For many new businesses, a limited liability company (also called an LLC) is a popular entity type.
And it’s no surprise because the LLC offers the flexibility of a partnership with the limited liability protection of a corporation ― truly the best of both worlds for many entrepreneurs.
If you’ve done any research on LLCs, then you’ve probably encountered the term “professional limited liability company.” The PLLC isn’t just another name for an LLC, though ― it’s a completely different entity type. While the professions that use PLLCs vary a bit from state to state, they’re typically owned and operated by specialists, like doctors, lawyers, accountants, etc. However, the PLLC is only available in just over half of all states.
In this guide, we’ll give you the scoop on what a professional LLC is and how you can form one yourself.
Select a state below to form a professional LLC in your state. Alternatively, you can hire an LLC formation service (like LegalZoom) to take care of the paperwork.
What Is a Professional LLC (PLLC)?
Simply put, a professional LLC is a specialized type of limited liability company, which is specifically designed to meet the business needs of certain licensed professions. These professions vary from one state to another, but they usually include attorneys, doctors, engineers, chiropractors, accountants, and other licensed professionals.
The PLLC shares a great deal in common with the regular LLC, including the pass-through taxation model. Most PLLCs (except for those that elect to be taxed as corporations) pay partnership-style taxes in which there is no tax paid on the corporate level, and instead all profits “pass through” the business itself to be claimed on the members’ tax returns.
Not all states allow for the formation of professional LLCs, as some states like California require you to form a professional corporation instead. That’s why it’s important to check your state’s regulations before you file any forms to create a PLLC.
How Does Liability Work in a Professional LLC?
On the surface, the professional LLC and a standard LLC look the same, and when things are going well, the two types are nearly identical. But there’s a key difference in the way these two business entities are treated on a legal basis. In other words, when something goes wrong, that’s when the distinction kicks in.
A standard LLC offers complete personal asset protection. Basically, this means that the individual members of the LLC cannot be sued for something the business did. So, if the business caused an injury or the LLC defaults on a debt, the owners of the business can’t be expected to pay.
Only the business itself can be sued unless the LLC members committed fraud or failed to maintain the business according to state guidelines.
A professional LLC works a little differently. The members still have some personal liability protection, but a PLLC does not protect its members from malpractice lawsuits.
For example, if a doctor in an urgent care clinic structured as a PLLC gives a misdiagnosis, that doctor can be sued accordingly. Thankfully, each member can only be sued for malpractice they cause, while the other members are shielded from having to share in the responsibility.
This makes a professional LLC very different from a partnership ― in a partnership, all partners are liable for the mistakes of other partners.
That said, if an issue occurs that isn’t related to malpractice — like a debt or a missed rent payment — the professional LLC acts like any other LLC. In these situations, the members’ personal liability is protected by the PLLC’s corporate veil. The same goes for common liability issues facing all businesses with physical locations, like slip-and-fall accidents.
Pros and Cons of a Professional LLC
The PLLC has some pretty clear-cut advantages and disadvantages for entrepreneurs. Let’s take a look and see if any of them move the needle one way or the other for you.
- Fewer formalities and paperwork: Compared to PLLCs, professional corporations are legally required to maintain a heap of paperwork, including bylaws, minutes from shareholder and director meetings, business ledgers, and much more.
The formalities required are often considered to be a hassle, and that’s without even mentioning the incorporation process itself, which requires far more time and effort than forming a PLLC.
Luckily, PLLCs do not have to worry about these requirements. A PLLC does need to maintain some business records, but not to the same extent. Any meetings are held at the discretion of the members, whereas corporations must have meetings for both shareholders and the board of directors.
- Personal asset protection: The PLLC receives limited liability protection for its owners. Much like a typical LLC, the PLLC protects its owners from common liability issues. For example, if a customer slips on a wet spot on your floor and injures themselves, they could sue your business for damages. If they do, your PLLC owners’ liability will be limited to their investments in the business itself, while their personal assets are protected by the PLLC’s “corporate veil.”
