Professional Association vs. LLC
There are difference between a professional association and an LLC or limited liability company, including benefits and tax implications.4 min read
2. Professional Corporations Are Subject to Special Tax Treatment
3. Limited Liability Company
4. How Limited Liability Companies Are Taxed
Updated July 14, 2020:
Professional association vs. LLC can help show the differences between a professional association and an LLC or limited liability company, as well as the benefits and tax implications of the two entities.
Professionals who require having professional corporations include:
- Health care professionals like doctors, nurses, dentists, opticians, physiotherapists, optometrists, and speech pathologists
- Social workers
Usually, the individuals who form and administer the affairs of the PA must be qualified professionals in the profession in which the association is operating. A PA is an independent legal entity which continues to exist for decades after its creation. A majority of states have strict restrictions on who can form a professional corporation and the services they can offer.
Professional Association Have the Benefits of an LLC
In regular corporations, the liability of a shareholder is restricted to their investment in the corporation. The corporation's creditors cannot have access to the shareholder's assets like his or her home or personal bank accounts. However, the personal assets of a partner in a general partnership can be reached by the partnership's creditors. For example, if a doctor who is a partner in a general partnership causes some form of injury to a patient due to negligence, the patient can sue any of the partners, and the courts can order that partner to settle the victim from his or her personal assets.
Professionals who form a professional association are entitled to a certain degree of limited liability. A shareholder in a professional association cannot be held liable for the negligence of another shareholder-professional or the business debts of the association.
Doctors and other professionals who are shareholders of a professional corporation still require professional liability insurance because they are personally liable for their professional misconducts. Most states have legislation which mandates professionals to have liability insurance. Despite being incorporated, doctors in most states must have medical malpractice insurance.
Professional Corporations Are Subject to Special Tax Treatment
A professional corporation is a classification based on state laws; it has no relationship to the IRS or tax code.
A professional corporation can either be a C corporation or an S corporation. As a C corporation, the entity will pay corporate taxes and also file its own tax returns. On the other hand, it can be an S corporation whereby its profit and losses are transferred to the shareholders who will pay its taxes along with their personal tax returns.
A C corporation falls under the personal service corporation category if its entire stocks belong to professionals in the following field:
- Health services
- Actuarial Science
- Performing arts
However, there are certain tax benefits that C corporation professional associations enjoy.
A C corporation is entitled by the tax law to offer its employees certain benefits that are deductible as a business expense from the revenue of the corporation. Some of these benefits include:
- Health, dental, and accident insurance
- Disability insurance
- Deferred compensation plans
- Group term life insurance
- Benefits related to working conditions, like company-owned cars
Limited Liability Company
A limited liability company, also known as LLC, is a business entity whose owners are not personally liable for the debts incurred by the business.
An LLC is not limited to any profession. It's more or less like a corporation but lacks shareholders or a board of directors.
An LLC does not pay corporate tax as its income goes directly to the owners who pay it through their income tax. Most states allow one or more persons to form and operate an LLC. Owners of an LLC are called members, and an LLC can have one or more members.
How Limited Liability Companies Are Taxed
The IRS treats an LLC's income as follows:
- Federal income tax considers a single-member LLC as a sole proprietorship.
- An LLC with two or more members is considered a partnership and is required to file the same tax return filed by partnerships as well as offering members with a Schedule K-1.
- Owners of an LLC with multiple members have no tax withholding on their income as they are not seen as employees of the business entity since they are considered to be partnerships. Additionally, members of the LLC who work for the business have to pay self-employment taxes on their profit, along with the federal income tax on the LLC profits. However, owners of a multimember LLC who don't work for the business won't pay self-employment from their share of the company's profits.
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