A professional corporation (PC) and a professional limited liability company (PLLC) are business entities that offer liability protection and tax advantages for licensed professionals, such as doctors, architects, dentists, mental health professionals, lawyers, and accountants.
In most states, all or at least half of the owners of a PC or PLLC must be licensed professionals in the field for which the business was formed, and the business can only offer these services.
What is a Professional Corporation (PC)?
Depending on your state, if you are a licensed professional who wants to form a business and offer these services, you may need to create a PC. In most states, every shareholder in a PC must be licensed. Typically, licensed professionals of different professions cannot be shareholders in the same PC.
To form a PC, the first step is to file articles of incorporation with your state and pay the required fee. The articles of incorporation will include bylaws describing how your business will operate and information about shareholders.
A PC must follow the same compliance regulations and requirements of a regular corporation, including keeping stock ledgers and holding regular meetings for the board of directors and stakeholders.
Owners of a PC may be subject to double taxation unless they qualify for an S corp. By default, the Internal Revenue Service (IRS) considers a PC to be a C Corp and, therefore, taxed at the corporate tax rate.
A PC provides owners and members of a PC with protection against business lawsuits and lawsuits filed as a result of actions taken by other shareholders or owners of the PC. Owners and shareholders in a PC are still liable for individual negligence.
What is a Professional Limited Liability Company (PLLC)?
A PLLC is similar to a limited liability company (LLC). However, forming a PLLC is restricted to certain licensed professionals. An LLC is a business structure that protects owners from business liability as long as business and personal assets are kept separate. An LLC’s debts and legal judgments are paid using the business assets, not the owner’s personal assets.
A PLLC protects the assets and property of each member from any litigation. Each member of a PLLC is independently liable for negligence.
Forming a PLLC involves a similar incorporation process to forming an LLC in that the members must draft articles of organization and operating agreements and file them with the state in which the business is located. Unlike with an LLC, for a PLLC, your state licensing board will need to approve your PLLC.
State law varies regarding the minimum and maximum number of PLLC members permitted in a PLLC, the percentage of members who must be licensed, what type of professionals can form a PLLC, and whether a PLLC is even an option. For example, professionals in California cannot form a PLLC but can form a PC or a registered limited liability partnership (RLLP), while professionals in other states, such as New York and Arizona, can form a PLLC.
Owners of a PLLC will be taxed individually, as a partnership, or as an S corporation. If the business chooses to be taxed as an S corp, profits and taxes pass through the PLLC to the individual owners. The owners are responsible for paying taxes on their individual tax returns.
Since a PLLC frequently requires that the business stays within the limits of a practicing licensed professional, a PLLC business structure may limit your business offerings. For example, a dermatologist may not be permitted to offer nutraceuticals using a PLLC.
A PLLC offers the same liability protections as an LLC. It offers malpractice protection from actions taken by partners in the PLLC, but each member must maintain their own malpractice insurance, as each member is liable for their own malpractice.
Which is Right for you?
If you are a licensed professional and considering opening your own business, a fee-only financial advisor can help you evaluate the pros and cons of an LLC, PC, and PLLC.
Important considerations when choosing your business structure:
- Are you a licensed professional? If you are not providing a professional service, an LLC may be your best option.
- Have you checked state laws? States vary on whether they allow professionals to form a PLLC. For example, California will not allow professionals to form a PLLC.
- Will you have partners in your business? A PLLC or a PC may be a better choice than an LLC or partnership because they provide legal protection from your partner’s actions. You will still need malpractice coverage for yourself but will be protected against legal actions taken against the business or your partners.
- How will you limit tax liability? A wealth manager or financial advisor can describe the taxation benefits available with each business structure and make a recommendation based on your individual needs.
There is no one-size-fits-all guide to investment. Working with a financial advisor near you can ensure you make the best financial decisions for yourself and your loved ones.