- Insulated from malpractice suits: While the PLLC’s owners all share the entity’s personal asset protection, they do not share liability for malpractice suits. For instance, let’s say you own a PLLC for physicians, and one of your co-owners botches a surgery. If the patient files a malpractice suit for the damages, only the owner who performed the surgery will be liable for the lawsuit, while the other PLLC owners have no liability whatsoever.
- Flexible business structure: The PLLC is a much less rigid and formal business entity than the professional corporation. The PLLC is allowed to choose its own managerial structure, while a PC must adhere to strict requirements that involve clearly defined roles for directors, officers, and shareholders. In addition, PLLCs have some options for taxation that PCs don’t. A PLLC can be taxed like a general partnership, C corporation, or S corporation, depending on what’s best for your business. Meanwhile, a professional corporation will have at most two choices for taxation, and often just one.
- Difficult to attract outside investments: The PLLC is allowed to raise capital through investments but it’s not nearly as common as it is for professional corporations. A PC can issue stock to easily transfer ownership, while a PLLC will need to jump through some hoops to add a member. Also, venture capitalists almost never invest in PLLCs because they’re not appealing investment vehicles at all. So, if you’re interested in attracting VC funding, you might want to look at a PC instead of a PLLC.
- Self-employment taxes: Just like a typical LLC, a PLLC’s members are considered self-employed and must pay self-employment taxes. This means they’re subject to the 15.3% self-employment tax rate, which includes both the employer and employee portions of Medicare and Social Security. By contrast, corporation owners are not legally viewed as self-employed people and are therefore exempt from paying this tax.
- Legalities are not well-defined: First off, the legal structure of a PLLC can vary from state to state, so you’ll need to check with your state to see what exactly is required. Furthermore, the PLLC is a relatively new business entity in America, and it’s not even recognized in all 50 states yet. This means that there can be some question marks regarding how the courts will treat a PLLC, and you never want uncertainty when it comes to legal issues for your business.
Professional Corporation vs. Professional LLC
As a formal entity type, the professional corporation has been around since the 1970s. More recently, many states have introduced the PLLC, which is a similar business type in some ways. For starters, both entities provide personal asset protection for all owners, while simultaneously limiting each owner’s exposure to the other owners’ malpractice suits.
For the most part, the differences between these entities are very similar to the differences between a standard corporation and LLC. A PLLC has more flexibility for taxation, as it can elect to pay taxes as a pass-through entity, a C corporation, or an S corporation. In addition, the PLLC has a much lower administrative burden than the PC does, as the PLLC is required to keep far fewer records. Finally, the PC has a rigid management structure with clearly defined roles (directors, officers, board members, shareholders, etc.), while the PLLC is more pliable and you can adjust it to suit your needs.
While the PLLC clearly has plenty of advantages over the PC, the opposite is true as well. For instance, with a PC, you can sell stock to easily transfer ownership, whether to bring in new owners or to redistribute a departing owner’s shares. Additionally, because the PC has been around longer than the PLLC, the legalities are more consistent and predictable, and court systems have more precedent for PCs. Finally, PCs exist in all 50 states, while the PLLC isn’t nearly as established and isn’t recognized in some states.
Things to Consider Before Forming a PLLC
The first thing you should consider when deciding whether the PLLC is the right entity for you is whether your business operates in a licensed profession.
Keep in mind that different states have different guidelines regarding which business types can form PLLCs and which must form PCs. Typically, the professional LLC is meant for doctors, lawyers, accountants, and other licensed professions, but you should check with your state before forming one to make sure this is the right entity for you.
Another important question is whether the PLLC or the professional corporation is the better option for your business. As we discussed earlier, each of these entities has some advantages over the other and choosing the right one could save your business time and money.
In addition, you should make sure you’re okay with the drawbacks of PLLC ownership. As we discussed earlier, it’s extremely difficult for PLLCs to bring in outside investments. In addition, self-employment taxes can be a significant burden for PLLCs. Finally, the fact that the PLLC is a relatively new business entity that isn’t recognized in all 50 states creates some unpredictable legal elements due to the lack of consistency and precedent.
When Is the Best Time to Start a PLLC?
Once you’ve decided that the professional LLC is definitely the best business entity for your organization, you should probably form it as soon as possible. We always recommend forming your entity before you start transacting business with your new PLLC. This is because, if you don’t, every transaction you execute before forming the PLLC will be as a general partnership.
