Professional Limited Liability Companies (PLLCs) – 2024 Guide

Start a Professional LLC: A Professional Limited Liability Company (PLLC) is a specific type of limited liability company designed for licensed professionals, such as doctors, lawyers, accountants, and architects, among others. This form of organization combines the benefits of limited liability protection, typical of traditional LLCs, with the stringent regulatory requirements necessary for professional practice.

In this article, we shared our deep knowledge and understanding of what is a PLLC and how to start a PLLC. Not all states permit professionals to create a PLLC. For those states, you must start an LLC to conduct your business.

Understanding PLLCs

A PLLC is a hybrid entity that merges the characteristics of a corporation with those of a partnership or sole proprietorship, specifically tailored for licensed professionals. Unlike regular LLCs, PLLCs are required to ensure that all members (owners) are licensed to provide the professional services offered by the business. This requirement varies slightly from state to state but generally includes professions such as medicine, law, accounting, and engineering.

The primary purpose of a PLLC is to enable professionals to practice together, pooling resources and sharing administrative duties, while also protecting each individual member from personal liability for business debts and other liabilities, except for malpractice. This structure is particularly beneficial in professions where the risk of malpractice claims is significant, as it allows professionals to insulate their personal assets from business liabilities.

Members of a PLLC

Qualifications and Licensing Requirements for Members: To form a PLLC, all members must hold valid licenses in the professional field in which the PLLC will operate. This ensures that the business meets the stringent standards required by state licensing boards.

Roles and Responsibilities of Members: Members of a PLLC typically share responsibilities related to the management and operation of the business. They must adhere to professional standards and ensure that the PLLC complies with all regulatory requirements. Roles can be divided based on individual expertise, with some members focusing on client services while others handle administrative duties.

Ownership Percentages and Liability for Malpractice: Ownership percentages in a PLLC can vary and are usually determined by the initial investment or agreement among members. Despite the limited liability protection for business debts, members are personally liable for malpractice or professional misconduct. This means that while a member’s personal assets are protected from business debts, they are not shielded from claims arising from their professional actions.

Which States Allow PLLCs

A handful of states in the US allow professionals to create a PLLC instead of an LLC according to their profession. These states are Arizona, Arkansas, Colorado, District of Columbia, Florida, Idaho, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, and West Virginia. The rest of the states do not allow having a PLLC, whereas if you’re a professional you may proceed to start an LLC.

Services Provided by PLLCs

PLLCs are designed to offer professional services that require a state license. These services include:

• Medical Services: Physicians, dentists, and other healthcare professionals can form PLLCs to practice medicine, share resources, and provide patient care while protecting their personal assets from business liabilities.
• Legal Services: Lawyers and law firms often use PLLCs to practice law. This structure allows them to collaborate with other legal professionals and share administrative responsibilities.
• Accounting Services: Accountants and accounting firms benefit from the PLLC structure by pooling resources and providing comprehensive financial services while limiting personal liability for business debts.
• Architectural and Engineering Services: Architects and engineers can form PLLCs to offer design and consulting services, ensuring compliance with professional standards and protecting their personal assets from business liabilities.
• Licensing Requirements for Services: Each state has specific licensing requirements for the services provided by a PLLC. These requirements ensure that the professionals offering services through the PLLC are qualified and adhere to state regulations.
• Adherence to Professional Standards: Members of a PLLC must maintain their professional licenses and adhere to the ethical and professional standards of their respective fields. This includes continuing education, compliance with state laws, and upholding the quality of services provided to clients.

PLLC vs LLC

A Professional Limited Liability Company (PLLC) and a Limited Liability Company (LLC) are two business structures that provide their owners with liability protection. Nevertheless, there are several differences between the two types of companies. The following is a breakdown of what makes PLLC different from LLC:

• Professional Services

PLLCS was tailored for professional service businesses such as law firms, accounting firms, medical practices, and architectural firms among others. Whereas, any business can be converted to an LLC including those offering professional services albeit not exclusively.

• Ownership Rules

PLLCs have to be owned and managed by individuals who hold licenses to practice the specific professional service that the PLLC provides for the most part. For an LLC, an individual or corporation may own an LLC without having any special requirements in terms of licensing which also includes another LLC or foreign entity.

