Updated June 28, 2020:

Forming a PLLC vs LLC is an easy decision once the requirements and restrictions for each are understood. If the company is in a business that requires a license or certification then a professional limited liability company (PLLC) may be required by your state, otherwise a limited liability cLiompany (LLC) may be the best option for the organization.

The difference between an LLC and a PLLC is mainly that only licensed professionals such as architects, doctors, lawyers, real estate agents and accountants can form PLLCs. The structure selected depends on the type of business and services provided and the state in which the company is being formed. Each state has very specific rules and regulations about the creation of LLCs and PLLCs for certain services.

Limited Liability Company

First let's look at what becoming an LLC can do for an organization. Briefly, it's a legal business structure that provides business owners with certain benefits. LLCs are approved by the state instead of the federal government. The owners give assets and resources to the company but are not personally liable for the company. LLCs can have one member (owner) or more. While almost any kind of company can be a LLC, some states prohibit specific licensed professionals from creating an LLC.

Some describe an LLC as a cross between a partnership and a corporation. It provides flexibility in the management structure like partnerships do. It also has elements that are more like a corporation. For example, a corporation's shareholders cannot be sued personally for business debts or lawsuits against the corporation. It's the same with an LLC.

The benefits of an LLC are many, but one of the biggest is that each owner is only liable up to the amount they invested into the company. So, an owner is not liable for company's debts and liabilities over and above what they decided to contribute. If you invest $10 you can only lose $10. LLCs also have a tax benefit. The LLC is responsible for taxes, not the owners of the LLC. It's called partnership pass-through taxation. It's one of the reasons that LLCs are so popular.

Professional Limited Liability Company

A PLLC is a kind of LLC specifically for licensed professionals. The difference between an LLC and a PLLC is mainly that only licensed professionals such as architects, doctors, lawyers and accountants can form PLLCs. Check with your state to determine if they permit licensed professionals to form a standard LLC. Lawyers and doctors are commonly found on the state list of professions that cannot form standard LLCs.

This is due to the fact that members of a PLLC are not shielded individually from malpractice claims against them. In a PLLC each member is personally liable for their malpractice but not for other members' malpractice. Some states even go as far as only allowing licensed professionals to form professional corporations.

In order to form a PLLC you must research the state in which you wish to form it. In many ways, it mirrors the process for forming an LLC with a few additional steps. For example, PLLC filing must be signed by a member (and licensed professional) and provide licensing information.

The documents on licensing are then sent to the licensing board of the state for approval. In many states, every member of the PLLC must be a licensed professional but in others only half the members need to hold a license. A few states require that a licensed professional be the main organizer of the professional limited liability company and sign all of the organizational documents, meaning a third-party company cannot form the PLLC. Then the documents may be filed with the secretary of state. Due to the additional approval, the process to form PLLCs usually takes longer to finish than a standard LLC. Once the PLLC is fully formed, the business may need to add “PLLC” to its official name.

Taxes

The Internal Revenue Service has no recognition of LLCs or PLLCs. A company must choose to be taxed as an individual, a partnership or an S Corp. If there is only one member of a LLC or PLLC it's called “disregarded status”. The IRS has a form (Form 8832 – Entity Classification Election) that owners are required to fill out.

If an owner fails to submit this form then the organization may be classified into the wrong category, which could have negative consequences for tax liability. In other words, an organization may pay more or less taxes based on the classification.

LLC Membership

There is no limitation on who can be a member (owner) in an LLC. So, the business may be owned by one or more individuals and even other business entities. It can be organized for any kind of business from selling shoes to cutting grass. However, each state bars specific businesses from forming an LLC.

PLLC Restrictions

Members of a PLLC are almost always licensed professionals. States have their own list of professions that may (or must) pursue a PLLC. Doctors and lawyers are almost always on the list as well as accountants and architects. Often a business will be required to provide licensing proof for every member of the PLLC.

Liability

The separation between the member and the entity is one of the main reasons to form a PLLC or an LLC. An individual member will not be liable personally for the business' debts or any judgments against the business. The formation of a PLLC doesn't protect a member from malpractice claims from their own malpractice. This is why most professionals carry their own malpractice insurance even if they are a member of a PLLC.

Banks usually require a personal guarantee in order to provide a loan to a PLLC. This means that if the PLLC defaults on the loan someone will be personably responsible for that debt. Any supervisor may be liable for the actions of the employees he or she supervises even though the PLLC protects you from other employees' actions generally.

What are the Differences Between an Arizona PLLC vs LLC

The statute that defines professional limited liability companies in Arizona is Revised Statutes Section 29-841.4. It states, “Professional limited liability company' means a limited liability company organized under this chapter for purposes that include rendering one or more categories of professional services.” “Professional service” is defined in Arizona Revised Statutes Section 10-2201.6 as “a service that may be lawfully rendered on by a person licensed or otherwise authorized by a licensing authority in this state to render the service.”

