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As a licensed professional, you have different options to consider when you’re setting up a business. If you’re deciding whether or not an LLC or PLLC is right for you, then you’ve come to the right place.
This in-depth guide will explain the differences between LLCs vs. PLLCs and give you tips for selecting the best entity structure.
Why Choosing the Right Type of LLC Is So Important
With any new business, picking the appropriate entity type to form can be a complicated process. For licensed professionals like physicians, accountants, attorneys, architects, and more, there are some additional factors to consider.
In some states, businesses that require specialized licensing cannot legally create an LLC. Instead, these professions must form a PLLC. Other states don’t even offer the option to form a PLLC, regardless of your profession.
Aside from the state-specific requirements, there are other reasons why forming a PLLC would be better than a traditional LLC. The liability protection of an LLC doesn’t cover certain instances that would otherwise protect a PLLC. If you choose the wrong entity type, you could be faced with a malpractice lawsuit, even if the event had nothing to do with you.
Let’s take a closer look at these two entity types to clarify how each one works:
A limited liability company, better known as an LLC, is a legal business entity formed at the state level.
Unlike a sole proprietorship or a partnership, LLCs separate the owner from the business in terms of personal liabilities and debts. Corporations also limit liabilities for business owners, but a corporation has stricter rules for management, record-keeping, and other formalities. LLCs can also choose how they’ll be taxed, giving the owners lots of options for potential tax savings. LLCs can have one owner or multiple owners. Owners in an LLC are called “members.”
Due to the flexible management structure, taxation options, relaxed operating rules, and liability protection, LLCs are an extremely popular choice for new businesses across the country.
With that said, certain states won’t allow licensed professionals in fields like medical care, legal services, tax services, accounting, and similar occupations to form an LLC.
Even if your state does allow members of your licensed profession to create an LLC, a PLLC might still be a better option—assuming it’s available in your location.
PLLC stands for “professional limited liability company.” As the name implies, this business structure is designed specifically for companies that require a specific professional license to operate.
Only certain individuals qualify for PLLC formation. The structure is designed for doctors, lawyers, accountants, and other licensed professionals. Generally speaking, if your business requires registration, certification, or a license from the state to practice your profession, then you’ll be eligible for a PLLC. But if you’re opening a restaurant, starting a web design business, or opening a laundromat, PLLCs won’t be an option for you.
PLLCs can only offer services related to the professional license. So a law firm registered as a PLLC couldn’t sell pizza and pasta out of the office. But a boutique retail LLC could have an in-store cafe.
Similar to an LLC, PLLCs can have one or multiple members (owners). But unlike an LLC, there are usually restrictions on who can be an owner in a PLLC.
Most states that offer PLLCs for entity formation will only allow licensed professionals to be a member. At the very least, a specific number of licensed professionals must usually maintain a minimum level of ownership in the company.
The biggest difference between an LLC and PLLC is the way liability protections are offered to members. Here’s an example to explain:
Let’s say you’re opening a medical practice with two other physicians. The three of you decide to form an LLC. If one of the doctors gets sued for medical malpractice, all three of the members will be held liable.
But if the three physicians decided to form a PLLC, only the physician responsible for the incident would be subject to the medical malpractice lawsuit. In short, the malpractice of one member doesn’t impact the liability of other members in a PLLC.
Quick Tips for Deciding Between an LLC vs. a PLLC
Whether you decide to form an LLC or a PLLC, you shouldn’t go through the formation process on your own. The steps to create each entity will be fairly similar, although a PLLC obviously has specific licensing requirements that could add extra time or an additional step to the process.
That’s why you should use an entity formation service for assistance. Solutions like MyCorporation make it really easy for anyone to form an LLC or PLLC.
Rather than filling out all of the paperwork and filing documents with the state on your own, MyCorporation can handle everything on your behalf. You just need to answer some simple questions about your business or professional service, and they’ll take care of the rest.
In addition to the basic filing requirements, MyCorporation also offers tons of other business services that are crucial for LLCs and PLLCs alike.
They offer registered agent services, DBA names, LLC operating agreements, business license services, EINs, and more. If you want to have your LLC or PLLC taxed as an S corporation, MyCorporation also offers services for S-corp elections.
The LLC formation service and PLLC formation service both start at just $99 plus state filing fees.
Tip #1 — Check the Eligibility Requirements in Your State
LLCs can be formed in all 50 states. PLLCs are not recognized nationwide.
So first and foremost, you need to see if you’re even eligible to form a PLLC in your state. This information should be readily available on your secretary of state’s website. If you’re having trouble finding it, a quick Google search like “can you form a PLLC in [your state]” should give you a quick answer.
This is another reason why working with an entity formation service like MyCorporation is worth it. They’ll help you determine whether or not the structure you want to form will go through in your state.
Assuming a PLLC is available in your state, there are still some unique state-specific rules that could apply to your eligibility. Examples of professions eligible for PLLCs commonly include:
- Medical practices
- Physical therapists
In some states, social workers, real estate agents, and architects could qualify for PLLCs as well.