General partnerships are an informal business entity, and if you operate a business with at least one other person and you haven’t formed a formal entity (like a corporation, LLC, PC, PLLC, etc.), you are automatically categorized as a general partnership. General partnerships have no personal asset protection, so you and your co-owner(s) will be personally liable for any transactions you execute as one.
In our opinion, that alone is reason enough to incorporate as a PLLC as soon as you’re 100% certain it’s the right entity for you.
Forming a Professional LLC
Forming a standard LLC is a relatively straightforward process, and forming a professional LLC is nearly as simple because the process for doing so is almost identical. With this in mind, let’s cover the basics of how to form a professional LLC.
First, you’ll want to learn about your state’s requirements. As we mentioned earlier, not all states allow for professional LLCs. Even if your state does, you’ll also need to ask a few other important questions. For instance, what professions are allowed to form a PLLC in your state? And is this list the same as the list of professions that are required to form a PLLC or PC?
Then, there’s the matter of the licenses you need to obtain. In some states, every member needs to obtain a license, whereas, in other states, it’s acceptable if just half of the members have the necessary professional certifications.
1) Name your PLLC
The first step in any state is to come up with the perfect business name for your new PLLC. Your PLLC’s name is important because it’s your company’s best chance to make a first impression with potential customers, and you need to make an impact. Choose something memorable that also highlights the purpose of your business.
Another crucial aspect of naming your PLLC is making sure the name you want is actually available and hasn’t already been claimed by another entrepreneur. Therefore, you should search your state’s business database to ensure that you can use your desired name. (It’s probably a good idea to come up with a few different options in case your first choice is taken!)
2) Designate a registered agent
Every PLLC operating in the United States must have a registered agent. This role includes receiving important document deliveries from the state (such as service of process paperwork and annual report reminders), informing you of the receipt, and forwarding the documents to your business. In short, the registered agent ensures that the state always has a reliable point of contact for every company operating within its borders.
Just about anyone can be your registered agent, as you can designate an individual or a professional service for this role. Most states don’t have any rules regarding who can serve as a registered agent, except the PLLC itself cannot be its own agent. (Colorado also requires that all registered agents be at least 18 years old, but you won’t find this restriction in other states.)
3) Prepare and file your PLLC formation documents
This is the most important step in your PLLC formation journey. Much like with a standard LLC, most states refer to these documents as the Articles of Organization, although some other states use alternate names, such as the Certificate of Formation.
The information required for this filing varies by state as well, but for the most part, you’ll need to include the name of your PLLC, the principal office and mailing addresses, the registered agent’s name and address, whether the PLLC is managed by members or managers, and the name and address of at least one member or manager. You will also need to share your business purpose and include proof of your owners’ licensure.
Again, the exact info can vary, and each state has its own processing times as well, so make sure you nail down all of the relevant details for your state before you get started. In some states, you will need to submit your documents to the state board that oversees your profession for approval before filing them with the Secretary of State. That’s why the PLLC formation process often takes longer than that of a standard LLC.
4) Draft an operating agreement
There are only a few states that require PLLCs to draft and submit an operating agreement to the state, but we think that every PLLC should have one regardless of whether it’s technically required. An operating agreement is important because it outlines the details of how your business will be run, and it can help prevent ownership disputes.
Typically, the type of information you’ll want to include in your operating agreement includes details about the business structure, the business purpose, management and voting rights, capital contributions and distributions, membership changes, the dissolution process, and more.
Even if you own and operate a single-member PLLC by yourself, you should create an operating agreement because it helps you separate the PLLC from yourself as a person, a crucial aspect of personal asset protection.
5) Obtain an EIN
The next step is to acquire a federal tax ID number (often referred to as an EIN or employer identification number) from the Internal Revenue Service. This is similar to a Social Security number for an individual, as the EIN is a nine-digit number that’s used to identify your business for taxation purposes.
An EIN can help your PLLC accomplish many important tasks, including opening business bank accounts (more on this in a moment…), hiring employees, and more.
