Choosing a business entity type? You’ve options like a limited liability company, LLC, or PLLC. Could it be the right entity for your business?
This guide dives into PLLCs and explains how to form one.
What Is a PLLC?
A professional limited liability company (PLLC) is a type of LLC meant for licensed professionals, such as lawyers, doctors, and architects. Like LLCs, PLLCs, which are not available in all states, also offer limited liability protection.
One difference between PLLCs and LLCs is that the state’s licensing board must verify the license of the professional seeking to form a PLLC and approve the articles of organization. In addition, PLLC members must be in a profession requiring a license or certification from the state, but this is not clear in all states.
Some states list the professions that can have a PLLC, while in others, it’s more of a gray area. Typical professions that can form a PLLC include:
- Physicians, dentists, and other licensed medical professionals
- Real Estate Agents
- Social Workers
Differences Between an LLC and a PLLC
LLCs and PLLCs are considered “pass-through” entities, meaning income passes through the business to the members for tax purposes. Accordingly, the LLC or PLLC is not taxed, so all income is reported on members’ tax returns at their income rate.
Both LLCs and PLLCs are legal entities that are separate from the members. As a result, your assets are protected because you’re not personally liable for the company’s debts or legal liabilities.
However, there are some instances in which an LLC or PLLC member could have personal risk. For example, if an LLC member is guaranteed a business loan, they would be personally liable for the debt.
The main difference between an LLC and a PLLC is regarding malpractice claims. Each PLLC member is personally liable for any malpractice claim made against them but not for malpractice claims against other PLLC members.
For this reason, PLLC owners also need personal malpractice insurance to protect their assets.
Forming a PLLC
A PLLC is formed the same way an LLC is formed, except, as mentioned above, the state’s licensing board must approve the PLLC’s articles of organization.
The steps to form a PLLC are as follows:
1. Name Your PLLC
Naming your business can be challenging. You need a name that’s unique and easy to remember and conveys what your business does. You also need it to be SEO-friendly so that it can easily be found on Google.
Your business name is your business identity, and the first impression people will have of your company, so take care with this step of the PLLC formation process.
Once you have a few business name ideas, you’ll want to ensure they’re available. First, do a business name search on your state’s relevant website, usually the Secretary of State’s website. You’ll also need to check your state’s PLLC naming regulations to ensure you comply.
Next, you’ll need to make sure the name is not trademarked. Then, check with the US Patent and Trademark Office to ensure the name is available nationally.
You should also check to see if the domain name is available, which you can do on a site like GoDaddy. For example, you’ll want a .com domain name rather than .org or .co to give your business domain more credibility.
Once you know it’s available, you can reserve the name with your state using their name reservation form.
2. Select a Registered Agent
Most states require that you appoint a registered agent for your PLLC. A registered agent is a person or company authorized to accept official correspondence for your business, such as legal, tax, or financial documents.
A registered agent ensures your business stays in compliance with state laws. The registered agent’s job is to provide no important notices or documents that are missed.
In most states, a member of the PLLC can be the registered agent, or you can choose an individual that meets your state requirements. Generally, the conditions are that the registered agent:
- Be 18 years or older
- Have a physical address in the state
- Be available during regular business hours
- Be registered to operate in the state, if the agent is a business
Some states have more specific requirements, so check the rules in your state.
Many business owners hire a registered agent service to ensure all important documents are received and addressed in a timely manner. A registered agent service also offers convenience.
If you choose to be your registered agent, you’ll have to be available at your registered agent’s address during regular business hours. However, a registered agent service will allow you the flexibility to run and grow your business wherever you need to be.
3. Determine Your Management Structure
Members or managers can manage PLLCs. In a member-managed PLLC, members handle all management duties. In a manager-managed PLLC, non-member employees oversee operations and management duties.
Some states require that when you register your PLLC with the state, you declare whether your PLLC will be member- or manager-managed, so be aware that you may need to make this decision before you file.
4. File Necessary Documents with Your State
In most states, the document you need to file to make your PLLC official is the articles of organization. In some states, it’s called a certificate of organization or a certificate of formation.
Generally, you can file the document online, usually on the Secretary of State’s website. The document requires your business name, address, registered agent information, and sometimes member or manager information.
However, the state licensing board must approve your PLLC articles or organization before filing them. Filing fees vary by state and range from $40 to $500. Depending on the state, your PLLC should be approved within a few weeks of filing.
Some entrepreneurs use a business formation service like ZenBusiness to handle this step. It saves time and ensures the process is done correctly.
5. Determine Your Tax Status
As mentioned above, PLLCs are pass-through entities, meaning income passes through to members or members. If the PLLC has only one member, it’s taxed as a sole proprietorship. If the PLLC has more than one member, it’s taxed as a partnership.
