Professional LLC (PLLC)

Overview

There are about 30 states that have adopted provisions allowing the formation of a PLLC. Another nine states allow a licensed professional to form a regular LLC. The remaining states not allowing PLLCs are either silent on whether a licensed professional may conduct business through a regular LLC or specifically prohibit it. All references below to a PLLC also include a regular LLC for states allowing a licensed professional to form a regular LLC.

Like a regular business LLC, a PLLC combines the advantage of limited liability protection of a corporation with the advantage of pass-through taxation of a partnership or sole proprietorship. However, there are substantial limitations on the limited liability protection afforded by a PLLC.

Many licensing agencies require licensees who form a PLLC to provide malpractice insurance or post other equivalent security to compensate any clients or patients who are harmed by the actions of the licensee. Secondly, most, if not all states have a public policy that every individual is legally responsible for damages that are caused by his or her personal negligence or other misconduct. No limited liability entity will provide a shield against personal liability in these circumstances. For regular business obligations outside of the above limitations, however, a PLLC will provide the same limited liability protection for the personal assets of a licensee member as in a regular business LLC.

Though partnerships and sole proprietorships avoid double taxation as pass-through tax entities, they don’t offer any limited liability protection for owners. Similarly, a corporation offers limited liability protection but the potential of double taxation if taxed as a C Corporation.

An LLC may be managed solely by the owners, called members, or the members may appoint one or more managers to run the business on a daily basis. An LLC is therefore characterized as member-managed or manager-managed. Because of the special requirements imposed on a PLLC for all members to be licensed professionals, it would not be common to have a manager-managed PLLC for several reasons. Unlike a business LLC, the members in a PLLC would rarely have a passive role. Secondly, the licensee members would be very restricted on the duties and responsibilities that could be vested in any non-licensee manager.

A PLLC is formed by filing Articles of Organization with the Secretary of State (or equivalent formation agency) in each state. Some states require prior consent from a licensing agency before Articles can be filed for a PLLC. A PLLC allows members considerably greater flexibility in determining the organization’s management structure than a corporation. This is accomplished through a written operating agreement among the members to control matters such as how management will be organized, rights of members, allocation and distribution of profits and losses, and transferability of memberships. Again, a PLLC will be subject to additional restrictions or requirements not imposed on a business LLC because of the requirement that the members be licensed professionals. State PLLC Acts provide default provisions that will govern the LLC if the members do not enter into an operating agreement or if the operating agreement is silent on a given topic.

A PLLC has several tax classifications to choose from depending on the number of members and the formation state.

Advantages

For multiple owners, a PLLC offers the following advantages over a corporation:

• Members are permitted to have different percentage allocations of profits and losses in a PLLC, which is prohibited for shareholders in an S Corporation. For example, if two licensee shareholders each had a 50% ownership interest in an S Corporation, each would be required to receive 50% of any profits and losses of the corporation. In a PLLC, each licensee member could have a 50% ownership and voting interest but have a 60/40 (or other disproportionate) distribution of profits and/or losses of the PLLC;
• Members have far greater flexibility through an operating agreement to define their rights and obligations than can be achieved in the corporation context with bylaws and minutes. A PLLC operating agreement, if properly prepared, would also cover the sale and transfer of any membership interest, methods for valuing an interest, and payment terms. These would not be covered in the formation documents for a professional corporation. A separate shareholder buy-sell agreement must be prepared.

Management

Members in a PLLC must all be individuals and all generally must be licensed in the same profession. It is possible that a member in a PLLC could be a professional corporation in which the shareholder(s) practice in the same profession as the other PLLC members unless the formation state’s laws or licensing board’s regulations require only individual licensed members.

A PLLC may be formed with only a single member, thereby providing the owner with limited liability protection (with the limitations discussed above) not offered by a sole proprietorship. When there are multiple members, the structure is much like a partnership.

Subject to any restrictions or requirements imposed by the formation state laws or licensing agency regulations for a PLLC, the members have great flexibility through a written operating agreement to define their respective rights and responsibilities, powers, profit and loss-sharing arrangements, and rights or restrictions on transferring ownership interests.

Certain fundamental rights of members cannot be changed and other rights may be changed only by a written operating agreement. If no operating agreement is prepared, state PLLC Acts contain “default” provisions that will apply. These fall far short of the detail covered by a well-prepared operating agreement and do not cover many essential provisions members would generally require in an operating agreement and may not reflect the intentions of the members on how they would structure their relationship or respective rights and obligations.

