A professional limited liability company (PLLC) is a business entity that offers tax benefits and limited liability for professionals, such as lawyers, accountants, and doctors. A PLLC is similar to a limited liability company (LLC), but a PLLC does not provide as much liability protection, and PLLC owners are limited in the services they can provide within the same business. Some states do not recognize PLLCs, while in other states, a PLLC is the only option for professionals who want to form a business entity that limits liability.
To form a PLLC, at least one of the owners (owners are known as members) must be a licensed professional. In some states, all members must have a license in the same profession. In these states, an owner can hire an employee to help run the business, but only professionals can legally own the business. To be a licensed professional for purposes of forming a PLLC, you must have the required credentials to practice your profession in the state where you want to open your business.
The term “professional” refers to a number of occupations whose practitioners must have a state license before they can offer their services. Your state’s PLLC statutes likely list the professionals that can form a PLLC, and if your occupation is not on that list, you cannot form this type of entity. Commonly, the following can form a PLLC:
Many states prohibit owners of a PLLC from providing more than one type of service under the same business, professional or otherwise, with few exceptions. For instance, if you form a dentistry PLLC, you may not also provide graphic design services under the same business. If you do, the law will consider your graphic design services to be a separate business. As a separate business, it will not have liability protection, and come tax time, you must report its income and expenses separate from your PLLC.
Most states make exceptions to this rule, especially in the medical field. For instance, a physician’s medical practice could likely have a pharmacy under the same PLLC. To find out what services you can combine, check with your state’s PLLC statutes.
PLLCs offer limited liability, meaning that if someone sues the company or the business owes a debt, the owners are not personally responsible for paying that debt. However, PLLC members remain personally liable for their own malpractice, also known as professional negligence. Malpractice occurs when a professional does not meet the professional standards in providing services, such as when an accountant mishandles a client’s money. If someone sues you over your professional misconduct, the PLLC will not provide limited liability protection, and your personal assets will be on the line to satisfy a malpractice judgment against you. For this reason, many professionals obtain malpractice insurance for coverage.
Despite this limitation, PLLC offers other liability protections that make this entity worthwhile. If you form a PLLC with another professional and someone sues him for malpractice, you will not be personally liable for his malpractice. In contrast, if you owned a partnership, you could be personally liable for your partner’s malpractice. In addition, the PLLC will protect you from liability for other business debts and obligations, such as issues arising out of an office lease or vendor contract, or a slip and fall at your office.
A PLLC is a pass-through entity, which means that the business does not pay corporate tax. The profits from the company flow through the business to the owners, who report their share of their profits on their personal tax returns and pay tax accordingly. By contrast, a C Corporation pays corporate tax, and after the profits are distributed, the owners pay taxes a second time on the same income on their personal tax returns.
Owners of PLLCs enjoy the 20% Pass-Through Deduction, which allows members to deduct up to 20% of qualified business income on their personal taxes. However, tax regulations limit the deduction for many professionals whose annual taxable income is over $160,700. If your income is over this threshold, consult with a tax attorney or an accountant.
The steps to form a PLLC will depend on your state and your profession. The basic requirements are:
State licensing: You must first obtain a state license with your professional licensing agency, such as admittance to the state bar for attorneys, or a CPA license for accountants.
Approval from your state Licensing board: Some states’ professional licensing agencies and state laws require prior written approval from the licensing board before you can file PLLC formation paperwork. When required, you include the written approval with your formation documents.
Business name: Select a name for your business that complies with your state’s rules. Many states require you to include “Professional Limited Liability Company,” “PLLC,” or another abbreviation in the name. Some states require that you include the last name of at least one of the members in your business name.
Formation documents: File formation documents, which your state might refer to as the articles of organization or a certificate of formation, with your Secretary of State and pay the filing fee.
Operating Agreement: Draft an operating agreement, which is an internal document that provides how the members will manage the business and split profits.