Starting a business is exciting, but sometimes choosing the right business structure can be difficult. The first challenge you’ll face is deciding what type of business structure is right for you. If so, should it be a sole proprietorship, a corporation, or another form? Understanding the different business structures will best protect you and your business for years to come. However, today we’re going to talk about one specific business structure, and that’s the Professional Limited Liability Company, or PLLC. It’s a special form of business formation for licensed professionals, e.g., physicians, lawyers, therapists, accountants, or anyone who is a licensed specialist in a particular field. A PLLC offers some benefits and protections that can help make business operations easier and safer. Let’s learn what a PLLC is, how it works, and why it might be right for you as a licensed professional.
What is PLLC?
The PLLC structure is quite similar to traditional LLCs, but this business structure is limited to licensed professionals. If you are a physician, attorney, chiropractor, psychotherapist, or other licensed professional, a PLLC may be a good option for you. This business structure allows you to run your business while protecting your personal assets (like your home, savings, or car) from business debts or lawsuits. At the same time, it keeps things flexible and easier to manage than a corporation.
In short, your PLLC is not your personal liability, and your personal assets won’t be affected if it gets sued or cannot pay its debts. You’re only responsible for what is in the business. This is a huge relief for many professionals who want to protect what they have worked hard for.
However, if you’re accused of malpractice or professional negligence (like making a serious mistake in your work), a PLLC won’t protect you. You’ll need malpractice insurance for that.
Why Should You Consider a PLLC?
There are several good reasons to choose a PLLC if you’re in a licensed profession. Here are the main benefits:
- Protect Your Personal Assets: In this business form, your personal property is completely separate from your business. That means if your business is sued or bankrupt for any reason, your personal property will be protected. This is why this type of business uses the term “limited liability” at the end of its name. This is one of the biggest reasons why many professionals select PLLCs.
- Tax Flexibility: Similar to an LLC, a PLLC offers pass-through taxation, which allows you to avoid “double taxation.” This means that some business structures, such as a C corporation, pay taxes on their profits, and then when the after-tax dividends are distributed to the owners, those owners also have to pay taxes on the dividends they receive. This is called “double taxation.” With a PLLC, business profits or losses are reported on the owners’ personal tax returns, but you don’t have to pay separate taxes on the company’s profits, which helps you avoid paying taxes twice.
- Professional Credibility: Having a well-managed business structure like PLLC can make your professional image more credible. Clients often feel more comfortable working with someone who has a certain business structure.
- Management Flexibility: A PLLC doesn’t need a board of directors like a corporation. It’s much easier to manage. You or your partners can manage it directly, or you can hire a manager to help.
How Does a PLLC Work?
A PLLC works a lot like an LLC. It’s a separate legal entity from you as the owner. That means if something happens to the business—like a lawsuit—your personal assets won’t be on the line. But there are a few things to keep in mind.
First, you’re still responsible for any professional mistakes you make, such as malpractice. For instance, if you’re a lawyer and someone sues you for giving bad legal advice, having a PLLC won’t protect you from that. You’ll need malpractice insurance for that kind of thing.
Second, to set up a PLLC, you’ll need to be licensed in your field. Not just anyone can create one. For example, a lawyer needs to pass the bar exam and keep up with their license to run a PLLC.
Differences Between an LLC and a PLLC
Both provide personal liability protection, but a PLLC is for licensed professionals only. Some states even require professionals to form a PLLC instead of an LLC if they want that liability protection. So, if you’re a licensed professional, the choice is usually clear: go with a PLLC.
However, one can also form an LLC without any qualifications. It is an excellent choice for small business owners who do not require a special license to operate, such as freelancers, consultants, or retail shop owners.
Are There Any Downsides to a PLLC?
While PLLCs have a lot of advantages, they’re not perfect for everyone. Here are some things to consider before starting one:
- Limited to Certain Professions: Not everyone can form a PLLC. It’s only for licensed professionals, such as physicians, lawyers, accountants, architects, and so on. If you’re in a different field, you’ll need to look at other business structures.