In other words, an Arizona PLLC is an LLC that provides services by a person (or persons) professionally licensed to provide that service in the state of Arizona. In addition, that service may only be performed by the limited number of licensed professionals in Arizona. Examples would be:

  • Attorneys
  • Medical doctors
  • Certified public accountants
  • Real estate agents

Unique to Arizona is the requirement that the “Articles of Organization” must state that the company is a PLLC. These same Articles of Organization must also name the organization's professional services it was formed to provide. The name of the organization must include the words “professional limited liability company” or it can be abbreviated in uppercase or lowercase letters.

A PLLC may issue membership only to legally licensed professionals in Arizona or other states where a professional service described in the articles of organization is provided. An unlicensed spouse with a community interest in membership of the PLLC does not have the right to vote the membership interest. Likewise, a trust established for the benefit of a licensed individual member and that individual's immediate family does not give the immediate family the right to vote the membership interest. Memberships may be issued to the following:

  • General partnerships
  • Registered limited liability partnerships
  • Partnerships
  • Joint ventures (domestic or foreign)
  • Professional corporations
  • Professional limited liability companies

As long as all of the partners are licensed professionals in the profession conducted by the PLLC and at least one partner is licensed legally in Arizona to provide the service described in the articles of organization.

There are also other circumstances which may lead to issuing membership interest to other persons. One caveat is, after the voting membership interests have been issued, other persons in the aggregate cannot have more than 49 percent of the membership interests able to vote for officers and managers of the PLLC (unless the board requires more or less).

There is only one profession in Arizona that requires it's licensed professionals to form a professional limited liability company and that is real estate sales agents. Realtors do not have to form a PLLC unless they want their broker to pay them as an entity rather than as an individual.

Arizona Department of Real Estate Requirements for Real Estate Agent's PLLCs

Arizona requires that the name of the professional limited liability company name be the name of the licensed real estate agent's name as it appears on that license. The PLLC name, which is what the salesperson or broker acts through, may be the full or last name of it's member(s) and must also contain the words “professional corporation” or “professional limited liability company”. The name needs to reflect whether it is one or more licensee (for example Linda Cary, P.C. or Cary & Cary, P.C.) As a designated broker, the name must be the broker's full or last name and the words or abbreviation either P.C. or PLLC. It cannot be a fake name.

In addition, the Articles of Organization of a PLLC must contain the statement, “The sole purpose of the professional corporation (or professional limited liability company) is to render professional real estate services.”

LLC and PLLC Extras

Supervisors have a slightly different liability than members who do not supervise in LLCs and PLLCs. While limited liability company and professional limited liability company members don't face liability for the actions of other members or their employees, if it is determined that they directly supervised an employee they could be held liable for those actions.

In some states (California for example) businesses who offer licensed or certified professional services cannot form PLLCs. Instead they must form professional corporations in order to offer licensed or certified professional services. Additionally, in California, LLCs cannot offer the services of licensed or certified professionals.

How to Form a PLLC

If you want to form a PLLC, the most important thing you can do is to learn the specific filing requirements. In addition to filing your Articles of Organization, you will need to prove that your LLC's members are professionally licensed. You also need to have at least one licensed professional sign your Articles of Organization.

The licensing board in your state governing your profession must provide final approval for your PLLC in certain circumstances. In particular, you must obtain licensing board approval if your state requires all PLLC members to be professionally licensed.

Not every state requires that all PLLC members be licensed. In certain states, for example, only half of your company members need a professional license. Some states also allow a deceased member's heirs to continue PLLC ownership with first obtaining a professional license. After forming your company, you may need to update your name to include the abbreviation ‘PLLC.'

Because of the potential need to obtain approval from a state licensing board, forming a PLLC can take longer than forming a traditional LLC. After the state licensing board has approved your PLLC, you can file your formation paperwork with your state's LLC office.

The majority of states do not allow unlicensed individuals to own a share of a PLLC. Depending on the state where you are forming your company, the person organizing your PLLC must be a licensed professional. This person must also sign your company's formation document. In states with this requirement, you cannot hire a private company to help you form your PLLC.

Conclusion

Forming a PLLC or LLC is an easy decision, once the requirements and restrictions for each are understood. If the company is in a business that requires a license or even certification then a professional limited liability company may be required by your state, otherwise a limited liability company may be the best option for the organization.

The difference between an LLC and a PLLC is mainly that only licensed professionals such as architects, doctors, lawyers, real estate agents and accountants can form PLLCs. The structure selected depends on the type of business and services provided and the state in which the company is being formed. Each state has very specific rules and regulations about the creation of LLCs and PLLCs for certain services.

If you need help with forming a limited liability company or a professional limited liability company, 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 School and Yale Law School and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures,and Airbnb.