Many business owners are familiar with limited liability companies (LLCs), but fewer know about professional limited liability companies (PLLCs). Both LLCs and PLLCs offer unique benefits to protect business owners from liability and the potential to save on taxes.
However, not all businesses can become PLLCs, while more can choose LLC status. Here’s a closer look at LLC vs. PLLC registration to help you decide which could make the most sense for your unique business needs.
Intro to LLCs
An LLC is a limited liability company. Limited liability companies are relatively easy to create and maintain. LLCs are a great way for solo business owners to limit legal liability and potentially save on taxes. While each state has different regulations and requirements, you can form an LLC in every state in the United States.
An LLC is a pass-through business entity. A pass-through entity means your taxes pass through to your personal tax return, so the LLC generally won’t have to pay federal income taxes. LLCs are relatively simple business entities compared to more complex corporations.
Why choose an LLC?
The two main benefits of an LLC are related to legal liabilities and taxes.
- Legal liability: If you run an LLC and maintain separate finances for your personal and business needs, you can protect your personal assets from liability in case of a legal dispute. For example, if a customer suffers harm from your product or service, they can sue your business, but your personal assets, like your retirement account and home, are not at risk.
- Taxes: Depending on your business profit, there could be a tax benefit if you opt for taxation as an S Corp. Learn more about how those tax savings work in this more detailed article focused on saving money with an LLC taxed as an S Corp.
When you work as a sole proprietorship, you have personal liability if your business is sued. An LLC helps mitigate this risk through the liability protection.
If you’re interested in taking advantage of the benefits of an LLC and want help forming your business and tracking your finances, Collective can help. Find out how it works and schedule a free consultation here.
Who can form an LLC?
Most business owners can start an LLC. Whether it’s a side hustle or a full-time gig, you can take steps to turn your business into its own legal business entity. Be aware that the cost of forming an LLC varies widely by state. Many states charge less than $100 per year for forming an LLC, while others have a minimum $800 fee for LLCs. Check your state’s Secretary of State website for cost and fee details.
When your LLC is formed, you will receive Articles of Organization (or similar documents), an important document in business formation that proves your business exists.
Intro to PLLCs
A PLLC is a professional limited liability company. In many ways, they work like a traditional LLC. However, they’re generally limited to business owners considered “professionals,” like those who work in medical, legal, and other professions who have professional licensing requirements.
Unlike LLCs, which are available in all states, PLLCs are only allowed in under a dozen states. Even if you qualify for a PLLC, you may prefer an LLC to use a more widely recognized business structure.
Why choose a PLLC?
In many cases, the benefits of a PLLC are nearly identical to those of an LLC. Those benefits include legal liability protection and the option to file taxes as an S Corp. But they’re only for licensed professionals in certain fields.
The biggest difference is that PLLCs offer different protections in case of a malpractice claim. A malpractice suit may put the individual’s personal assets at risk despite forming a business entity.
With a PLLC, only the person accused of malpractice is at risk, while other partners (known as members) are not at risk. This protection can vary by state. If you’re a professional considering a PLLC, consider consulting with a trusted legal professional to ensure you’re protected as you expect.
Who can form a PLLC?
PLLCs are limited to a specific set of professionals set by the state where you’re forming the business. Here’s a list from Colorado as an example, but your state’s list may differ:
- Medical practice
- Physical therapists
- Social workers
- Marriage and family therapists
- Professional counselors
- Addiction counselors
In other states, licensed real estate and other professional services providers may also be able to create a PLLC.
In addition to standard LLC forms, you may have to submit additional documentation, such as a professional license, to verify your status as a professional eligible for a PLLC.
States allowing the formation of PLLCs include Arizona, Colorado, Florida, Minnesota, New York, North Carolina, Texas, and Washington. Laws can change, so it’s best to check with your state or a trusted legal professional to ensure you’re eligible for a PLLC.
Tip: A C Corporation is another type of business entity offering strong liability protections. However, owners may be subject to double taxation by the IRS.
LLCs vs. PLLCs for solo business owners and entrepreneurs
For many solo business owners, an LLC is a better fit than a PLLC. This is because both entities offer nearly the same protections and benefits when working as a professional in your own business. PLLCs are a little harder to create and less widely available than traditional LLCs.
Depending on your state, professions in the medical, legal, accounting, or real estate industry may be required to form a PLLC, so check your state’s requirements when preparing to form your business entity.
Businesses with multiple LLC members that don’t need professional licenses may still want to form an LLC to maintain limited liability protection and pass-through taxation. In this scenario, creating an operating agreement outlining each member’s ownership and responsibilities in the small business is a good idea.
If you’re working in a larger company with partners, a PLLC can make sense, as the PLLC protects other members of the PLLC from malpractice claims against other members. In this scenario, all members must carry their own malpractice insurance, so you’re most protected if another business member winds up in a malpractice suit.
PLLC businesses make sense for some professionals working with others in the same business, but they’re usually not the best choice for solo business owners, as the added work doesn’t provide you with any material benefits.
If you’re a solopreneur working independently, Collective can help you form your business and manage your business finances. Learn how to work with Collective and how we can help here.
Eric Rosenberg is a finance, travel, and technology writer in Ventura, California. He is a former bank manager and corporate finance and accounting professional who left his day job in 2016 to take his online side hustle full-time. You can connect with him at Personal Profitability or EricRosenberg.com.