Key Takeaways

  • Eligibility differs: Only licensed professionals can form a PC, while most individuals can form an LLC, unless state law imposes restrictions.
  • Liability protection: Both PCs and LLCs offer personal liability protection, but PCs do not shield members from personal malpractice.
  • Taxation varies: PCs are taxed like corporations (C or S corp), while LLCs offer pass-through taxation by default.
  • Governance and flexibility: LLCs offer simpler management with fewer corporate formalities; PCs must follow strict corporate governance.
  • State laws matter: Some states require professionals to form a PC or PLLC and prohibit licensed professionals from forming standard LLCs.

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

Eligibility

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.

Tax Considerations

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.

Tax Treatment and Salary Rules

In a PC, profits are taxed either as a traditional C corporation (with potential for double taxation) or an S corporation (pass-through taxation). However, PCs must pay reasonable salaries to professional shareholders before distributing profits, especially under S corp status.

LLCs benefit from pass-through taxation by default, allowing income to flow directly to the members’ personal tax returns. LLCs can also elect to be taxed as S or C corporations if desired, offering more control over how income is distributed and taxed.

Management Structure and Operational Flexibility

PCs have a rigid corporate structure, requiring:

  • A board of directors
  • Regular shareholder meetings
  • Adoption of bylaws

LLCs offer more flexibility in management:

  • Can be member-managed or manager-managed
  • No requirement for formal meetings or a board
  • Operating agreement governs internal affairs

For solo practitioners or small professional groups, an LLC structure can simplify decision-making and day-to-day operations.

Formation and Ownership Requirements

The formation of a PC vs LLC involves different ownership rules:

  • PCs require that all shareholders, directors, and officers are licensed in the same profession.
  • LLCs are more flexible—owners (called members) do not need professional licenses unless required by specific state regulations.

Some states do not allow professionals to form traditional LLCs. In those jurisdictions, professionals may be required to form a Professional Corporation (PC) or a PLLC. For example, California prohibits licensed professionals from forming standard LLCs, limiting them to sole proprietorships, general partnerships, or PCs.

Liability and Malpractice Implications

While both PCs and LLCs offer limited liability protection, the nature of this protection differs. A Professional Corporation (PC) shields owners from liabilities arising from business debts or obligations—but not from malpractice or professional negligence. Each professional remains personally liable for their own malpractice, though not for the malpractice of other shareholders.

In contrast, Limited Liability Companies (LLCs) protect members from both business debts and certain liabilities, but professionals in an LLC may still be held personally accountable for malpractice if they were directly involved.

In states where Professional Limited Liability Companies (PLLCs) are allowed, the same rule applies—each member is liable for their own professional conduct but not that of their co-owners.

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 to 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.

Who Should Choose an LLC?

An LLC may be ideal for:

  • Solo professionals or small groups who want flexibility and minimal formalities
  • Professionals in states that allow PLLCs
  • Owners who value pass-through taxation and operational simplicity
  • Those planning to reinvest earnings into the business rather than draw large salaries

LLCs can also appeal to those planning to eventually expand or add non-licensed members or investors, which PCs do not permit.

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, the 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:

  • Veterinarians.
  • Lawyers.
  • Engineers.
  • Medical doctors.
  • Accountants.

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.

Who Should Choose a Professional Corporation?

A PC might be the better choice if:

  • Your state prohibits professionals from forming LLCs or PLLCs
  • You plan to take a fixed salary and distribute remaining profits
  • You prefer the structured nature of corporate governance
  • You want to establish a multi-professional group with clear role definitions

Note that PCs can be particularly suitable for medical, legal, or financial practices that need a high level of regulatory compliance and liability segmentation.

Frequently Asked Questions

1. What is the main difference between a PC and LLC? A PC is limited to licensed professionals and follows a corporate structure, while an LLC is more flexible and can be owned by individuals without professional licenses in many cases.

2. Can I form an LLC if I'm a licensed professional? In some states, yes. In others, you may be required to form a PC or PLLC. Always check your state’s rules before proceeding.

3. Does a PC protect me from malpractice liability? No. A PC protects against business liabilities but not personal malpractice. Each professional is responsible for their own actions.

4. Which is better for tax purposes, PC or LLC? LLCs generally offer more tax flexibility with default pass-through taxation. PCs may face double taxation unless they elect S corporation status.

5. Can a PC have non-licensed shareholders? Usually not. PCs must be owned and operated by professionals licensed in the specific field of service.

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