At first glance, there is barely any difference between an LLC and a PLLC. And there is some truth in that, with both business types boasting similar liability insurances and freedom of operation. But when it comes to their respective purposes, the two show major distinctions.
Where the limited liability company (LLC) is more generalized, accepting almost any individual into an ownership group, the more confined nature of the professional limited liability company (PLLC) is restricted to specialists with valid professional licensed.
The choice of either of these structures depends on your field of expertise and the regulations that your state may impose on the members of your occupation, including nurses, physicians, lawyers, and many others.
So how do you determine the optimal structure for your business? Will you and your co-owners require state licensing based on the goods and services you provide? And are there any major differences in the PLLC and LLC formation and maintenance?
Let’s take a closer look at each of these structures, their similarities, differences, formation guidelines, and more.
What Is an LLC?
As a business structure, the limited liability company (LLC) is incredibly flexible both in terms of maintenance and organization. Taking the best features from incorporated structures and more “informal” entities like sole proprietorships or general partnerships, the LLC model finds an excellent balance between business convention and innovation.
Limited liability protection is naturally the main point of attraction of this business model. The concept of the so-called corporate veil is fairly simple: it separates the company assets from the personal ones.
Not only does it offer personal asset protection, but the owners as individuals are clearly isolated from the personality—or the brand if you will—of the company itself. What does the separation of assets mean for the ownership group?
For one, if your LLC faces a lawsuit and loses the case, your personal possessions (property, valuables, real estate) cannot be seized as a result. In other words, the creditors can only pursue your company assets and won’t touch your belongings or savings.
Another point of interest is LLC’s flexible taxation. Much like partnerships or sole proprietorships, LLCs are pass-throughs exempt from federal income tax.
This default status means that as an LLC owner, you will be filing the company’s earnings and losses on your personal tax return. And unlike with other business models, you can actually elect the preferred tax structure for your LLC.
So if your company’s operations would benefit more from a corporate tax structure, you can choose for the LLC to be taxed as a corporation in the early stages of the formation process.
Keep in mind that C-corporations are subject to double taxation, while S-corporations are exempt from federal income tax and can be considered flow-throughs.
What Is a Professional LLC?
A Professional Limited Liability Company (PLLC) is technically classified as an LLC subtype. Unlike regular LLCs, this structure is designed to be operated by licensed specialists of a specific professional niche and is therefore regulated based on the type of service it provides.
The PLLC format varies depending on the state of formation, with some states allowing only certain licensed professionals to create such an entity. More information about permissible types for licenced professionals can be found on the Secretary of State website for your area.
Professions that must form a PLLC (if the said specialists plan to work together to provide the same service) include:
- Medical doctors
- Psychologists and therapists
If you are licensed in any of the aforementioned occupations, some states might give you an option to choose between two possible formal business structures: a professional LLC or a professional corporation (not to be confused with a personal service corporation or PSC).
Although both share certain similarities, they also diverge in two major points: tax structure and liability insurance.
A professional corporation (PC) is an incorporated entity that differs from a regular corporation in the narrower scope of its limited liability protections.
A PC only ensures personal asset protection against debt collection litigations but does not protect individual company shares.
PLLCs, on the other hand, do not rely on shareholding like corporations do and can therefore shield your personal assets in the event the company itself is being sued.
Remember that neither PCs nor PLLCs protect the owners from personal malpractice and professional negligence lawsuits.
A PC can elect to be taxed as a C-corp or S-corp but not as a general partnership.
C-corp taxation means that each owner, being their own employee, is required to pay the FICA payroll tax instead of the self-employment tax. The flat rate for this tax is currently 21%.
S-corp taxation is more lenient, with all business profits and losses going through the shareholders’ tax returns.
PLLC tax structure is congruent with the LLC model. The owners are exempt from the FICA tax and file all revenue and losses in their personal returns without the preceding federal income tax deduction.