6) Set up the PLLC’s financial infrastructure
Next, you’ll need to set up a business bank account and an accounting system. The business bank account is simple enough — all you need to do is bring your EIN to the bank of your choice and tell them you’d like to set up a business account.
Once the account is set up, make sure to use it exclusively for your business expenses and income. Commingling your business and personal assets is a highly dangerous practice that makes your PLLC susceptible to lawsuits, administrative dissolution, and more.
As for your accounting system, the easiest solution is to get accounting software like QuickBooks for your business. This allows you to keep track of all your business income and expenses in one convenient place, making tax time (and legal compliance) a breeze.
7) Acquire licenses and permits
Some states require PLLCs to obtain a general business license to operate in a compliant fashion, while others do not. Whether your state requires a general license or not, it’s likely that your LLC will require at least one license or permit.
In addition to your professional licenses, there are quite a few industries that require either federal or state licensure (or both), such as agriculture, aviation, mining, firearms, broadcasting, and more. If your PLLC operates in any of these industries, you may have complex licensing requirements.
In addition, there are many different licenses required by county and municipal governments, including liquor licenses and occupancy permits. Don’t forget to check with every government agency that has power over your business (federal, state, county, municipal) to ensure you’re complying with all relevant licensing and permitting requirements, and obviously, don’t forget about your professional licenses.
8) Obtain business insurance
If your business has employees, you will be legally required to acquire workers’ compensation insurance in most states. And, even if your business is located in Texas (the one state that doesn’t require workers’ comp), you should still absolutely obtain this coverage.
Beyond workers’ comp, there are many industry-specific insurance policies that might be advisable depending on the nature of your business, and a general liability policy is almost always a good idea, especially for businesses with retail locations that customers visit in person.
Hiring a Service to Form Your PLLC
If you would rather not tackle the formation process yourself, there are other options.
You could hire a business attorney to draft and file your formation documents, but this costs hundreds or even thousands of dollars that many startups simply don’t have access to. Fortunately, there’s another option, and that’s hiring an online business formation service.
Because the process for forming a PLLC doesn’t vary that much from a standard LLC, it typically doesn’t cost too much more to hire a formation service to form one. These services can form your PLLC for far less money than an attorney will charge, and some of them even charge less than $100.
However, some of our favorite LLC formation services don’t offer PLLC formations. That said, there are still some solid options out there.
Our favorite PLLC formation service is Swyft Filings, with an outstanding price point of just $49 (plus your state’s fee). Swyft Filings includes its compliance monitoring tool at no extra charge, which helps your PLLC track important deadlines like annual report due dates. Furthermore, it offers a 100% satisfaction guarantee and attracts outstanding reviews from its customers. It’s hard to go wrong with Swyft Filings forming your PLLC!
Another strong option is Rocket Lawyer. While Rocket Lawyer charges $99.99, more than twice as much as Swyft Filings does, Rocket Lawyer is the most experienced company in this industry, with more than 25 million customers served to date. Rocket Lawyer’s other big advantage is its extended customer support hours that stretch well past what most companies offer on a daily basis. Add in its positive customer feedback and excellent refund policy, and you’ve got an intriguing PLLC formation company in Rocket Lawyer.
Our third choice is IncParadise, and as far as we know, it’s the only company other than Swyft Filings and Rocket Lawyer that offers PLLC formations for under $100. It’s easy to form a PLLC with IncParadise, as you just need to fill out its standard LLC formation forms and indicate “PLLC” when you enter your business name. IncParadise will expedite your formation for free if you’re starting a business in Nevada, and its other advantage is its extremely cheap registered agent service. If this interests you, give IncParadise a look!
Cost of Forming a Professional LLC
One of the most common questions we hear from entrepreneurs is how much it actually costs to form a PLLC. There are often additional expenses involved with the process, other than the fee you pay the state for your formation document filing. It’s important to note that, much like each state charges its own rates for PLLC formations, the additional costs can vary from state to state (and industry to industry, in some cases) as well.
Let’s quickly break down some of the other potential costs. One that isn’t usually required is a name reservation fee, which is required by law in Alabama but is optional elsewhere. In most states, a name reservation only has a nominal fee — in many, this will only cost you $10-20.
