There is more than one difference between a PLLC vs LLC. If you are a licensed plumber or carpenter and you already have an LLC, there’s no need to transform it into a professional limited liability company immediately. In fact, only three states require licensed professionals to form a PLLC.
In California, however, licensed professionals like doctors, lawyers, and chiropractors are not allowed to form LLCs or PLLCs. They should set up registered limited liability partnerships (RLLPs) or professional corporations (PCs), instead.
Limited Liability Company
First, let’s shed some light on what a limited liability company (LLC) is and what degree of liability protection this business structure offers. An LLC is a legal entity that provides business owners with a greater level of asset protection than a sole proprietorship if a customer files a lawsuit against the company.
LLC registrations are approved by the secretary of state instead of the federal government. Like corporations, members, or there can be only one member, the business owner, the case is with sole proprietorships.
What Is a PLLC?
This is a subcategory of the LLC that operates based on specific regulations. PLLCs are necessary for a fairly wide variety of professions, but the list may vary by state. In a PLLC, business owners can take advantage of pass-through taxation, just like in an LLC. Any of the two business types allows certain flexibility regarding management responsibilities and organization of the business.
What is a Professional Service Corporation?
Professional corporations pay taxes at a fixed corporate rate that varies every year. It is now fixed at 21%. They can lower this expense through deductions for life and health insurance. Also, a PLLC’s income passes through to the owners’ personal tax returns, so business owners seldom pay personal income tax.
Keep in mind that a professional corporation offers less asset protection than an LLC or PLLC. Any creditor that files a lawsuit against a professional corporation can eventually be granted control over its shares. By contrast, PLLCs don’t have shareholders, so creditors can only pursue the debtor’s net income from the company, but not their personal assets.
Forming a Professional LLC
In order to form a professional limited liability company you have to file an application to the state licensing board and the State Secretary. First, you have to find an available business name for your practice.
To do this, you can use the business name search service of ZenBusiness. It’s included in their Basic package along with a free registered agent service for just $39 a year. Next, you have to have the Articles of Organization of your PLLC approved by your state’s Licensing Board.
The Board may have different requirements for medical doctors, lawyers, or chiropractors. In most states, you’ll have to provide proof that every member of the business holds a valid license allowing him to practice their professional services in that state. Professional limited liability companies have to have their Articles of Organization signed by at least one licensed professional.
After you get the approval of the Licensing Board, you will need to file your Articles of Organization and any other formation documents required by your Secretary of State’s Office.
Forming an LLC
You should first decide where you’d like to form an LLC and check the local state law. You should then choose a name for your business that is available for registration. As a third step, you should choose a registered agent service.
Many LLC formation companies like ZenBusiness offer a free registered agent with their formation packages. The attorneys of the LLC formation company will also prepare the Articles of Organization of your LLC. While a PLLC must register with the state’s licensing board, there’s no such requirement for LLCs.
Next, the formation service files your formation documents with the Secretary Of State. Filing times range from seven to two or three business days, depending on the package you’ve selected.
Having established your limited liability company, you must apply to the Internal Revenue Service (IRS) for an employer identification number (EIN). You are going to need an EIN to open a business bank account for your LLC, as well as file income and employment tax returns.
With your company’s EIN, you should go to the bank and open a business bank account. If your LLC is going to operate in other states, you should also apply for foreign qualification.
How are LLCs taxed?
Depending on elections made in the operating agreement of the LLC, the IRS taxes the LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”).
As a rule, a U.S.-formed LLC with at least two members is classified as a partnership. However, the members of the LLC can file Form 8832 and request the IRS to tax their business structure as a corporation.
For income tax purposes, an LLC with a single member is treated as “an entity disregarded as separate from its owner”. However, the business owner can file Form 8832 and elects to be treated as a corporation. Regarding the employment tax in the different states, an LLC with a single member is considered a separate business entity.
How are Professional LLCs taxed?
When it comes to paying taxes, PLLCs are subject to the same taxation requirements as LLCs, depending on the number of members. A Professional LLC with only one member can pay taxes as a sole proprietorship, while a PLLC with multiple members pays taxes as a partnership, C corporation, or S corporation. If you choose the last two taxing options, your PLLC will be subject to a corporate income tax as well.
LLC vs PLLC: Similarities
LLCs and PLLCs share the same formation procedure, business structure, and obey the same tax laws and regulations. They share the following key similarities:
- LLCs and PLLCsare formed by filing Articles of Organization with the Secretary of State.
- Both businesses offer limited liability protection to their owners and members.
- PLLCs and LLCs can be taxed as pass-through entities.
- Both businesses allow their members to choose how the business shall be taxed.
- Both business structures are very flexible regarding their organization and taxation.
Flexible contribution and distribution
Because the different members of an LLC or PLLC may contribute different amounts of time and money to the business, you probably don’t want to distribute profits equally among them. Both business structures allow you to specify how distributions and profit allocations will be set up. The specific distributions can reflect the different levels of owner participation.
LLC vs PLLC: Differences
While LLC and a PLLC have a lot in common, there are some important distinctions to keep in mind. The crucial difference between a PLLC and an LLC is that when forming a PLLC, most states require some proof of professional licensing before they can approve the articles of the organization.
Another difference between a PLLC and an LLC is in the scope of limited liability protection regarding malpractice. A PLLC does not shield its members from malpractice claims resulting from their own actions, but only from malpractice claims resulting from the actions of other company members.
For example, if you’re an attorney in a legal PLLC and a client files a claim against another attorney in the PLLC questioning the quality of their professional service, your personal assets remain protected. Only the finances of the business, including the percentage you own, will be at risk. However, PLLC members have to have a valid malpractice insurance policy to cover claims made against them.
Personal guarantees
Because of the increased risks associated with PLLCs, banks may ask for a personal guarantee in order to lend money to the business practice. This means all PPLC members are personally liable for any business debts they have guaranteed.
LLC or PLC: Which is the right business type for me?
Because real estate agents need different licenses in the different states to practice their profession, they should form PLLCs. Even if you are just starting your small business, I do not recommend sole proprietorship as a business structure.
It may be a lot cheaper to set up than a limited liability company, but a sole proprietorship offers zero asset protection. You’d better form an LLC from the onset and enjoy the advantages of personal liability. If you have business partners, you can make them LLC members.
A professional LLC is the right business structure for you if you offer services as a licensed professional. As licensed professionals, all PLLC members must sign the filing documents of the company and include certified copies of their professional licenses.
You must also submit the formation documents to the licensing board in your state before filing them with the Secretary of State. So, the process of forming a PLLC takes longer than a standard LLC. This is yet another key difference between an LLC and a PLLC.
LLC vs PLLC: Bottom Line
In conclusion, you can use an LLC service like ZenBusiness to prepare all the formation documents shared by PLLCs and LLCs and only submit the specific licenses yourself.