Difference Between LLC and PC: Everything You Need to Know
A limited liability company (LLC) combines the tax benefits of a partnership and the limited liability protection of a corporation.3 min read
The difference between LLC and PC is straightforward. A limited liability company (LLC) combines the tax benefits of a partnership and the limited liability protection of a corporation. A professional corporation (PC) is organized according to the laws of the state where the professional is licensed to practice.
Differences Between an LLC and PC
Anyone is eligible to form a limited liability company, but some businesses, such as insurance and banking businesses, cannot form an LLC. Only professionals with a state license authorizing them to practice can form a professional corporation.
State Rules and Regulations
Rules and regulations for forming an LLC or PC vary by state. For example, in Massachusetts, one-owner companies are not eligible. The District of Columbia and all other states have their own statutes for forming LLCs. PCs and LLCs may not be recognized by other states. In this case, the business entity must file as a foreign (out-of-state) company. Also, some states allow professionals to choose between forming a professional corporation or forming a regular corporation.
LLC and PC owners have personal liability protection from debts incurred by the business and any claim to business assets. This means creditors cannot come after or attach personal assets. The exception is if a creditor proves the company was misrepresenting itself or operating fraudulently.
LLCs and PCs have advantages and disadvantages regarding taxation and personal liability protection. PCs taxation is handled like a C corporation, which is on the company's net profits. If after-tax net profits are distributed, owners are subject to double taxation.
LLCs are not required by most states to pay state taxes, but there are a few that do. Also, some states impose an annual registration, renewal, or franchise fee. Limited liability companies and professional corporations can file as an S corporation to avoid double taxation. An S corporation is created via an IRS tax election.
Overview of a Limited Liability Company
A limited liability company is similar to the organization of a limited liability partnership (LLP). An LLC can have one member. There are no restrictions on the maximum number of members allowed. For smaller businesses, an LLC is well-suited for owners who want the protection of personal liability without the disadvantages of incorporation.
An LLC is not limited in the type of lawful products or services it may offer. The owners of an LLC do not need to be individually licensed to provide products or services. The LLC itself must be registered and licensed to do business in many jurisdictions.
Overview of a Professional Corporation
A PC is a variation of a corporation, but unlike a traditional corporation, the shareholders must hold a license in the business in which they plan to operate. For example, a husband who does not hold a medical license cannot own shares in his spouse's medical practice. In some states, members of different professions cannot own shares in the same professional corporation.
Organizing a professional corporation is not necessarily the only option. Indeed, it is not as popular as it once was due to tax law changes. Another reason is LLCs and professional limited liability companies (PLLC) both provide limited liability protection, same as a PC, but are easier to operate.
The professions required to incorporate vary from state to state. Check with the filing office for your state, which is usually the Secretary of State, for information about the requirements for your profession. The following list is a sample of professions that are often required to form a professional corporation:
- Medical doctors.
Forming a PC has its advantages. In many instances, a group of professionals licensed in the same industry forms a group of practitioners. By doing so, it provides liability protection for each member and practitioner of the group. The group has this protection whether they all work in the same facility or in separate locations.
In the event that a professional retires or chooses to leave the group, ownership is easily transferred to the others in the group. In this way, each remaining professional shares in the management responsibilities and profits without any liability for each other's malpractice actions.
PCs are streamlined in the way the corporation is organized. The corporate structure allows each professional more access to control over the corporation's operations.
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