• Formation and State-wise Rules

The creation of both PLLCs and LLCs takes place at the state level whereby each state has its own specified rules. Some states don’t allow for the formation of PLLCs while others stipulate criteria regarding which professions qualify for a PLLCs.

• Costs & Processing Time

Formation costs vary by state in either forming a PLLC or an LLC but are generally similar. On the other hand, on average it takes between one week to four weeks for the formation of PLLC or LLC depending on the state.

• Liability Protection

Personal assets are protected from business debts and liabilities under both PLLCs and LLCs. However, some states may limit the extent of liability protections for PLLCs in relation to professional negligence claims.

• Tenure & Ongoing Compliance

PLLCs and LLCs are generally created to exist perpetually unless otherwise expressed. To legally stay in existence, both types must file annual reports and pay an annual fee.

• Taxation

In default mode, both PLLCs and LLCs are pass-through entities for tax purposes such that profits and losses get reported on their owners’ personal tax returns. However, while an LLC can elect to be taxed as a corporation this option is usually not available for PLLCs.

When choosing between a PLLC or an LLC, you should consider the nature of your business, specific state laws and regulations as well as long-term goals. You may consult a legal professional or a tax advisor to make the correct decision fitting your firm’s requirements.

Formation Process of a PLLC

Creating a professional LLC does not require any different method than that of a general LLC formation. However, there are some state-specific regulations that PLLCs have to follow. Besides, not all states permit for PLLC. Hence, the first thing you need to do is choose the state accordingly.

Step 1: Comply with State Regulation

Each state has a regulation for approving your PLLC. So, as soon as you decide to start your professional LLC, you must receive approval from the state. Different regulatory organizations oversee diverse departments (professionals).

The approval comes once the license of the professional and other compliances are fulfilled. Medical board, bar association, and other concerned boards are in charge of overseeing the professional activities of doctors, attorneys, engineers, chiropractors, architects, and others.

Step 2: Name your PLLC

Naming your PLLC is the most important task as the name will be the first identity of your company. Just like any other LLC, there is a set of LLC naming guidelines everyone has to follow. In the case of starting a PLLC, the name must depict the exact business nature or service they are offering.

• The name should have the terms ‘PLLC‘, ‘Professional Limited Liability Company‘, ‘Professional Ltd. Co.‘, and ‘Professional LLC‘.
• The name should be unique and available to use. One can file a DBA name beforehand if they aren’t forming their PLLC immediately.
• The business name should not resemble other businesses, government organizations, banks, or any authority.
• Make sure to have a name that is not misleading or confusing regarding the services offered.

PLLC name reservation process is similar to LLC name reservation. It is recommended to check with the Secretary of State to get the name reservation process in detail. (check out the SOS website list for all states).

Step 3: Get a Registered Agent

The next step is to hire a registered agent. A registered agent is the person responsible for receiving legal and government documents on your behalf. A PLLC member or owner can also act as a registered agent, however, that will not be a rational decision as the person in the position must be available in the office during business hours.

It will be wise to appoint a professional registered agent as they fulfill the criteria as well as are experienced. To become a registered agent in any PLLC you must have the following eligibility,

• The person must be aged 18 years or above
• The person must have a work permit in the state where the PLLC is created
• The person must have a permanent residential address in the state where the PLLC is located

ZenBusiness is one of the best PLLC formation services that offer registered agent service at a very reasonable price. Apart from ZenBusiness, there are other best registered agent services one can explore and compare their price and services.

Step 4: Filing Articles of Organization

The formation of a PLLC requires filing the Articles of Organization with the state’s Secretary of State office. This document includes essential information about the PLLC, such as its name, address, and the names of its members.

In many states, Articles of Organization need to receive approval from the State Board or state authority like medical associations, bar councils, and such. Filing a formation document is similar to filing an LLC. However, it is better to get a professional service, like ZenBusiness and others to get your filing done.

