When an entrepreneur starts a company, protection is what he/she is seeking most. Especially if the company requires a license and has a large number of owners.
In such professional domains, a PLLC is what an entrepreneur can opt for, because it can shield a business owner from potential lawsuits against the company.
In this article, we will cover what exactly PLLCs are, and how they're different from LLCs.
What Is PLLC?
PLLC stands for Professional Limited Liability Company.
A PLLC is a type of business structure that offers personal asset protection to business owners in licensed professions such as accounting, medicine, law, and much more.
A limited liability company (LLC) is a popular business structure because it offers tax benefits, limited liability protection, management/owner flexibility, and more.
However, some states don't let licensed professionals run an LLC. In California, there are no LLCs or PLLCs, but Registered Limited Liability Partnerships (RLLPs). Therefore, licensed professionals of these states run PLLCs to get the benefits of LLCs.
PLLC vs. LLC: What’s The Difference?
PLLCs fall under the same laws as LLCs and offers almost the same advantages. But there are some notable differences between being a member, and the liability limitation that comes with it.
In LLCs, anyone can be a member or owner of the business/company however, it’s not the same for PLLCs. To be a member, you must have a verified license to work as a professional in a particular domain.
PLLCs shield members from liability caused by other member’s malpractices. This means the negligence of one member can’t subject the other members to culpability, and the one who is responsible for malpractice is solely liable for the consequences. The other owners won’t be liable for his/her wrong doings.
PLLCs can’t protect members from malpractice lawsuits.
How To Determine If A PLLC Is Right For You
By now, you should have a base understanding of what PLLCs are and how they’re different from LLCs. Next, we’ll go over the list of pros and cons.
- Negligence of one member of a PLLC does not make the other members personally liable. This is a significant advantage compared to a general partnership or sole proprietorship.
- Members of a PLLC are not personally accountable for the debts and legal actions incurred by the company, including unpaid office rent.
- The PLLC has the option of being taxed either as a corporation or as a pass-through organization.
- Compared to corporations, PLLCs are simpler, cheaper, and require less compliance.
- Not all states recognize PLLCs.
- Even in places where PLLCs are permitted, eligibility may be restricted to specific licensed professions.
- Self-employment taxes are due on all PLLC earnings.
The pros visibly outweigh the cons of a PLLC, and why not? PLLC doesn’t just shield an organization, but its protects the members too.
How To Form A PLLC (Step-By-Step Process)
Setting up a PLLC is similar to setting up an LLC. The difference is that PLLCs requires a confirmation of each owner’s professional license from the state’s licensing authority.
1. Choose A Name For Your PLLC
The name of your organization should be distinct from others. You should conduct a ‘state name search’ to ensure that your name isn’t too similar to other business within the same industry before proceeding to the next step.
In addition, there should be PLLC or P.L.L.C appended at the end of the name, and it cannot be misleading or contain vulgar language.
2. Appoint A Registered Agent
Business enterprises must appoint a registered agent or statutory agent in every state. A person or firm designated as your company's registered agent will send and receive legal documents on your behalf for things like court filings, official notices, lawsuits, and more.
Failure to comply with these things could result in losing PLLC status for your company, so be very diligent when choosing a registered agent.
3. Obtain PLLC Company License
The professional license, which the state licensing board for your profession will issue, is the most crucial license for PLLCs. Each member of the PLLC must hold a valid license to practice the profession of said company.
You may need to apply for extra company licenses or zoning permission however, this varies by state. So, check your states licensing requirements to make sure you have everything you need before moving on to the next step.
4. File Articles Of Incorporation
You must file your company’s articles of incorporation with the secretary of state, which can be done online for quick processing. PLLCs may utilize a somewhat different form for their articles of formation than standard LLCs do. The articles will be reviewed and approved by the licensing body for your profession, which will result in the state formally authorizing them. A copy will be given to you to keep with other company records.
5. Create An Operational Contract
In a few states, LLCs and PLLCs are required to create an operating agreement. Even though it's not necessary in your state, it's a good idea to have one, particularly if your PLLC has numerous owners.
The operating agreement serves as a guide for your PLLC's daily activities and lists each owner's contributions to the company and portion of profits. It ensures that everyone within the organization is aware of their responsibilities and the standards they are to be held to.
6. Pay PLLC Taxes And Submit Yearly Report
PLLCs are pass-through entities for federal and state tax purposes, just like regular LLCs. As a result, each owner will be responsible for paying personal income taxes on their respective portions of the company's profits. Federal income taxes won't be paid by the LLC itself.
The LLC also has the option of choosing to be taxed as a corporation or to pay corporate taxes on its earnings. Depending on the company's earnings, several states impose an annual franchise tax or gross receipts tax on PLLCs. For PLLCs with employees, payroll tax requirements exist as well. Lastly, a few jurisdictions demand that PLLCs submit an annual report each year with their current address and registered agent information.
7. Comply With Any Additional PLLC State And Federal Regulations
Additional state and federal requirements may apply to PLLCs. For instance, PLLCs that are taxed as companies, have numerous owners, or have employees that must apply for an employer identification number (EIN).
Every state, with the exception of Texas, mandates that companies with employees must purchase workers compensation insurance. PLLCs with workers must also pay federal payroll taxes and withhold taxes from employee wages.
It's crucial to treat the company as a separate legal entity after forming a PLLC in order to maintain restricted responsibility for the proprietors. This entails opening a distinct business bank account, obtaining a credit card just for business use, and keeping track of business funds independently of any owners' personal money.
The fact that a PLLC separates the individual from the entity is one of the main justifications for forming one. If a PLLC is established, the person will often not be held personally responsible for the debts of the company, or any legal actions taken against the company.
A PLLC will not always shield you from harm. Even if you form a PLLC, it is a good idea to have malpractice insurance.