Key Takeaways

  • Professional Associations (PAs) are limited to licensed professions such as doctors, lawyers, and accountants, and provide liability protection but require strict compliance with professional regulations.
  • LLCs are more flexible, open to any type of business, and provide liability protection without professional licensing restrictions.
  • Tax treatment differs: PAs may be taxed as C or S corporations, while LLCs default to pass-through taxation with the option to elect corporate treatment.
  • Ownership rules vary: PAs typically require all owners to be licensed in the same profession, while LLCs allow broad ownership, including individuals, entities, and non-U.S. residents (in most cases).
  • Choosing between PA vs LLC depends on professional licensing requirements, tax planning needs, liability protection, and state-specific laws.

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:

  • Attorneys
  • Engineers
  • Accountants
  • Health care professionals like doctors, nurses, dentists, opticians, physiotherapists, optometrists, and speech pathologists
  • Veterinarians
  • Psychologists
  • 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.

Ownership and Licensing Restrictions in a PA

Unlike LLCs, professional associations are highly regulated when it comes to ownership and participation. Most states only allow licensed professionals in the same field to be owners or shareholders of a PA. For example, a group of doctors may form a PA together, but they cannot include a non-medical investor as a shareholder. This ensures that professional standards are upheld but limits the flexibility of raising outside capital.

In contrast, LLCs do not have such restrictions. Membership can include individuals, corporations, or even foreign investors, making LLCs more attractive for businesses seeking broader ownership structures.

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:

  • Accounting
  • Law
  • Health services
  • Architecture
  • Actuarial Science
  • Consulting
  • Engineering
  • 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

Liability Protection in a PA vs LLC

Both PAs and LLCs provide liability protection, but the scope differs. A PA shields owners from debts and liabilities of the entity itself and from the malpractice of other professionals in the association. However, individual professionals remain personally liable for their own acts of negligence or malpractice. This is why malpractice or professional liability insurance is still required.

LLCs offer similar protection: members are not personally liable for company debts. However, if an LLC member personally commits negligence or malpractice (for example, an accountant filing fraudulent returns), they remain individually responsible. In both cases, liability protections stop short of covering personal professional misconduct.

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.

Flexibility and Ease of Formation

LLCs are widely chosen because of their flexibility in management and fewer compliance requirements. Unlike PAs, which are subject to state licensing board rules, an LLC does not require all owners to hold professional licenses. This makes it possible for professionals to include partners who contribute capital or business expertise without being licensed.

In addition, LLCs generally require less paperwork, have fewer ongoing reporting obligations, and are easier to dissolve or restructure compared to PAs. Many entrepreneurs prefer LLCs when seeking a balance of liability protection and simplicity.

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.

Comparing Tax Options for PA vs LLC

LLCs and PAs differ in the tax elections available:

  • LLC Tax Options:
    • Default pass-through taxation (sole proprietorship or partnership).
    • Option to elect S corporation status to potentially reduce self-employment taxes.
    • Option to elect C corporation status for retained earnings and corporate benefits.
  • PA Tax Options:
    • Can be taxed as an S corporation, with profits and losses passed to shareholders.
    • Can be taxed as a C corporation, but if categorized as a “personal service corporation,” it may face a flat 21% federal tax rate.
    • Deductible employee benefits (health insurance, retirement plans) are often more accessible under PA corporate structures.

The right choice often depends on whether the business wants maximum flexibility (LLC) or must meet state requirements for licensed professionals (PA).

Frequently Asked Questions

  1. What professions require a PA instead of an LLC?
    Professions such as doctors, lawyers, accountants, engineers, and other licensed fields often require forming a PA or professional corporation under state law.
  2. Can non-licensed individuals own part of a PA?
    Generally, no. Most states require all shareholders of a PA to be licensed in the same profession. LLCs, however, allow broader ownership.
  3. Do PAs protect against malpractice claims?
    No. A PA protects against the malpractice of other owners, but each professional remains personally liable for their own negligence. Malpractice insurance is still required.
  4. Can an LLC be converted to a PA?
    In some states, it is possible to convert or reorganize, but it depends on licensing rules and state business laws. Legal advice is recommended.
  5. Which is better for tax purposes: PA or LLC?
    It depends. LLCs offer flexible tax treatment and simplicity, while PAs may offer more structured benefits but could face higher tax rates as personal service corporations.

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