If you’re looking to form a limited liability company, you should check with your state to determine whether you’re allowed to form a standard LLC.
Many entrepreneurs don’t even realize that there is a second, entirely separate form of LLC known as the professional LLC (or PLLC, for short).
The PLLC is a business entity that is intended for licensed professionals operating in industries where certifications are required to operate a compliant business entity. Which professionals need to form a PLLC? How is the PLLC different from the LLC? And what are the similarities between them?
In this article, we’ll try to answer these questions and more. Read on to find out what the differences between professional LLCs and regular LLCs really are!
LLC vs PLLC Similarities
As you may have gathered ― based on the fact that both of these business types include the letters “LLC” in their names ― there are quite a few similarities between the LLC and the PLLC.
First off, the formation process for these two entities is nearly identical, with the only noteworthy difference in most states being the designation of a certified profession for PLLCs. Otherwise, the articles of organization for both the LLC and PLLC are basically the same.
In addition, both the PLLC and the LLC provide limited liability protection to their member/owners (although the PLLC places more limits on how that liability is shared in the case of malpractice), and they both benefit from pass-through taxation.
This means that the company’s profits are not taxed on the corporate level, but rather pass through the business entity itself and are claimed on each member’s tax returns.
Difference #1: Who can form one
One way a standard LLC differs from a professional LLC lies simply in who can form one. Almost anyone who’s a legal adult can form a regular LLC, but it’s different for a professional LLC.
It’s not only unnecessary for most people to form a PLLC, it’s actually a business structure that is strictly reserved for certain professions that require licenses. These occupations can vary from state to state, but they typically include doctors, architects, chiropractors, accountants, and similar professionals.
In some states, these professionals cannot function in their field unless they decide to form a professional LLC (or professional corporation). This requirement exists because many of these professions are prone to malpractice ― and as we’ll discuss later, malpractice and limited personal liability don’t always mix too well.
One other important distinction is that some states require every member of a professional LLC to be a licensed professional in that field, but other states view this differently.
Some other states only require half of the members to be licensed, and there are even a number of states that allow descendants of a dead member to inherit their family member’s membership within the PLLC. It’s vital that you fully understand your specific state’s requirements in this regard, as it can dramatically alter your plans for forming a PLLC.
Difference #2: Where you can form one
You can form a regular LLC in all 50 states and the District of Columbia, too. It’s a business type that’s recognized all across the country, so many businesses choose to expand their reach to multiple states.
Forming a professional LLC is not an option in many states. For example, California doesn’t allow for professional LLCs, so any applicable businesses would have to form a professional corporation instead.
Difference #3: The personal liability of each member
The where and who of professional LLCs or regular LLCs only matter so much. Ultimately, the most important difference between these two LLCs is the extent to which each member is held personally liable.
Regular LLCs are favored entity types due to their corporate veil, which grants the members personal asset protection.
For example, let’s say that an LLC is sued for damages in an accident, but the business does not have enough money to pay the settlement. If this happens, the personal assets of the members cannot be taken to make up the difference. A regular LLC offers this personal asset protection to all of its members at all times. Suing a member of the LLC — also called piercing the corporate veil — is far from impossible, but it’s certainly quite difficult.
Liability for a professional LLC is a bit different. Whether or not a member of a PLLC has personal asset protection depends on what caused the liability to begin with. General business issues, such as a defaulted debt, a missed rent payment, or something similar fall under the protection of the PLLC’s corporate veil, just like they would with a traditional LLC.
However, individual members of an LLC are not shielded from malpractice lawsuits. Let’s say a doctor is sued because they botched a surgery. That doctor will need to pay the lawsuit personally, not the LLC.
This is why most states require these licensed professionals to form a professional LLC ― with this structure, a member of a PLLC can’t hide behind the business to avoid a malpractice lawsuit. It keeps the members of the PLLC accountable to their industry’s standards.
A professional LLC offers one other advantage, however: the other members of the LLC cannot be held liable for the malpractice of other members. This makes the professional LLC different from a partnership, where the liability is spread between the partners.
The professional LLC and the regular LLC may look alike on paper, and there are indeed many areas of overlap. In fact, the PLLC and the LLC are nearly identical in every way, but there are a few key factors which make these business types distinct.
The most important distinction is the personal liability of the members, which protects the other members of the PLLC if there’s a malpractice suit against one of the other owners.