Step 5: Creating an Operating Agreement

The next step is to get the operating agreement. This is an important internal document that not all states demand. Though not mandatory, still we suggest you have an operating agreement to maintain a transparent business structure. Members‘ names, contributions, capital shares, and all other internal information should be recorded in the operating agreement.

As mentioned, not all states have mandatory rules for filing an operating agreement, but it is strongly recommended to have one for a smooth business process. Also, a PLLC operating agreement is required at the time of dissolution. Hence, filing an operating agreement at the time of creating a PLLC is better.

Step 6: Obtaining EIN for PLLC

Obtaining an EIN (Employer Identification Number) is a mandatory step while forming a PLLC. It is a 9-digit identification number issued by the IRS for the PLLC owners. To conduct business in your state as a PLLC owner, you must obtain the EIN. EIN can be obtained in four ways, online, by mail, by fax, and over the phone to the IRS. The application form is available on the IRS official site.

State-Specific Requirements and Variations in the Formation Process

The process of forming a PLLC can vary by state. Some states may have additional requirements, such as publishing a notice of formation in a local newspaper or obtaining additional permits or licenses. It is essential to check the specific requirements of the state where the PLLC will operate.

Legal and Liability Considerations

Personal Liability Protection Offered by a PLLC: One of the main advantages of forming a PLLC is the limited liability protection it offers. This means that members are not personally liable for the debts and obligations of the PLLC, protecting their personal assets from business liabilities.

Malpractice Liability for Members: While PLLCs offer protection from business liabilities, they do not shield members from malpractice claims. Each member is personally liable for their professional conduct and any claims arising from malpractice. This ensures accountability and adherence to professional standards.

Conditions Under Which the Corporate Veil Can Be Pierced: In certain situations, the courts can “pierce the corporate veil,” holding members personally liable for the PLLC’s actions. This can occur if the PLLC is engaged in fraudulent activities, if there is a commingling of personal and business funds, or if the PLLC fails to adhere to corporate formalities. To maintain liability protection, it is crucial for members to keep personal and business finances separate and comply with all legal and regulatory requirements.

Taxation of PLLCs

Pass-Through Taxation Benefits: One of the significant advantages of a PLLC is pass-through taxation. This means that the PLLC itself is not taxed on its income. Instead, profits and losses pass through to the members, who report them on their individual tax returns. This avoids the double taxation faced by traditional corporations.

Corporate Tax Obligations: Although PLLCs generally benefit from pass-through taxation, they can choose to be taxed as a corporation (C corporation or S corporation). Electing S corporation status can provide tax advantages by allowing members to receive a portion of their income as distributions, which are not subject to self-employment taxes.

Payroll Taxes and Income Considerations for Members: Members of a PLLC are typically considered self-employed and must pay self-employment taxes on their share of the PLLC’s income. If the PLLC elects S corporation status, members who are also employees must receive reasonable compensation as wages, which are subject to payroll taxes. Any additional income can be distributed as dividends, potentially reducing the overall tax burden.

State-Specific Regulations

• States That Recognize PLLCs: Not all states recognize PLLCs. It is essential to determine whether the state where you plan to operate allows the formation of a PLLC. Most states that do recognize PLLCs have specific regulations and licensing requirements that must be followed.
• State Licensing Boards and Their Roles: Each state has licensing boards responsible for overseeing the professions allowed to form PLLCs. These boards ensure that members meet the necessary qualifications, maintain their licenses, and adhere to professional standards. They also handle complaints and disciplinary actions related to professional misconduct.
• Filing Fees and Ongoing Compliance Requirements: Forming a PLLC involves initial filing fees, which vary by state. Additionally, PLLCs must comply with ongoing requirements, such as annual report filings, license renewals, and continuing education. Failure to meet these requirements can result in penalties, fines, or even the dissolution of the PLLC.