Officers

A PLLC is not required to have officers and most don’t. They are permitted, however, and may help define the roles and authority of members in a member-managed PLLC.

How Its Taxed

The tax classifications available to a PLLC vary based on the number of members. Unless a PLLC elects to be taxed as a corporation, profits and losses are passed through to the members in accordance with their percentage ownership interests. The PLLC is does not pay income taxes as an entity at the federal level.

A single member PLLC is automatically treated as a disregarded tax entity, the same as a sole proprietor, giving it pass-through tax treatment. However, a single member PLLC may choose to be taxed either as a C Corporation or an S Corporation. This may be done to avoid unfavorable tax treatment for a PLLC in the formation state which does not apply to an entity taxed as a corporation. Also, a single member PLLC could choose to be taxed as an S Corporation to enjoy the simplicity of the PLLC formation and be able to receive a portion of the profits of the business in the form of a salary and a portion as a distribution that is not subject to self-employment taxes.

A multiple-member PLLC is automatically taxed as a partnership. A general partner’s allocable share of partnership income is typically self-employment income if based on services provided to the PLLC, which is subject to self-employment taxes.

When a PLLC is taxable as a partnership, a member’s eligible share of income may be treated one of three ways: (1) as net earnings from self-employment, (2) as salary or wages, or (3) as distributable shares of partnership income. Self-employment income incurs an additional tax of 15.3 percent.

FAQs

What is the difference between an LLC and a PLLC?

A PLLC, or Professional Limited Liability Company, is an entity type reserved for certain licensed professionals. Only about 30 states authorize the formation of a PLLC and about 11 of those that do not allow a PLLC will allow licensed professionals to operate through a regular LLC. Other than the restriction for use by licensed professionals, the characteristics of a PLLC are essentially the same as a regular LLC.

What professionals are required to form a PLLC?

In the 30 or so states that allow a PLLC, it is an alternative to forming a professional corporation rather than a requirement for a licensed professional. The list of professions is specific but generally includes attorneys, accountants, veterinarians, medical doctors and most other health or healing arts professionals. Other common professionals include psychologists, court reporters, engineers, architects, sometimes real estate licensees, and insurance agents.

Does a professional LLC provide limited liability protection like a regular LLC?

For general business obligations, there is no difference in the limited liability protection of a regular LLC and a professional LLC. However, liability in a PLLC often arises from the negligence, or malpractice, of the professional providing personal services. As a matter of public policy, neither a professional providing licensed services nor any principal of a regular LLC is protected from liability for negligence by operating through a PLLC or other limited liability entity. Additionally, most licensing agencies require a licensee operating through a PLLC to provide malpractice insurance or other adequate security.

Are there special requirements for Articles of Organization of a PLLC?

Most of the provisions of professional LLC Articles match those of a regular LLC. The main differences are that the name of a professional corporation must meet any specific requirements imposed by the licensing agency in that state. These often require that the name include the surname of at least one licensed member. Another requirement is that the Articles must indicate that a professional LLC is being formed. Many states require that approval or written consent be obtained from the licensing board and submitted with the Articles of Organization.

Are there any registration requirements for a professional LLC?

As stated in the previous answer, some states require written consent from the licensing board to be submitted with the Articles of Organization. Other states or licensing agencies require that a registration form be submitted to the agency after the Articles are filed. Still other licensing agencies have no registration requirements at all.

May a professional LLC have different licensed professionals or engage in other business activities?

With rare exceptions, states and licensing agencies restrict a professional LLC to engaging in a single profession. They also are generally restricted to providing only licensed activities and not combining any other business operations with the professional LLC services. Some states allow certain types of licensed health providers to be part of the same professional LLC or to form affiliated groups.

Can a professional LLC operate under a DBA rather than its PLLC name?

Most licensing agencies that restrict PLLC names have a procedure to obtain authorization to use a fictitious business name, or DBA. This is a separate procedure from a DBA that is filed by a regular LLC or other person or entity. The DBA name must still meet certain requirements. For example, the name cannot be misleading, it cannot indicate or suggest that the licensee has any qualifications or provides any services not included or permitted by the license.

Can a licensed professional sell or transfer an ownership interest in the PLLC?

The sale or transfer of an ownership interest, called a membership interest, in a professional LLC is restricted. They may only be sold or transferred to another licensed professional in the same profession. Also, if a member becomes disqualified, dies, or becomes mentally incapacitated, it is usually required that the PLLC repurchases or retire the shares.