What is a PLLC (Professional Limited Liability Company)
A Professional Limited Liability Company (PLLC) is a type of Limited Liability Company that is operated and owned by the people who comprise the PLLC.
These people are called members who are of the same profession such as lawyers, accounts or doctors and can only offer services that are related to their licensed profession.
A Professional Limited Liability Company is considered an actual business entity and one of the things it can do that makes it appealing for professionals, is to offer tax benefits in addition to limited liability.
Although similar to a Limited Liability Company (LLC), a PLLC cannot provide as much liability protection as a standard Limited Liability Company.
Professional Liability Companies also cannot offer as many services as an LLC, only being able to provide a limited amount of services within the same business.
There are cases when certain states do not acknowledge or even recognize Professional Limited Liability Companies while in other cases, a Professional Limited Liability Company is the sole option for a group of professionals who would like to establish a business entity that grants them limits on liabilities within their area of operation.
Who Can Form a PLLC?
There are two scenarios that make up the forming of a Professional Limited Liability Company which will differ depending on where it is registered in.
It is either all owners of a PLLC are licensed or, at least one owner is.
Owners of a Professional Limited Liability Company are more commonly known as members.
Some states require all members of a budding PLLC to have a license and have each member be of the same profession.
Other states only require at least one member of a budding PLLC to have a license.
In the states where it is required to have every member in a PLLC be a licensed professional, the members have the option to hire employees to operate or help run their business for them however, only licensed professionals can legally own the business under a PLLC.
To be considered as a licensed professional in formally establishing a Professional Limited Liability Company, all the credentials required by the state to practice your profession must be met.
These required credentials to practice might differ from state to state so it is best to check in with the state where you are planning to form your business.
“Professional” is an umbrella term for a number of works that mandate its practitioners to have a state license that allows them to offer their respective services.
The Professional Limited Liability Company statutes of your presiding state will list the professionals that can establish a PLLC.
The most common occupations that are eligible to establish a Professional Limited Liability Company are:
- Real estate agents
- Social workers
If your current profession does not fall under the Professional Limited Liability Company Statutes of your presiding state, you will not be able to establish a business entity as a Professional Limited Liability Company.
Restriction on Combining Services
In most cases, many states do not allow owners or members of a Professional Limited Liability Company to have more than one type of service provided under the same business whether professional or not.
Though this prohibition exists, there are instances of a few exceptions.
In the event that a dentistry has been established under a Professional Limited Liability Corporation, it is prohibited for that same dentistry to offer services that cater to graphic designing for example.
If this dentistry does decide to offer graphic designing, the state will recognize the graphic design services offered by the dentistry as a completely separate business.
Considered now as a separate business, the graphic design services must report and file its income and expenses separately from the established dentistry Professional Limited Liability Company and as a non-PLLC, there will be no liability protection granted.
There are certain instances that lift the restriction on combining services. In fact, almost every state allows an exception to this rule especially for businesses in the medical field.
An example of this is when a physician’s Professional Limited Liability Company has a pharmacy under the same PLLC that hosts its medical practice.
Finding out what services can be legally combined under a Professional Limited Liability Company can be done through referring to your presiding state’s statutes for Professional Limited Liability Companies.
Limited Liability: Not for Your Own Malpractice
Qualified professionals form Professional Limited Liability Companies because it provides them with limited liability.
Limited liability means that if anyone sues the company or the business has some sort of financial obligation such as a debt, the owners or members are not personally responsible to handle the court case or settle financial obligations like the company’s debt.
Despite the granted limited liability, members of a Professional Limited Liability Company are still personally liable for malpractices that they commit under their practice which is also known as professional negligence.
Professional negligence is a malpractice that a PLLC cannot protect its members from.
A malpractice happens when a professional does not meet professional standards when conducting their practice or providing their services such as when an accountant mishandles a client’s records or money.
