Professional Limited Liability Company Explained

Kaitlin Edwards | Feb 24, 2024

Professional Limited Liability Company Explained

Licensed professionals looking to open their own office, firm, or practice have several options for a company structure. Some professionals opt for a LLP (limited liability partnership) or a PC (professional corporation). A PLLC, meaning a professional limited liability company, is a possible consideration when making the important decision of how to structure your business.

A PLLC (if permitted in your state) can be a solution if you meet the eligibility criteria. Here’s what you should consider before making any major business decisions surrounding the company structure that will work best for you.

What Is a Professional Limited Liability Company (PLLC)?

A professional limited liability company is very similar to a standard LLC (limited liability company), but the option is only available to qualified professionals in states where PLLC structures are offered to businesses.

The biggest difference between a PLLC and an LLC is that all members of a PLLC must have a valid professional license in their field and offer professional services to their clients or customers.

The advantage of choosing a PLLC is the type of liability protection it provides. For example, liability protection from malpractice or harm dealt by another member of the PLLC can be highly advantageous.

A PLLC structure protects the personal assets of PLLC members from creditors pursuing the PLLC for a debt, and anyone who pursues legal action against a PLLC cannot obtain property from other members due to the misconduct of a single member.

Who Can Form a PLLC?

The professional limited liability company structure is intended to be used exclusively by licensed professionals in specific fields that require higher education. Doctors and medical professionals, lawyers and legal professionals, accountants and financial professionals, and several other types of professionals can use the PLLC structure when opening their own practice or firm.

PLLC structure isn’t recognized in every state. Currently, the following states allow professionals to utilize PLLCs:

  • 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
  • West Virginia

States that don’t allow companies to use a PLLC structure may have similar alternatives. You can research local business registration laws and rules to learn more about the options available to you. It’s best to make a business decision once you’ve thoroughly explored all of your options and found the right fit.

What Are the Eligibility Criteria for Forming a PLLC?

The eligibility criteria for forming a PLLC may slightly differ from state to state, but the foundation of these criteria remains the same. You must be a partnership of licensed professionals who provide regulated services to the public.

Your state may have different rules for the maximum or minimum number of PLLC members, the amount of PLLC members that must carry licenses, and the types of professionals allowed to form PLLCs. It’s best to check local regulations to clarify your eligibility for forming a PLLC and explore all options available to you.

How Does a PLLC Protect its Members?

A PLLC protects its members from certain actions of other members of the PLLC. If one partner is sued by a client or customer for malpractice or negligence, the resulting action cannot impact every member of the PLLC. Each professional is independently liable.

A PLLC also protects the assets and property of everyone involved in the PLLC. If a judgment is awarded against a PLLC member, the PLLC as a whole isn’t responsible for paying that judgment or rendering property to satisfy that judgment.

PLLCs protect the private property and assets of members. Creditors and debt collectors cannot pursue PLLC members personally for debts associated with the PLLC.

What Are the Tax Implications for a PLLC?

LLC taxes are handled collectively. PLLC taxes are different. Income passes through to be divided by members of a PLLC as appropriate. Each member will report their share of income on an individual personal income tax return. Note that a PLLC is liable for employment taxes.

The partnership will collectively file a special form called Form 1065, Return of Partnership Income. Form 1065 shows profit, loss, business expenses, and tax deductions for the PLLC. This form isn’t used to assess or pay taxes. The IRS checks this form to make sure all revenue to the partnership is accounted for on each individual member’s personal tax returns.

PLLCs can choose to be treated as S corporations or C corporations and handle their taxes accordingly. It’s best to review the implications of each scenario with the members of your PLLC and the involvement of your PLLC’s accountant or bookkeeper to determine if it would be advantageous to do so.

Are There Any Downsides of Forming a PLLC?

There are plenty of advantages to forming a PLLC if this structure works best for everyone involved, but there may also be some downsides.

Since PLLCs aren’t recognized in every state, your corporation is significantly less portable. If your team decides to relocate, you may need to limit your possible destinations or make changes to your business structure.

When you choose to use a PLLC, your state may limit you to exclusively offering services directly related to your license. Complementary or supplementary products, services, or treatments may disqualify you from using a PLLC structure.

Some lenders may be hesitant to work with PLLCs because they’re often viewed as high-risk. Partnerships leave room for disagreement. One or more partners may exit, which impacts the PLLC’s ability to generate revenue. The types of professionals eligible to form PLLCs are also among the most likely to be sued by a client, patient, or customer. Financial institutions will consider these risks when making a lending or credit decision.

How Do You Form a PLLC?

Forming a PLLC is very similar to forming an LLC, with the exception of proof of licensure. If you’re eligible to form a PLLC, the process will work similarly to this. Your state may have unique requirements for PLLC formation and business registration.

Choose a Name

The first part of forming any business is choosing and reserving an available name. In most cases, your Secretary of State will have resources that allow you to browse name availability and reserve a name. You’ll likely need to meet a requirement that prohibits you from using a name that is identical or very similar to an existing business in your state. You may also be required to include “PLLC” in the formal name of your partnership.

Choose a Registered Agent

PLLCs are required to designate a registered agent. A registered agent is a third party who is allowed to accept government mail, official business mail, and legal documents on behalf of the PLLC. PLLCs are often subject to unique legal concerns (i.e. malpractice for medical practices), and a registered agent must be available for correspondence.

Mosey is your go-to for compliance needs — and can even serve as your registered agent so that you have more time to make sure your business is running smoothly. Our platform is quickly adding support for more entity types across the compliance space. If you’re a PLLC, keep your eyes peeled for added support. We have your back for many other types of business structures.

Obtain Licensing Approval

PLLCs often need multiple licenses. The first and most important license is the professional license issued by the formal regulating body for the profession. For example, healthcare providers must be licensed to practice healthcare and lawyers must be licensed to practice law in the state where the PLLC is being established.

There are also local and state licenses to consider. Very few states require a general business license. Most relevant business licenses are issued by the county, parish, borough, or city where the PLLC is being established.

Obtaining proper licenses often involves several substeps that are unique to the type of licenses required. This is likely to be the lengthiest part of the process, and it’s important to follow local regulations exactly as they are written.

File Articles of Organization

When you have reserved a name for your business, hired a registered agent, and completed all of your licensing requirements, you’ll have everything you need to file the articles of organization for your PLLC. At this point, your PLLC will become a recognized business entity and you’re allowed to formally open for business.

Manage Your PLLC

There’s a lot to consider when deciding if a PLLC structure is right for your business, firm, or practice. There are many unique advantages that come with forming a PLLC, including enhanced protection aspects for its members. There may also be a few drawbacks that you’ll want to consider if you ever intend on relocating your business or if you’re heavily relying on funds from a lender. It’s best to speak with your potential partners before making any major business decisions.

For more resources on business compliance, check out Mosey’s other guides.

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