Many states only allow professional license holders to own shares of a PLLC. Some states will only allow the professional license holder to sign organizational documents, which means a private company can’t form the business for you.
Technically, an LLC could be the owner of another LLC. So another business entity can have a membership stake in the company. But with PLLCs, this usually isn’t an option.
Tip #2 — Know Your Risks and Liabilities
With an LLC, the risks and liabilities are much more straightforward. Your business is treated as a separate entity, and you can only be held liable for debts and lawsuits up to the amount you’ve invested in the business.
However, an LLC does not protect you against personal liabilities for negligence, malpractice, or personal wrongdoings related to your licensed service. Your personal assets can still be exposed during a lawsuit.
All partners in an LLC are liable for malpractice suits. So if your partner is sued for negligence, then you’ll also be liable for the lawsuit. In a PLLC, each member is responsible for their own malpractice suits.
It’s also worth noting that many banks and lenders view PLLCs and licensed professional services as a high risk. So lenders might ask for a personal guarantee to lend money to your company. In this scenario, you would be personally liable for any debts that you’ve personally guaranteed. Personal guarantees aren’t as common with a traditional LLC.
Tip #3 — Always Carry Malpractice Insurance
If you’re a licensed professional, you should carry malpractice insurance regardless of the entity you decide to form. That’s because you’ll always be personally liable for your own malpractice lawsuits, even if you form a PLLC.
For those of you who plan to open a practice on your own without any partners, there’s really no difference between an LLC or PLLC. The only reason to form a PLLC here would be if your state requires you to do so or if you’re planning to take on a partner down the road.
Malpractice insurance helps cover the costs associated with lawsuits or personal liabilities due to negligence in your practice.
Long-Term Strategies For LLCs vs. PLLCs
In addition to the quick tips mentioned above, there are some long-term considerations you need to keep in mind when you’re deciding between an LLC and a PLLC. We’ve explained these strategies in greater detail below:
Strategy #1 — Evaluate Your Long-Term Tax Implications
At the end of the day, LLCs and PLLCs are still businesses. Businesses generate money and pay taxes. But the great part about both of these entity structures is that you have some flexibility with how the business gets taxed and how you’ll pay taxes on your personal returns.
By default, LLCs and PLLCs are taxed as pass-through entities. This means that income generated by the business gets passed to the owner’s personal return.
Members in an LLC and a PLLC can choose to be taxed as corporations. With an S corp election, the business itself will not pay income taxes. Instead, the owners are taxed based on profits distributed for their share of ownership. This typically comes in the form of a salary, and members won’t have to pay self-employment taxes on those distributions.
In short, you have different tax options to consider when you’re setting up your entity. So consult with a tax professional to help you determine the best course of action for your business.
Strategy #2 — Think About Your Management Structure
You’ll also need to decide whether or not to form a member-managed or manager-managed LLC. Your choice will impact the voting rights and decision-making process for business decisions.
Manager-managed LLCs are more common for traditional LLCs that want to have silent partners. These are members who invest in the company but don’t have a say in day-to-day decisions for the company.
This is far less common for PLLCs, where unlicensed professionals usually can’t own a stake in the company.
With that said, there’s another entity structure known as a PC—professional corporation. PCs offer similar professional liability protections as a PLLC, but they’re treated as a corporation.
This means the management structure and ownership structure are a bit different. Owners will become shareholders as opposed to members. They own stock in the company and must elect a board of directors. There are additional management and operational requirements imposed on PCs, like regular shareholder meetings.
If you’re opening a smaller practice with one or two other licensed professionals, a PLLC should be suitable. But for larger organizations with potentially dozens of licensed professionals, a PC might be a better option in terms of the management structure.
If you’re starting a multi-member LLC or PLLC, you may eventually run into some issues, disputes, or disagreements with your partners. This is a natural part of doing business, regardless of your profession.
To keep things civil and solve disputes quickly, you need to keep written documents of actions and decisions. So months or years from now, one of the members doesn’t say “I never agreed to this” or “that never happened.”
The way to keep all of this organized is with member resolutions. You should read our complete guide to LLC member resolutions to protect yourself and keep things organized with your partners.
As mentioned earlier in this post, it’s also important for you to think about the management structure of your LLC or PLLC. We have another in-depth guide on members vs. managers in an LLC that will give you more information on the roles and duties.
Some of you might be in a unique scenario right now where you’re a licensed professional running an LLC. But after reading this guide, you may ultimately decide that a PLLC is a better option for your business.
Depending on your state, you might be able to amend your articles of organization and change the structure from an LLC to a PLLC. But in other states, you may need to start a new PLLC from scratch.
If you fall into the latter category, then you’ll need to dissolve your existing LLC to avoid complications and liability problems. While this may seem like an intimidating process, we have a step-by-step guide on how to dissolve an LLC.