Domestic vs. Domestic Professional LLC
Understanding domestic vs. domestic professional LLC is helpful when creating a new business. An LLC is a recognized business entity under state law.3 min read
2. How are PLLCs Formed?
3. What is the Difference Between an LLC and a PLLC?
Understanding domestic vs. domestic professional LLC is helpful when creating a new business.
An LLC, or limited liability company, is a business entity recognized under state law to create a valid company. In an LLC, owners of the company, known as members, donate to the company but aren't held personally liable for its debts. Each member is only responsible for the amount of debt equal to their ownership share in the company and can't be held responsible for anything above that. LLCs have partnership pass-through taxation, which means the LLC itself, not the members, takes care of the taxes.
Although LLCs can be formed for any kind of business, each state has unique laws about how LLCs are formed. In some states, certain kinds of professions aren't allowed to form LLCs.
What is a Professional LLC?
A professional limited liability company, or PLLC, can only be created by certain types of licensed professionals who only offer services directly related to their field. Because some states don't allow licensed professionals to create regular LLCs, they instead form PLLCs.
The types of professions that are allowed to create PLLCs vary by state, but typically include doctors, lawyers, engineers, and accountants.
In terms of function and organization, LLCs and PLLCs aren't very different. The main difference is that a PLLC doesn't protect members from malpractice claims made against them. However, a PLLC provides the same protection against liabilities as an LLC in all other areas. Because members are vulnerable to malpractice claims, malpractice insurance is critical. Each member is only responsible for his or her own malpractice, not for claims made against other members.
In some states, licensed professionals aren't allowed to create PLLCs and instead must form professional corporations, or PCs.
How are PLLCs Formed?
Each state has its own requirements for creating a PLLC. In general, you need to file forms and articles of organization, just as you must do with an LLC. You must also file documentation that each member of the PLLC is properly licensed. At least one member is required to sign the articles of organization as a licensed professional.
Before a PLLC can be formed, it must be approved by the state licensing board. Requirements vary depending on the state—some require that all members must be licensed professionals, and others do not. Some states allow only half of the members to be professionals, and some allow heirs of a deceased member to carry on with ownership of the PLLC.
After the PLLC is officially created, some states require the business to add “PLLC” after the company's official name.
What is the Difference Between an LLC and a PLLC?
LLCs and PLLCs are similar because they both serve the same general purpose, which is to protect the personal assets of the owners. The main difference between the two entities is who is allowed to become a member.
Here are a few other differences:
- Company membership - certain professionals aren't legally allowed to establish their company as an LLC. Some professions, including doctors, lawyers, and accountants, are required to form PLLCs in some states. The licensing board for each state can tell you that state's requirements for PLLCs and LLCs.
- Legal requirements - the basic requirements to create an LLC are articles of organization and a few other forms that are set forth by the state laws. Some states require LLCs to submit operating agreements before they can be officially created. Starting a PLLC requires the same general paperwork, but with the added requirements of approval by the state licensing board. If the PLLC has members from multiple professions, it may need to get approval from each professional board.
- Liability protection - in both LLCs and PLLCS, legal action taken against the company or any debt it incurs can't impact the personal assets of the members. Exceptions to this rule include if a member personally guarantees that payment can be made. In that case, the member is held responsible if the company can't pay. PLLC members are also liable for malpractice claims. Some states require PLLCs to have malpractice insurance, but the same isn't required for LLCs.
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