A professional L.L.C. is different from a traditional L.L.C. in multiple ways. This guide covers all the differences and similarities between a professional and a conventional L.L.C, from their other legal structures to operational differences.
What is a professional L.L.C.?
A professional L.L.C. is a limited liability company designed to facilitate professional services. Professional services can be defined as a service that usually requires its executives to have a state-issued license to operate, e.g., doctors, lawyers, etc. So, in most states, each member of a P.L.L.C. is required to have a professional license.
Each state has its specified set of rules for professional L.L.C.s, and they can differ from what is required to be a member of a P.L.L.C. to how a P.L.L.C. operates. That is why it is vital to understand the set of rules defined by each state for a professional L.L.C.
Legal & operational differences
As discussed earlier, a P.L.L.C. is a kind of L.L.C. designed explicitly for licensed professionals. One difference between a P.L.L.C. and an L.L.C. is that only licensed professionals such as doctors, lawyers, architects and accountants can form a P.L.L.C. Doctors and law practitioners are usually found on the state list of professions that are not allowed to create standard conventional L.L.C.s.
Another primary legal differences between these two types of L.L.C.s is that the members of a P.L.L.C. are not protected individually from malpractice claims arising against them. In a professional L.L.C., each member is personally liable for their malpractice but not for malpractice of other members. Some states also go as far as only allowing approved and licensed professionals to form a professional corporation.
To form a professional L.L.C., you must know all the requirements set by the state in which you wish to start it. In so many ways, it mirrors the process for forming a conventional L.L.C. with only a few additional steps.
Furthermore, another legal difference between a conventional L.L.C. and a P.P.L.C. is the filing process. When you are filing the Articles of Organization for your P.L.L.C., you will receive instructions on filing from both the Secretary of State office and your state’s licensing board. This operational and formational difference between a P.L.L.C. and an L.L.C. is distinct, as it distinguishes the set-up of your conventional L.L.C. from that of a P.L.L.C.
Therefore, when a P.L.L.C. applicant is filing the articles of organization, he must get his or her state’s licensing board’s approval, and this a step that a conventional L.L.C. can forego.
Advantages of a professional LLC
A professional L.L.C. has a lot to offer to a professional, including that it separates the professionals from the entity and shields them from most forms of personal liability. It would mean that, in the case of company debt and other kinds of liabilities, only the P.L.L.C. is held accountable, not the professional.
Thus, creditors can only go after the P.L.L.C.’s assets and bank accounts and can’t touch any personal property or assets of professional owners. And since owners won’t be liable for debts related to business, a P.L.L.C. mostly won’t need many business insurances. However, it is crucial to make sure to maintain good records separating personal expenses from business ones.
Another financial benefit of a P.L.L.C. for a professional is that, just like in a conventional L.L.C., it can elect for pass-through taxation status. It will allow any business tax to “pass-through” straight to its professional owners. This may not sound a big deal, but it prevents any double taxation, which is very common in regular corporations. It also ensures that taxation is being done on a personal rate and not on the corporate tax rate.
Furthermore, compared to traditional business corporations, professional L.L.C.s are much easier to operate, cheaper, and more flexible to register and maintain. Unlike conventional partnerships or various sole proprietorships, P.L.L.C.s can also offer better retirement plans for members with higher stakes.
Drawbacks of a P.L.L.C.
One of the significant drawbacks of a P.L.L.C. is that it does not protect professionals from individual malpractices. Furthermore, there is more struggle involved in keeping the records and other processes related to filings.
However, perhaps, one of the most significant disadvantages of a P.L.L.C. comes to raising money. Corporations have a unique intrinsic ability to go public on stock exchanges and can quickly raise capital.
It is the primary reason that most of the world’s largest companies are not limited liability companies but corporations. So, if you are a professional and have plans for mega-growth, P.L.L.C. is not the platform to fulfil your ambitions.
A PLLC is subject to different rules.
A professional L.L.C. is generally subject to slightly different rules as compared to regular L.L.C.s. At the start, P.L.L.C. registration requires more tangential documents, paraphernalia and licenses. Furthermore, it also needs the certificate of formation and company operating agreement.
In addition to the previously discussed additional documents, a P.L.L.C. must also state that it is a P.L.L.C. in its articles of organization and should contain “P.L.L.C.,” “P.L.L.C.;” or similar denotations to show that it is a professional L.L.C.
In a traditional L.L.C., membership transfer can quickly happen to a party (inside or outside) with the necessary approval required under the company’s operating agreement. However, it is not the same when it comes to a P.L.L.C. Only another professional with the same profession can receive membership into a professional L.L.C.
A PLLC is not afforded the same liability protection as an L.L.C.
While it is already discussed in the article, it is essential to understand the difference in liability protection in an L.L.C. and a P.L.L.C. A professional L.L.C. does not provide individuals limited liability protection when it comes to malpractices. It will only protect the rest of the members from personal liability who were not involved in malpractice.
P.L.L.C. formation service
While there is no legal requirement to opt for a registration agency or attorney to register your P.L.L.C., considering all the paperwork and hassle, it is not a wrong choice. Especially since you are applying for a professional L.L.C. and not for a conventional L.L.C., people with relevant expertise can always do better.
There are many online platforms where you can consult attorneys and other professionals to help you register your professional L.L.C. While it may sound like an extra expense, it is always worth it.
FREQUENTLY ASKED QUESTIONS
This section includes some of the frequently asked questions and their answers related to the topic of a professional L.L.C.:
- Who can own a professional L.L.C.?
To form a professional L.L.C., the owner must be a professional with a state-issued license. While most states also require all other members of the P.L.L.C. to have licenses, some states offer relaxation and only need the owner to have a professional license.
- Can you change an L.L.C. to a professional L.L.C.?
Yes, owners of an L.L.C. can amend their articles of organization to change their L.L.C. into a P.L.L.C. It will require them to do all the paperwork necessary for a P.L.L.C., starting with the submission of professional licenses to the secretary of the state office.
- Is a professional corporation an L.L.C.?
No, only the professional limited liability company is an L.L.C. and can enjoy the benefits offered to an L.L.C. One of the significant differences between a professional corporation and an L.L.C. is the way they are taxed. In an L.L.C., there is pass-through taxation, while I.R.S. considers a professional corporation as a C corp, and it is taxed accordingly.