Define PLLC: Everything You Need to Know
If you define PLLC, you would indicate that the PLLC (professional limited liability company) is a unique business structure that only certain licensed professionals can operate. 3 min read
If you define PLLC, you would indicate that the PLLC (professional limited liability company) is a unique business structure that only certain licensed professionals can operate. You might ask why those persons don’t just form a typical LLC, and the reason for this is because some states don’t allow LLCs to be owned by those working in a profession that requires a license.
In order to find out if you need to form a PLLC as opposed to an LLC, you can look on your state’s website to find a list of professions that qualify. Lawyers, doctors, engineers, and accountants are some of the usual types of licensed professionals that qualify to form and operate a PLLC. The only state that doesn’t allow this is California, where professionals can form registered limited liability partnerships or professional corporations as opposed to PLLCs or LLCs.
How to Form a PLLC
Forming a PLLC is similar to forming a typical LLC. You’ll want to submit the articles of organization to the Secretary of State’s office, while also paying the applicable fee in that state. If the state also requires you to draft an operating agreement, then you will also need to satisfy this requirement.
Unlike an LLC, the PLLC must also show proof that every member is a licensed professional in the industry in which you choose to operate.
Keep in mind that in most states, only those with a license can be members in the PLLC. Furthermore, some states also require that the responsible party drafting and submitting the articles of organization be licensed.
PLLC Income Tax
Regardless of whether you form an LLC or PLLC, you will need to elect to be taxed in one of the following ways:
• Disregarded entity
The reason for this is because the Internal Revenue Service (IRS) doesn’t recognize an LLC or PLLC. If you choose to be elected as a disregarded entity, then you will be taxed as a sole proprietorship.
If you fail to elect how you want to be taxed, the default rules indicate that single-member PLLCs are taxed as sole proprietorships, whereas multi-member PLLCs are taxed as partnerships. Regardless, the PLLC will always operate as a pass-through tax entity, and members will report the profits and losses of the PLLC on their own personal tax returns. This is one of the biggest benefits of operating a PLLC, since the members can avoid double taxation, which generally occurs in a C corporation. However, you may need to submit an informational tax return if you elect to be taxed as an S corporation or partnership.
Advantages of a PLLC
As previously noted, PLLCs operate as pass-through tax entities, avoiding double taxation. Another benefit of operating a PLLC is the liability protection for its members. This means that the members cannot be held personally liable for the PLLC’s debts and obligations. Many professionals form PLLCs for this reason. Creating the PLLC separates the business from its members, further prohibiting personal liability for lawsuits brought against the business.
Potential Liability Issues
While there are many benefits to operating a PLLC, there are also some potential liability issues to keep in mind, including personal liability for the following:
• Malpractice or fraud lawsuits brought against the PLLC
• PLLC loan agreements where the bank requires a personal guarantee
• Responsibility for an employee’s actions
For example, if your business is sued for malpractice or fraud, you might likely be held personally liable. Therefore, it is beneficial to carry malpractice insurance.
Furthermore, if you obtain financing in the form of a loan, financial institutions generally require a personal guarantee to backup the loan. If this does occur, then you could be liable for failing to pay back the loan through your PLLC. This could be a potential problem for multi-member PLLCs, as one member could be responsible for the failure of other members to assist in paying back the loan.
Another potential liability issue could be the responsibility for your employee’s actions if you play a supervisory role for that employee.
If you need help forming your PLLC, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5-percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with, or on behalf of companies like Google, Menlo Ventures, and Airbnb.