If a member of a Professional Limited Liability Company is sued for professional negligence or professional misconduct, the Professional Limited Liability Company cannot provide limited liability protection which would result to the personal assets of the member being sued to be put on stake; the member’s assets will be used to reimburse, settle damages and overall satisfy the malpractice judgement placed against the member.
It is for this reason that several professionals opt to obtain coverage from malpractice insurance.
In spite of its limitations, the Professional Limited Liability Company is still a business entity that is worth a professional’s while to establish.
A Professional Limited Liability Company provides other forms of protection from liabilities. If a professional is with another fellow professional in a Professional Limited Liability Company and that fellow professional is sued for negligence or misconduct then the former professional cannot be held personally liable for his fellow professional’s malpractice as opposed to the scenario if both professionals were in a partnership.
In a partnership, professionals who own the partnership will be personally liable for the malpractices of their partner.
The Professional Limited Liability Company is also a barrier of personal asset protection against the liabilities of business debts and obligations such as the problems that may arise from a vendor contract or an office lease or even an accident or injury at the office.
Tax Benefits of a Professional Limited Liability Company
A Professional Limited Liability Company is recognized as a pass through entity.
A pass through entity is a business that is not obliged to pay for corporate tax.
What ends up happening in a PLLC is that its members have to report their share of the company’s profits on their personal tax returns and from there, they have to pay tax accordingly.
Profits earned from the business under a Professional Limited Liability Company will go directly to the PLLC’s members.
On the other hand, in a C Corporation the profits are taxed corporate tax and after the net profit is distributed, the owners are also obliged to pay taxes again on the same income that had already paid corporate tax but this time, they will need to declare it on their personal tax returns.
Professional Limited Liability Company owners are entitled to a 20% pass through deduction.
These 20% deductions that PLLC owners benefit from provides each member of the PLLC a deductible up to 20% from qualified business income on the member’s personal taxes.
There are tax regulations in place that need to be noted.
Tax regulations limit deductions for a number of professionals who have annual taxable income over $160,000.
Professionals who have incomes over the aforementioned threshold would find consulting with an accountant or with a tax attorney to be useful.
How to Form a Professional Limited Liability Company
Different states and different qualified professionals will need to produce different documents and go through different processes.
Checking in with your state on the statutes of establishing a Professional Liability Company will be beneficial.
If you aren’t sure where to begin, a formation service can setup your PLLC for you.
Although forming a PLLC will vary on a case to case basis, the basic requirements are the following:
Forming a Professional Limited Liability Company starts with obtaining a state license from the respective licensing agency of your profession such as obtaining a Certified Public Account (CPA) license for accounts or admission to the state bar for attorneys.
Approval from the state licensing board
There are states that have professional licensing agencies and laws that mandate to furnish written approval from the profession’s licensing board before the Professional Limited Liability Company formation paperwork can be filed.
When it is required, a written approval will have to be included with the budding PLLC’s formation documents.
Business names for Private Limited Liability Companies can only be selected when it complies with the state’s laws.
In most cases, states will require owners to include “Professional Limited Liability Company”, “PLLC” or any other abbreviation equivalent to denoting the nature of the business under a PLLC.
There are states that mandate the inclusion of at least one member’s last name in the registered business name.
Formation documents will need to be filed with the presiding Secretary of State.
It is through formation documents that a state is informed of the plan to establish and run a Professional Limited Liability Company.
Filing fees will need to be paid as part of submitting formation documents.
There are states that refer to formation documents as articles of organization or a certificate of formation.
Once the formation documents are filed, the Professional Limited Liability Company is now legally considered as an existing business entity.
Operating agreements will need to be drafted.
Operating agreements are an internal document as they are not filed to the state or any external presiding agency or body.
Instead, the operating agreement works as a comprehensive governing body that is implemented within the organization.
The operating agreement details how disputes will be settled, how members are expected to relate to one another and how the business will be managed with the corresponding splitting of profits.