Professional Limited Liability Partnership
A professional limited liability partnership functions like a regular limited liability company although LLC is being used more often for tax purposes.3 min read
A professional limited liability partnership functions like a regular limited liability company. The latter is, however, being used more often for tax purposes, as it is being taxed as a single entity. A limited liability company is a type of business owned by one or more people.
Reasons for Starting a Professional Limited Liability Company
In some states, certain professionals are not allowed to form a limited liability company. Instead, they form a professional limited liability company, where all members are required to have a specific set of skills that are recognized by a license. Examples of that are law offices, doctor offices, or architect offices. When a PLLC is formed, its founders file the Articles of Organization with the local secretary of state, and the owners' licenses are verified before the approval is given. Some states even require that the business name contains “PLLC,” so it is more easily identified by the public.
The main reason for starting a professional limited liability company is the owners' desire to separate their individual responsibility and the responsibility of the company as a whole. In other words, if one individual member of the partnership is sued, the other partners will not need to share liability. The opposite situation also applies, with partners not being personally responsible for debt or liability created by the business.
While the main difference between an LLC and a PLLC is the license requirements for the PLLC members, when it comes to paying taxes, the two entities operate identically. The net income or loss is calculated for each individual member, and they each pay their share. While a PLLC is similar in structure to a Professional Corporation (PC), it differs in the way of being taxed. The PC is taxed as a corporation, and its owners pay taxes according to received dividends.
How an LLP is a Better Option Than a PLLC
A limited liability partnership is a general form of partnership registered with the state. Its main advantage over a public limited liability company is that — in most situations — partners will not be held collectively responsible for the mistakes of other partners. Another significant advantage is that the LLP, unlike the PLLC, is officially recognized in all 50 U.S. states.
There are also advantages when it comes to paying taxes. The LLP is not taxed on its business income, unlike the PLLCs, which are taxed similarly to corporations. LLPs are not required to pay the Texas Margin Tax.
Malpractice Liability Protection for PLLC, PC, and LLP
The Business Organizations Code stipulates that a professional within an LLP is not responsible for the malpractice of one of his or her colleagues, unless they have been directly involved in the activity or have known of the bad practices and did not take any action. It's similar to other forms of professional partnerships, such as PCs and PLLCs, and provides protection against the wrongdoings of someone else within the business.
While any kind of encouragement or allowance of unethical behavior makes other parties within the company share the liability, there is no specific regulation for the prevention of such activities.
Different Types of Business Organizations
- A sole proprietorship is a form of organization where a single individual operates a business and pays taxes under his or her own name. Liability is entirely that individual's responsibility, and the owner's personal assets may be seized if taxes and credits are not paid in due time.
- A partnership is the association of two or more people that form a business with the purpose of making a profit. The partnership functions on its own, and any property acquired is owned by the entire partnership, not by individual members. It is crucial for a partnership to clearly specify how the profits and losses are shared by the partners.
- A limited liability partnership is usually created to clearly separate the obligations and liabilities of an individual partner from the other partners.
- A professional corporation is a corporation whose owners share a specific skill, such as medicine or law.
- Finally, the limited liability company is the most popular form of organization for small businesses.
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