What Is a PLLC?
Starting a business can be an exhilarating journey for entrepreneurs. However, it's essential to understand the intricacies of business law to safeguard your startup. One of the decisions small business owners must make is choosing an entity type for their company. From sole proprietorships to corporations, the options can be overwhelming.
One type of legal entity that professionals consider is a professional limited liability company (PLLC). A PLLC is a business structure made for licensed professionals in specialized industries such as the medical or legal fields. This type of business structure allows professionals like doctors, lawyers, chiropractors, and real estate agents to have limited liability protection against debts, taxes, and judgments against the business.
This article provides a brief overview of professional limited liability companies.
We make business formation EASY. Learn about our DIY business formation services here.
- PLLCs are a type of business entity available for professionals.
- PLLCs and LLCs have different business structures.
- Members of a PLLC are not personally responsible for the business debts and business taxes of a PLLC or judgments against a PLLC.
A professional limited liability company (PLLC) is a business entity. This entity is designed for professionals like doctors, lawyers, accountants, architects, and therapists. These professionals offer services like medical services, legal services, and more. This entity type allows entrepreneurs to provide professional services. At the same time, they enjoy personal liability protection, like an LLC. This means if your PLLC faces legal challenges, your personal assets typically remain safe.
The following are advantages for PLLCs:
- Asset Protection: A PLLC shields personal assets from business debts. PLLCs also help shield the owners from legal actions against the company.
- Tax Flexibility: PLLCs generally offer pass-through taxation. This prevents double taxation faced by corporations.
- Professional Image: Operating as a PLLC can enhance a business's credibility. This makes clients and partners more confident in your professional services.
- Management Flexibility: Corporations require a board of directors and specific officer roles. PLLCs allow members to manage the company directly or choose managers.
Tax Benefits of PLLCs
One advantage of forming a PLLC is potential tax benefits. Typically, PLLCs don't pay income tax as an entity. Instead, the income and losses pass through to the owners. The owners then report them on their tax returns. This setup can be more straightforward than a C corporation or S-corp, for example. These corporations face double taxation.
While single-member PLLCs often file taxes similarly to sole proprietorships, multi-member PLLCs might file like a limited liability partnership (LLP). Always consult a CPA to understand your specific tax obligations.
Liability Under PLLCs
Understanding liability is crucial for small business owners. A primary advantage of a PLLC is the protection it offers against personal liability. In other words, members of PLLCs are not personally responsible for paying business debts or taxes that their PLLC may owe. Their personal assets, like homes and cars, typically remain shielded.
A PLLC is a separate business entity from the individual members of a PLLC. This means that if someone sues a PLLC, the business owner's personal assets are not used to satisfy a judgment. It also means that if the PLLC defaults on a loan, the individual members are not responsible for repaying the loan. The same is usually true for any business tax debt.
Yet, this protection isn't absolute. There are times when members of a PLLC will be personally responsible for business debts and business taxes. This is sometimes called "piercing the corporate veil." It occurs when business owners mix personal and business funds, forcing the court to treat the company and the owner as the same entity.
You can avoid this outcome by keeping diligent track of your financial records. You should also use generally accepted accounting practices, such as maintaining separate accounts.
Keep in mind that members of PLLCs are not protected against malpractice suits. They are also not protected from lawsuits that allege professional negligence. Even as a member of a PLLC, you will need to carry your own malpractice insurance in the event that you must defend malpractice claims.
Disadvantages of PLLCs
There are some limitations to PLLCs that you should be aware of. First, there are professional limitations. Only certain professionals may form a PLLC. This limits its applicability as a business entity.
Second, not all states recognize PLLCs. This can pose challenges for professionals who offer services across state lines.
Lastly, establishing and maintaining a PLLC can be costly. It can be more expensive than creating and maintaining a sole proprietorship, for example. This can be due to state fees and the need for ongoing services.
Many entrepreneurs often ask about the difference between a limited liability company (LLC) and a professional limited liability company (PLLC). At their core, both protect business owners from personal liability. The key difference between an LLC and a PLLC is that members of a PLLC must have a professional license. A PLLC is designed specifically for licensed professionals, such as CPAs or lawyers.
Some states have laws that do not allow professionals to form a regular LLC. Thus, individuals with professional licenses must form a PLLC to operate with limited liability protection in that state. On the other hand, an LLC is a flexible business structure. This can be used by any entrepreneur.
Forming a PLLC
Starting your PLLC involves several steps. First, choose a business name that adheres to state law. Make sure it is distinguishable from existing businesses. Often, the name must include “PLLC" or a similar identifier. Then, draft an operating agreement detailing how the PLLC will be managed.
You'll also need a registered agent, someone responsible for receiving legal documents on behalf of your PLLC. Ensure to file the necessary paperwork, often called articles of organization, with your state. Since PLLCs are for licensed professionals, you might need to have proof of licensure for each member. Lastly, remember to maintain compliance with the rules for maintaining your PLLC.
Maintaining a PLLC
Once a PLLC is established, it's not a “set it and forget it" scenario. Regular maintenance is essential for the continued protection and good standing of your legal entity. You might need to:
- Submit annual filings: Most states require PLLCs to submit an annual report. This keeps the state updated on essential business details and helps maintain the PLLC's active status.
- Renew your licenses: Depending on the professional service offered, members might need to periodically renew their professional licenses.
- Update your operating agreement: As the business grows or changes, updating the operating agreement ensures it remains relevant. It also helps ensure the agreement addresses the company's current needs.
- Hold regular meetings: It's good practice for PLLC members to meet and discuss business matters. This helps ensure transparency and effective decision-making.
- Get and Maintain Malpractice Insurance: It's essential to protect your company in case of lawsuits and other legal issues.
Seeking Further Guidance?
Navigating the waters of business law can be tricky. This is especially true for new business owners. Seeking legal advice from a business attorney can be invaluable. Whether it's understanding the differences between bylaws and an operating agreement or deciding between a professional corporation or PLLC, a knowledgeable attorney can help guide you. They can assist with drafting legal documents and helping your business remain compliant.
If you're a licensed professional seeking help setting up your PLLC, consider using a service like FindLaw to get in touch with a business attorney today.
You Don’t Have To Solve This on Your Own – Get a Lawyer’s Help
Meeting with a lawyer can help you understand your options and how to best protect your rights. Visit our attorney directory to find a lawyer near you who can help.