How Are the PLLC and LLC Similar?
As already mentioned, LLCs and PLLCs have a lot in common when it comes to the framework behind their respective structures.
Regardless of the occupation or industry of your intended operations, both business models will irrevocably offer the following benefits:
- Personal Asset Protection: both LLCs and PLLCs offer liability insurances against net debt lawsuits brought against the company’s assets;
- Taxation: the two structures show great flexibility in terms of taxation due to their default classification as pass-throughs or flow-throughs that exempt the owners from federal income tax; you can still select C-corporation or S-corporation taxation method, but keep in mind that the C-corp model is taxed twice;
- Management: in both cases, you are allowed to choose your operational structure, meaning the company can be managed by its ownership group or by managers; outsourcing staff is common practice with larger entities, but the preferred managerial structure has to be selected during the formation;
- Flexible Contributions and Distributions: most of the time, the responsibilities are not distributed equally in a typical professional setting, LLCs and PLLCs included; fortunately these two business models stipulate for profit allocation based on individual participation.
To debrief, the popularity of LLCs and PLLCs comes from the organizational flexibility they both offer, from interior structuring and customization to financial insurances that provide more stability as a whole.
How Are the PLLC and LLC Different?
Despite their strong comparability, the two are not interchangeable. The main discrepancy between the two is the strictly professional focus of the PLLC model, but there are a few other distinctions to pay attention to, including:
- Formation: as a rule, the professional structure of a PLLC allows only licensed professionals to enter the ownership group, though some states have more relaxed admission rules permitting only half of the members to be licensed in the primary field of the entity’s operation; so if, say, four attorneys want to form a PLLC, either all of them at least half will be required to submit proof of license as issued by the state’s respective licensing board; in contrast, owners and/or members of an LLC can be professionals in different fields and don’t have to provide any proof of licensure;
- Limited Liability: although both business types ensure the protection of your private assets in the event of business debt lawsuits, PLLC cannot legally protect its individual owners from malpractice suits.
These differences may render one of the structures ill-matched for your particular case, so examine each option closely before making the final decision.
How Do I Form a PLLC or LLC?
The formation processes for both business types are fairly similar with some, discounting a few minor steps here and there. Doesn’t really matter if you plan to form an LLC or PLLC, the three main methods to go about it remain the same:
- hiring an attorney;
- hiring a formation service;
- electing a DIY route.
Regardless of the method, the formation requires you to draft and file the Articles of Organization that basically register the company with the state.
This is a fairly straightforward piece of documentation that states the company’s name and address, outlines its structure and type of operations, projects business goals, and supplies registered agent information.
When submitting the articles, you will likely be asked to pay a state fee. This formation fee is not universal and determined by each state individually, ranging from $40 (Kentucky) to $500 (Massachusetts).
Some entrepreneurs choose to contract a business attorney to oversee the formation process and keep all documentation in check. Professional lawyers tend to be rather costly, forcing many small business owners to hire a formation service instead that can form a PLLC or LLC for a lower rate.
Choosing the DIY method is guaranteed to save you money, but the other two options can give you much-needed peace of mind as well as give you more time to manage other aspects of your business.
Note: If you think about hiring a formation service, the offers from IncFile and Northwest Registered Agent could be worth your consideration, given their status as one of the top leading companies in the formation industry. For more information, check out our side-by-side comparison of the two.
As evidence shows, LLC and PLLC structures show a significant correlation in many defining aspects. But their differences, although far from numerous, are all the more crucial.
The key determinant in choosing between the two actually lies with the nature of your business. If you plan to work in a specific field with other professionals that hold identical licenses, your best option would be a PLLC.
But if your company is structurally divergent, with the owners practising in different occupational fields, then a standard LLC would suit you just fine.
And even though individual circumstances usually come with their own issues, the general experience with both PLLC and LLC is the greater structural personalization. The two also give you certain managerial flexibility and a less stringent tax structure.