choose how they want to be taxed. Both of them are considered to be pass-through entities, meaning that there is no tax paid on the corporate level, but rather the company’s net income passes through the business itself, and the owners pay tax on this money on their own personal returns. These entities are also able to elect to be taxed like a C corporation or S corporation, but these options are not widely used because they would cost most LLC owners more money.
- Management: LLCs and PLLCs are allowed to choose their management structures. These businesses can either be managed by their own members, or they can hire a separate manager from outside the company.
- Flexible Contributions and Distributions: With either of these business types, owners can choose whether they’d like to split up financial contributions and distributions equally, or if they would like to create an uneven split that reflects varying levels of participation by the owners.
How Are the PLLC and LLC Different?
There are also a few noteworthy differences between limited liability companies and their professional counterparts. The obvious one is the PLLC’s licensed professional status, but these items are also well worth keeping an eye on:
- Formation: When forming a PLLC, in most states you’ll need to prove that each member of the business is a licensed professional in the same industry ― in some other states, only half of the members will need to be licensed professionals. Either way, if you form a professional limited liability company for physicians, your owners will need to provide evidence of their individual status as a physician. Furthermore, in most states, you’ll need approval from the state licensing board to form the business.
- Limited Liability: While both LLCs and PLLCs get the same personal asset protection, we also need to point out that the PLLC structure does not protect each individual from malpractice claims. Because of this, PLLC members definitely need to pursue malpractice insurance to fully protect their assets.
How Do I Form a PLLC or LLC?
You have some options when it comes to the formation process for a limited liability company or professional LLC. You can form your own by filling out the articles of organization, which is a relatively basic document that explains the operational plans of your business, and also indicates the name of your company and the identity of your registered agent. Each state also has a formation fee which varies from around $50 all the way up to several hundred dollars, depending on which state you form in.
Some PLLCs and LLCs choose to hire a business lawyer to form their companies, as this route ensures that every step of the formation process is completed correctly. Another option is to enlist the assistance of a business formation service, which can form your company for much less money than a lawyer would cost, while still providing invaluable peace of mind and saving you quite a bit of time.
There are definitely more similarities between the limited liability company and the PLLC than there are differences. However, those few differences are crucial when it comes to determining which one is the right choice for you. In general, if your company will operate in a line of business that requires you to be a certified professional, the PLLC is probably the way to go.
We hope this article helped you to better understand the roles of the PLLC and the LLC in today’s American business landscape, and we wish you nothing but the best in your business future!