Choosing the right structure for your business can be complicated, especially if you’re starting a business for the first time. However, this is a mandatory step if you want to operate your business legally in your state.
For licensed professionals, such as accountants, architects, and attorneys, there are additional factors to consider before they can launch a business to offer their professional services.
The said professionals may feel drawn to start an LLC to enjoy liability protection. However, some states don’t allow professionals whose jobs need an operating license to form an LLC. Instead, these professionals are required to form a PLLC (Professional Limited Liability Company).
This article examines the key differences between LLC vs. PLLC to give you a keen understanding of the two business structures as you figure out the best way to register your business.
LLC vs. PLLC: Overview
An LLC is an incorporated business structure that provides its owners with liability protection while retaining some tax advantages of a Sole Proprietorship or Partnership. An LLC can be formed by one person or several people.
An LLC formed by one person is known as a single-member LLC while that formed by several people is called a multi-member LLC.
The LLC formation process can be a bit challenging for applicants. That’s why many business owners choose to work with a qualified registered agent who handles all the paperwork as they focus on other business processes.
Generally, the procedure for registering an LLC is as follows:
- Pick a name for your business
- Select a Registered Agent for your LLC
- File your Articles of Organization
- Draft an Operating Agreement
- Review tax requirements and apply for your EIN
A Professional Limited Liability Company (PLLC) is similar to an LLC and offers the same liability protection from business debt and liabilities. The difference between LLC vs. PLLC comes in their structure as a PLLC is meant for professionals that offer certain services.
In many states in the US, individuals providing professional services, such as medical care, taxes, legal services, and engineering, are required to obtain an operating license from a regulatory body to offer these services.
If these professionals want to create a business, they are required to form a PLLC and not an LLC.
LLC vs. PLLC: Legal Considerations
Most people like the LLC structure because it provides the same form of liability protection as a Corporation without the tedious formalities and paperwork required to form and maintain a Corporation.
The owners of an LLC enjoy personal liability protection from the debts of their businesses. The members of an LLC may lose the resources invested in the business, but their personal assets cannot be used to settle the liabilities of the business.
However, a member of an LLC is personally responsible for their illegal actions and negligence. Also, if the member chooses to personally guarantee a loan to the business, their assets can be used to settle the debt if the LLC is not in a position to do so.
PLLCs also enjoy the same liability protection as LLCs. But while a PLLC protects a member from the malpractice suits of others, it doesn’t protect individual members from their own lawsuits.
PLLC members are personally liable for their own malpractices. As such, it would be helpful if each member got their own malpractice insurance.
LLC vs. PLLC: Ownership
Next in this guide on LLC vs. PLLC is their ownership structure.
Most states are flexible when it comes to who can own a limited liability company. The typical members of an LLC may include:
- Other LLCs
- Foreign entities
Another interesting fact about LLC ownership is that an LLC can continue to exist even when a member leaves the business or retires according to the continuation rules outlined in the operating agreement.
The rules for owning a PLLC vary across states. In some states, all the members of a PLLC should have professional licenses for the services they are offering. In other states, it’s not mandatory for all members of a PLLC to have a specific professional license.
While an LLC can continue to exist after a member leaves the company, PLLCs may face some challenges because of the members’ professional license requirements.
As such, members may be forced to dissolve or restructure the PLLC if its operating agreement doesn’t have provisions for perpetual existence.
LLC vs. PLLC: Taxation
Are there any differences in the way LLC vs. PLLC entities are taxed?
Well, not at all.
IRS treats both LLCs and PLLCs as pass-through entities. This means the businesses don’t file tax returns or pay business taxes. Instead, LLC and PLLC members report the profits and losses of the company in their personal tax returns and pay taxes at the applicable individual rates.
The profits of LLCs and PLLCs are also subject to Social Security and Medicare taxes since the members don’t receive a paycheck.
However, members of an LLC and PLLC can choose to be taxed as an S Corp to reduce their tax burden. In this case, the members who work for the company are put on the payroll and only pay FICA taxes on their wages and not on their profit distribution.
The differences between LLC vs. PLLC are now clear. If you want to start a business that requires a professional license or certification, then a PLLC is the ideal business structure for you.
Otherwise, an LLC may be the best option for your business as it offers the liability protection of incorporation minus the tedious formalities and paperwork required to maintain a corporation.
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