What is a PLLC - Professional Limited Liability Company?
What is a PLLC (Professional Limited Liability Company)?
A PLLC is a specific type of limited liability company (LLC) called a professional LLC. A PLLC is formed and functions in the same way as a general limited liability company (LLC.)
A limited liability company is a business type for single-owner or multiple-owner businesses. An LLC works like a partnership, but it has the liability protection of a corporation. For tax purposes, an LLC is taxed like a sole proprietorship (for a one-owner LLC) or a partnership (for a multiple-owner LLC).
Professions That Can Form a PLLC
Some states do not allow certain types of professionals to form an LLC but instead allows them to form a PLLC. The members of the PLLC must be members of a specific profession which requires a license (CPA, attorney, chiropractor, or architect, for example). PLLCs are set up in specific states and the states laws regulate the PLLC.
State law designates which professions can form an LLC and restricts the membership of the PLLC to members of that profession. California law does not allow an LLC to be formed to provide professional services.
How a PLLC is Formed
Forming a PLLC is a two-step process. First, A PLLC is formed in the same way as a PLLC, by filing Articles of Organization with a state. The state will require that the license status of the owners be verified before the PLLC filing is approved. In addition, many states require a specific business name with "PLLC" in the name so that the company is clearly identified as a PLLC.
The second step is a review by your state licensing board. Before your PLLC can be approved, the state licensing board for your profession must approve the Articles of Organization. For example, a CPA firm wanting to become a PLLC must submit its Articles of Organization to the accounting licensing board for review.
The PLLC and Liabilities
Many professionals start a PLLC because they want to separate their individual liability from their liability as a member of the business. For example, if one physician is sued for malpractice, the other physicians don't also want to be sued. Forming a PLLC will protect owners from the malpractice liability of other owners. For general business liabilities and debts of the business, the owners are typically protected from liability because the LLC is a separate entity. But this is not always the case, and you should consult your attorney if you are concerned about professional liability.
How PLLCs pay Income Taxes
PLLCs pay income taxes in the same way as LLCs, depending on the number of members. A PLLC with one member pays taxes as a sole proprietorship; a PLLC with multiple members pays taxes as a partnership. LLCs pay income taxes by passing on the net income or loss of the LLC to its members. The members then pay the tax on their share of the profits or losses (called a distributive share) as part of their personal tax return.
A PLLC Compared to an LLC
As mentioned above, a PLLC is formed by a state in the same way as an LLC and the PLLC and LLC function the same way, with owners called "members" and an operating agreement that governs how the members work together and divide profits and losses. The difference is in the requirement that members of the PLLC be designated professionals.
A PLLC Compared to a PC (Professional Corporation)
PLLCs and PCs are similar in the respect that only professionals may be owners. States have similar requirements for both types of business entities, including verification of the licenses of the business owners and state limits on what types of professionals may form a PLLC or PC.
The PLLC and PC differ in business type and taxes. A PC is formed as a corporation, the corporation is taxed at the corporate rate, and the owners are taxed on dividends received.