PLLC vs LLP: Everything You Need to Know
PLLC vs LLP are options for business owners who want to form their business in the state of Texas. 3 min read
2. LLP: An Overview
3. PLLC: An Overview
4. PLLC and LLP Taxes
PLLC vs LLP
PLLC vs LLP are options for business owners who want to form their business in the state of Texas. Such options are important to consider when establishing your business. The state of Texas allows business owners to form a variety of different business structures, including an LLP (limited liability partnership) and PLLC (professional limited liability company). Both the Texas PLLC and LLP offer unique advantages to business owners, which should be considered before choosing the type of business structure to form.
Keep in mind that not every state in the U.S. recognizes a PLLC. Notably, a Texas PLLC might be prevented from doing business in another state that doesn’t allow the PLLC business structure. Most states that do recognize LLP and PLLC structures treat them as pass-through tax entities, meaning all profits pass through the owners who report it on their personal tax returns. However, the state of Texas treats PLLCs as corporations, meaning the PLLC loses the pass-through taxation benefit awarded to other business structures. Texas LLPs, however, still benefit from pass-through taxation.
LLP: An Overview
An LLP is a general partnership. The biggest advantage of an LLP is that individuals owning it cannot be held personally liable for the debts and obligations of the business. This is similar to LLCs and corporations. Traditionally, Texas law prohibited businesses from operating as limited liability companies (LLCs). For this reason, most businesses operated as LLPs instead. Unlike the PLLC, all 50 states in the United States recognize the LLP structure. Furthermore, unlike the PLLC, an LLP might not have to pay state taxes on its business income.
With regard to the forming and ownership structure of an LLP, there must be at least two people involved in the business, as is the case with any partnership. An LLP doesn’t have a maximum cap on how many partners can operate in the LLP.
Since the LLP operates as a pass-through tax entity, the business doesn’t pay corporate income taxes. All profits are passed through to the members (owners) who will report a portion of the business profits on their personal income tax return.
Another benefit of the LLP is the minimal paperwork required when forming. Similar to an LLC, the LLP doesn’t have to fill out much paperwork when registering.
PLLC: An Overview
A PLLC is a special type of LLC that provides similar benefits as ordinary LLCs. The key difference between the LLC and PLLC is the fact that only professionals (those with a profession that requires a license) can own and operate a PLLC. Such persons must form some type of professional service that only those with that license can provide. Some examples of such professionals include the following:
- Psychologists or Psychiatrists
The Articles of Organization for a PLLC is similar to that of an LLC with some additional steps. In addition to filling out the articles, the professional(s) creating the PLLC must include their license number or provide an actual certified copy of the license along with this document.
In addition to submitting the Articles of Organization, those creating a PLLC must submit documents to the state licensing board prior to filing it with the Secretary of State’s Office. Because of this, it might take a bit longer to form a PLLC as opposed to a typical LLC.
PLLC and LLP Taxes
The Internal Revenue Service (IRS) doesn’t recognize the PLLC or LLP for tax purposes. Instead, your business will need to elect how to be taxed. If you operate a multi-member LLC, you can choose to be taxed as a C Corporation, S Corporation, or partnership. If you operate a single-member LLC, then you can choose to be taxed as a corporation or sole proprietorship. You must submit the form to the IRS when choosing tax status election. If you fail to make this election, then the IRS might put your business in a category that might not be best suited for you and your business. For example, if you operate a multi-member PLLC and fail to elect tax status as a corporation (which is how you want to be taxed), the IRS might automatically tax your business as a partnership.
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