Key Attributes of PLLCs

• Business Entity Type: A PLLC is a distinct legal entity that separates the business’s liabilities from the personal assets of its members. This separation is crucial for licensed professionals who may face higher liability risks.
• Personal Liability Protection: While PLLCs protect members from personal liability for the business’s debts and obligations, they do not shield members from malpractice claims related to their professional services. Each member is personally liable for their professional conduct.
• Professional Services Offered: PLLCs are limited to providing professional services that require a state license. These services include but are not limited to, medical, legal, accounting, and architectural services.
• Tax Flexibility: Similar to LLCs, PLLCs can choose their tax treatment. They can be taxed as a sole proprietorship, partnership, S corporation, or C corporation, offering flexibility in how profits are distributed and taxed.
• Professional Image: Operating as a PLLC can enhance the professional image of a business. It signals to clients and peers that the entity adheres to high professional standards and regulatory compliance.
• Management Flexibility: PLLCs offer flexible management structures. Members can choose to manage the business themselves or appoint managers. This flexibility allows professionals to focus on their practice while delegating administrative tasks.
• Formation Cost: The cost of forming a PLLC varies by state but generally includes filing fees for the Articles of Organization and obtaining necessary licenses. Ongoing costs include annual report fees and other state-specific compliance fees.
• State Licensing Requirements: Each member of a PLLC must be licensed to provide the professional services offered by the business. The PLLC itself must also be registered with the appropriate state licensing board, ensuring compliance with professional standards.

PLLC vs Other Business Entities

• Corporation: A corporation is a separate legal entity that provides liability protection to its shareholders. It requires more formalities in terms of governance (e.g., a board of directors) and is subject to double taxation (corporate income and shareholder dividends).

• Sole Proprietorship: This is the simplest form of business, owned and operated by a single individual. It offers no liability protection, meaning the owner’s personal assets are at risk in the event of business liabilities.

• LLC (Limited Liability Company): An LLC offers limited liability protection to its owners (called members) and is not restricted to professionals. It provides flexibility in management and taxation but does not mandate professional licensing for its members.

Benefits of Choosing a PLLC

Enhanced Professional Image: Operating as a PLLC enhances the professional image of the business. It signals to clients and peers that the entity adheres to high professional standards and regulatory compliance, which can build trust and credibility.

Flexibility in Management and Operation: PLLCs offer flexibility in management structures. Members can manage the business themselves or appoint managers, allowing them to focus on their professional practice while delegating administrative tasks.

Protection Against Personal Liability: One of the primary benefits of a PLLC is the protection it offers against personal liability for business debts and obligations. This allows members to protect their personal assets while operating a professional practice.

Favorable Tax Treatment: PLLCs benefit from pass-through taxation, avoiding double taxation on business income. Members can also choose how the PLLC is taxed, providing flexibility in managing their tax obligations.

Potential Challenges and Drawbacks

Costs Associated with Formation and Maintenance: The cost of forming and maintaining a PLLC can be higher than other business structures. This includes filing fees, licensing fees, and ongoing compliance costs. Additionally, PLLCs may require legal and accounting services to ensure proper formation and operation, adding to the overall expenses.

Compliance with Stringent State Licensing Requirements: PLLCs must comply with state licensing requirements for both the business and its members. This includes maintaining professional licenses, adhering to continuing education requirements, and meeting other regulatory standards. Failure to comply can result in penalties or loss of the license to operate.

Possible Limitations on the Types of Services Offered: PLLCs are limited to providing professional services that require a state license. This can restrict the scope of services offered and may not be suitable for all types of businesses. Additionally, some states may have specific restrictions on the types of professionals that can form a PLLC together, limiting collaboration opportunities.

F.A.Q.

In Conclusion

Forming a Professional Limited Liability Company (PLLC) offers numerous advantages for licensed professionals, including personal liability protection, tax flexibility, and an enhanced professional image. However, it also comes with challenges, such as higher formation and maintenance costs and stringent compliance requirements. Despite these challenges, a PLLC can be an excellent choice for professionals seeking to practice together while protecting their personal assets and maintaining high standards of professional conduct.

Licensed professionals who prioritize liability protection and professional collaboration should consider forming a PLLC. It provides a structured yet flexible environment to operate a professional practice, ensuring compliance with state regulations and offering significant tax benefits. ZenBusiness, one of the most popular business formation services offers PLLC formation without any hassle. As with any business decision, it is essential to consult with legal and financial advisors to determine if a PLLC is the best fit for your specific needs and circumstances.