- Costs and Maintenance: A PLLC may be more expensive to establish and maintain compared to a sole proprietorship or partnership. You’ll need to file paperwork, pay state fees, and keep your business license up to date.
- State Laws: Not all states allow PLLCs, and some have different rules about them. If you work across state lines, this could become complex. You might need to register your PLLC in multiple states, and that can add additional costs.
How to Set Up a PLLC
Setting up a PLLC is pretty simple, here are the basic steps you’ll need to follow:
- Pick a Name: Make sure your business name follows state rules and doesn’t copy another company’s name. Most states require you to include “PLLC” or a similar tag in the name.
- Draft an Operating Agreement: This document outlines how you will operate your PLLC. It is not always mandated by law, but it is of great value to have a written document, particularly if your PLLC has multiple members.
- Choose a Registered Agent: A registered agent is a person who will receive legal documents for your company. You can be your own agent, but many people hire a company to do this for them.
- File Articles of Organization: When forming a professional limited liability company (PLLC), it’s important to file articles of organization. It’s a legal requirement to officially launch your PLLC with the state, unlike an operating agreement, which is optional in most places. The articles contain essential information about the business, such as its name, address, purpose, registered agent, and the names of members and managers.
- Get a License: Since PLLCs are for licensed professionals, you’ll need to submit proof of your professional license during your application. This could be your medical license, your law license, or anything relevant to your field.
- Stay Compliant: As your PLLC is formed, don’t forget to file annual reports, license renewals, and all other state reporting requirements to keep your business in good standing.
Tax Benefits
Tax flexibility is one key advantage of a PLLC. Most PLLCs are exempt from paying business income tax directly. Instead, profits (or losses) “pass through” to the owners and are reported in their personal tax returns, similar to how an LLC does.
If you’re the only owner of your PLLC, you’ll probably file taxes just like a sole proprietorship. If there are multiple partners you can file as a partnership. Either way, it’s a good idea to check with a tax professional to make sure you’re doing everything right.
Liability and Malpractice Protection
A big reason professionals choose a PLLC is for liability protection. If your PLLC runs into financial trouble or gets sued, your personal assets are usually safe. But this protection only goes so far.
If you make a mistake in your work—like a doctor who’s sued for malpractice or a lawyer who mishandles a case—you can still be held personally responsible. That’s why it’s important to have malpractice insurance in addition to forming a PLLC.
Also, be aware not to mix your personal and business finances. And if a court finds that you’ve treated your business and personal accounts as the same, they may hold you personally liable for business debts. This is also known as piercing the corporate veil, and one should stay away from it.
How Do You Keep a PLLC in Good Standing?
After forming your PLLC, you’ll need to do a few things to keep everything in good standing:
- File Annual Reports: In most states, you are mandated to file an annual report that will demonstrate your current business updates. This helps keep your PLLC active.
- Renew Your License: Since a PLLC is for licensed professionals, make sure you renew your license regularly to stay compliant.
- Keep Your Financials Separate: To maintain your personal liability, don’t mix your personal and business finances. Open a separate business account and keep good records.
- Update Your Operating Agreement: As your business grows or changes, you may need to update your operating agreement to reflect changes in how things will be managed. An up-to-date operating agreement can prevent headaches later on.
- Carry Insurance: Even with a PLLC, you’re not off the hook for professional negligence. Make sure you have good malpractice or liability insurance in case a client sues you for a mistake.
Do You Need Help?
Starting a PLLC can feel like a lot, especially when you’re juggling licensing, paperwork, and day-to-day business tasks. If you’re unsure about any part of the process, it might be worth talking to an experienced business attorney. They may assist with paperwork, answering questions, and ensuring that it is all set up properly.
Ready to Form a PLLC?
If you’re a licensed professional and want to protect your personal assets, a PLLC could be the right choice for you. It offers the liability protection of an LLC while keeping things simple on the tax front. Just make sure that you comply with the rules, maintain clean records, make sure that you have the appropriate insurance coverage.
Starting a business poses many decisions, and choosing the right business structure is one of them. A PLLC can provide the peace of mind you seek to be able to focus on what you are good at—your career.