Another variable that can add expenses is whether you choose to use a PLLC formation service or not, as most of these companies charge their own service fees in addition to the state’s formation fee. Similarly, whether you want a registered agent service will also affect your new PLLC’s bottom line. If you opt for assistance from an attorney instead, your expenses will obviously grow.
Then, there’s the issue of initial and annual reports. Initial reports aren’t required in very many states, but they’re a highly important part of the formation process in states that do require them. As for annual reports, most states require them from PLLCs, and the costs can vary widely, from as little as $10 in Colorado all the way up to $520 in Massachusetts.
Finally, even though PLLCs are usually pass-through entities, there can be state-specific tax responsibilities like franchise taxes for the right to do business in the state. All told, there are quite a few associated costs for some PLLCs, while others can get by with much lower expenses. It all depends on where your company is located and what line of business it’s in.
Frequently Asked Questions
Which professions typically form PLLCs?
The list of certified professions that should form PLLCs varies by state. That said, the list generally includes professionals like doctors, lawyers, accountants, architects, engineers, and more.
How long does it take to form a PLLC?
The answer to this question varies considerably based on your state of formation. There are some states that have online PLLC formation portals where you can form a PLLC immediately. Meanwhile, some states require you to mail in paper forms that can take a matter of weeks. Additionally, many states offer some sort of expedited service that can dramatically speed up your formation process. For more details, ask your PLLC formation service or your state’s Secretary of State office.
Should I use an online PLLC formation service, hire an attorney, or form my own PLLC?
All three of these options have their own advantages and disadvantages, depending on your priorities. Forming your own PLLC will always be the cheapest option, although it doesn’t involve any professional assistance. On the other end of the spectrum, hiring an attorney can be prohibitively expensive for many startups, although the expert advice you’ll get can make it worthwhile. Finally, an online PLLC formation service splits the difference, providing professional help while charging a fraction of an attorney’s fees.
What types of bonus features can I expect if I use a PLLC formation service?
This all depends on which company you choose to form your PLLC, and which of its formation packages you opt for. In general, it’s common to see these companies include perks and features like registered agent service, operating agreements, annual report service, binders embossed with your company’s name, and more.
Can I form a PLLC with a limited lifespan?
Yes, when you form your PLLC, you will have the option to designate a perpetual lifespan or a specified dissolution date.
What is a PLLC member? What is a PLLC manager?
A PLLC member is another term for an owner of the business. A PLLC manager refers to a designated individual who handles managerial aspects of the company. It is quite common for the same person to serve in both roles.
Do I need to hold regular meetings for my PLLC?
Professional corporations have strict requirements to hold shareholder and board of directors’ meetings on a regular basis, and also to take detailed minutes from those meetings. PLLCs are not required to hold these meetings (or, obviously, to take notes on them). That said, you are welcome to hold meetings anytime you’d like, or not at all!
How does limited liability protection work?
The limited liability protections afforded by a PLLC are often referred to as the “corporate veil.” This veil provides a layer of separation between your business and personal assets, preventing creditors from pursuing your house, car, personal bank accounts, and more while suing your business. Thanks to the corporate veil, only your business assets are at risk in a lawsuit.
However, if you fail to form or maintain your PLLC in compliance with state laws, your corporate veil could be “pierced” and you will lose your limited liability protection. It’s worth reiterating that limited liability protection does not include issues of malpractice.
What state should I form my professional LLC in?
When we’re discussing standard LLCs or corporations, there is at least an interesting debate about whether you should form your business in your home state or in another state. States like Delaware and Wyoming have some distinct advantages for entrepreneurs that can make these states appealing options.
However, PLLCs should typically be formed in their home states because the legalities of trying to cross state lines with the certifications and permits required for a PLLC is a hurdle that simply isn’t worth jumping over.
Professional LLCs allow licensed professionals to form a business together and get the best of both worlds: the flexibility of a partnership, with the limited personal liability of a corporation. Of course, that liability protection only goes so far, as each member is still subject to malpractice lawsuits.
If you’re a licensed professional looking to start your own business, then a professional LLC might be perfect. Otherwise, forming a standard LLC (DIY or through a service like LegalZoom/ZenBusiness) may be your best bet.