However, PLLCs can also elect to be taxed as a corporation if the members decide it makes financial sense. This is done by filing an election form with the IRS. In addition, you can choose to be taxed as a C-Corp or an S-Corp.
C-Corp status means income is taxed at the current rate for corporations (21% as of late 2022), which is lower than the usual individual taxpayer rate. But keep in mind that C-Corp shareholders – who, in the case of a PLLC, are members – must also pay taxes on their distributions. This is called double taxation.
However, in a PLLC taxed by default as a sole proprietorship or partnership, members are subject to self-employment tax. Once such a PLLC switches to being taxed as a corporation, self-employment taxes no longer apply.
Similarly, self-employment taxes do not apply to members with S-Corp status, which is the main advantage of electing S-Corp status.
With S-Corp status, members are generally paid as company employees, which means more accounting and payroll expenses. Therefore, S-Corp status is only beneficial when the self-employment tax savings exceed those additional expenses.
6. Draft an Operating Agreement
Most states do not require an operating agreement, but it’s a very important document. It defines members’ ownership percentages and profit allocations. Those are the most important elements of the operating agreement. Still, it should also include:
- Each member’s rights and responsibilities
- Management structure and roles
- Voting rights of each member
- Rules for meetings and voting
- What happens when a member sells their interest, becomes disabled, or dies
You can find operating agreement templates online, but it’s best to have it drawn up or at least reviewed by an attorney. The language of an operating agreement is crucial and can often help determine how member disputes will be resolved.
7. Get Your Employer Identification Number (EIN)
The IRS uses an EIN to identify your company, just as a Social Security number does for individuals. It’s used for tax filing purposes. An EIN is required if your PLLC has more than one member or you are hiring employees.
Obtaining an EIN simply requires applying on the IRS website. The IRS rules for obtaining an EIN are as follows:
All EIN applications (mail, fax, electronic) must disclose the name and Taxpayer Identification Number (SSN, ITIN, or EIN) of the true principal officer, general partner, grantor, owner or trustor. This individual or entity, which the IRS will call the ‘responsible party,’ controls, manages, or directs the applicant entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.
8. Obtain Business Licenses and Permits
Depending on the nature of your business, you may need to apply for various licenses and permits at the federal, state, and local levels.
At the federal level, licenses and permits are generally industry-specific and may include health licenses and permits from the Occupational Safety and Health Administration (OSHA).
You may need a general business license to operate at the state level. You’ll need a sales tax license if you sell tangible goods or services subject to sales tax.
Check the SBA guide for specific licenses required for your business. Here are some common licenses and permits you may need:
- Industry-specific licenses for certain professions and industries such as construction, plumbing, electrical, childcare, food handling, liquor, architecture, and finance
- Building and zoning permits
- Doing business as (DBA) permit if you’re doing business using a name other than your LLC name
- Health licenses and permits at federal, state, and local levels
- Fire permits
- Sign permits
This is a crucial step in the PLLC formation process, so make sure to check with your state and local government offices to find out all the licenses and permits you need. You could face steep fines and penalties if you operate without the proper licenses and permits.
If you need help, it’s a good idea to consult a business attorney to ensure you’re in full compliance. You can also use a service like MyCorporation to do the research and provide you with all the forms you need to license your business.
Open Your Business Bank Account
With a PLLC; keeping your business and personal finances separate for accounting and tax purposes is important. Co-mingling your business and personal funds can threaten your liability protection since the line between business and personal assets will not be clear.
Most banks offer business bank accounts, so check with your local bank. You’ll need your EIN and a copy of your articles of organization. Your bank may require other documents as well.
Get Business Insurance
To protect your investment in your business, insurance is the right choice. There are several different types of insurance you may need.
- General liability: A comprehensive insurance covering many business elements. It includes coverage against bodily injury and property damage.
- Professional liability: Protects against claims from a customer who suffered a loss due to an error or omission in your work. It’s also known as errors and omissions (E&O) insurance.
- Workers’ compensation: Provides compensation to employees injured on the job.
- Property: Covers your physical business space.
- Business Property: Covers equipment and supplies.
- Equipment Breakdown Insurance: Covers repairing or replacing broken equipment due to mechanical issues.
- Commercial auto: Covers your company-owned vehicles.
- Business owner’s policy (BOP): This option combines the above insurance types.
PLLC members should also have malpractice insurance.
Most states require that you file an annual or biennial report with the state to verify you’re still doing business. These can generally be filed online. A small fee usually applies and varies by state.
Now that you’re familiar with a PLLC, it’s time to decide if it’s the right entity for your business. If you choose to form a PLLC, remember that each member can be held personally liable for malpractice claims against them.
As a result, all members must carry personal malpractice insurance. Consult an attorney if you’re unsure whether a PLLC is right for you.