July 23, 2020
If you’re like many licensed professionals, your dream is to be your own boss. Maybe you’ve worked under someone else and learned the ropes or perhaps you’re ready to just form your own company right off the bat. Whatever your situation may be, opening up a new business is an exciting time that can also sometimes bring about its own set of headaches.
Being your own boss and starting your own company means you’re now responsible for looking into all the administrative practices, paperwork, legal documents, and taxes yourself. All these extra steps can be stressful if you’re completely new to it all. Even for a seasoned veteran, unless you happen to be an experienced business attorney, there are probably going to be some things you will need a hand with.
In this guide, we’ll help alleviate some of the stress of opening a professional practice by going through the differences between a Professional Limited Liability Company, or PLLC, and a Professional Corporation, or PC. We’ll highlight what makes each business structure unique, what options you have with each one, and what their limitations are.
Once we define all the terms and go into the details of both options, we’ll go into some of the considerations you should take into account when deciding whether a PLLC or PC would be best for your professional practice.
Before we get too deep into a comparison, it is important to note that this guide is only here to serve as an overview for general education. Your own legal counsel and financial professional will be best equipped to provide insight and advise you on the best options for your unique business goals and preferences.
What is a PLLC?
A PLLC is the professional version of the standard company structure known as a Limited Liability Company, or LLC. An LLC can be opened by pretty much anyone who wants to run a business and protect their personal assets. This is what is meant by the term limited personal liability and the main reason people who start off as sole proprietors or in partnerships choose to incorporate.
By starting an LLC or corporation, you as the owner separate yourself from the business entity. This means if your business should ever get into legal or financial difficulties, by and large, your personal assets—your car, home, and savings account—won’t be at risk should creditors come knocking. If you’re operating as a sole proprietorship or partnership this protection doesn’t apply, which is why these business structures are riskier, although much easier to set up and operate.
A PLLC and a PC will both provide an additional layer of protection against malpractice suits arising from actions taken by other owners of the company for a professional service. Note that this doesn’t mean an individual is shielded from malpractice due to their own actions or negligence, rather they would only be responsible for their own suits and not those to be taken up against another shareholder.
In terms of tax advantages and tax law, an LLC has the flexibility to go with the default, which is “pass through” taxation, S-Corp. designation, which is also “pass through” and comes with some other restriction, or C-Corp. taxation where you pay corporate tax. Pass through taxation means that the company income isn’t taxed at the corporate level, rather only as income taxes when the owners file their own personal taxes. This limits the burden of double taxation, which is a big consideration for small businesses.
The major distinction between a PLLC and an LLC is who can operate them. As we’ve said, anyone can open a regular LLC, but in order to own a PLLC you need to be a licensed professional. Those include:
Doctors
Lawyers
Accountants
Chiropractors
Architects
Engineers
It’s important to mention that some states, California for example, prohibit professionals from operating LLCs or PLLCs. Instead, they are limited to Professional Corporations or Registered Limited Liability Partnerships (RLLPs).
How Do You Start a PLLC?
The regulations for setting up and running a PLLC vary from state to state, but in most cases the steps are similar to starting an LLC. Here is an overview of the process, but again, you’ll need to check your own state’s specifics.
First, you need to choose a name that is not yet taken in your state. As a professional, in most cases you’ll need to make that clear in your name by appending PLLC or your professional designation at the end. See, e.g., NRS 89.040(3); Tex. Bus. Code § 5.059.
Next, you will designate a registered agent who will serve as the official point of contact for your company with the state and courts. This person or company will be sent all your official mail. You need to make sure they are a resident of the state you are operating in. See e.g., NRS 78.090; Tex. Bus. Code § 5.201(b).
After that, you will file your Articles of Organization with your professional governing body to receive approval. They will also need to verify that all members of your PLLC are licensed to practice. Then you will be able to file the Articles with the state.
Then, you need to request an EIN from the IRS. This is your company’s Social Security number and will be required for taxes, hiring employees, and various other forms.
Finally, you will want to draft your Operating Agreement. Although not required in many states, you will definitely want to have one. This is the rulebook for how your company will operate and will help you out in the long run should there be any disputes among members. Further, many banks will want to see your Operating Agreement before allowing you to open a business account.
LLCs are popular among small business owners because they are relatively simple to set up and require little paperwork to maintain. Corporations, on the other hand, have a much higher administrative burden and regulations they need to abide by.
What is a Professional Corporation?
Similar to how the PLLC is analogous to the LLC, a PC is in many ways similar to a standard corporation. The main difference being, again, that professionals cannot operate as regular corporations and only professionals can be shareholders in a PC.
Corporations default to C-Corp. taxation when they are formed. This means that they are considered a taxpaying entity and pay corporate tax on income. This income is then paid out to shareholders who need to pay taxes again on their personal income. For this reason, many small business owners opt to convert an to S-Corp. instead. Professional Corporations can also elect to be classified as an S-Corp.
An S-Corp. is very similar to the taxation of a sole proprietorship, partnership, or LLC, in that it receives “pass through” taxation as discussed previously. However, there are some other regulations that come along with being an S Corporation, including:
The maximum number of shareholder is 100
Shareholders must be US citizens or permanent residents
One class of stock can be offered
For a Professional Corporation, which already has limitations on who can be an owner, the S-Corp. designation simply limits the options further.
How Do You Start a PC?
As we’ve previously mentioned, it’s a bit more complicated to start a corporation than an LLC. There are regulations that vary from state to state, but generally the process is roughly like this for creating a Professional Corporation:
First, you choose your company name. Just like with a PLLC, you’ll need to make sure it’s unique in your state and includes a professional designation, either PC or professional abbreviations. See, e.g., NRS 89.040(2); Tex. Bus. Code § 5.054; W.S. 17-3-103.
Next, you draft up your Articles of Incorporation. You’ll include the purpose of your corporation and establish the intent to operate as a PC, among other information.
After that, you must register with the appropriate governing agency for your profession in your state.
Then, you draft your corporate bylaws, which are the rules and regulations by which your company will operate.
Lastly, appoint a Board of Directors and meet. Once you have this meeting, all your shareholders can put the bylaws into effect and conduct other required tasks.
There are certainly more federal and state requirements than listed out here, so if you are incorporating you will need to consult with a business lawyer or other legal entity to help you along the way with legal advice. After you form your corporation, there are many filings and regulations that need to be kept up with on a regular basis, such as annual tax reports, holding annual shareholder meetings, and taking corporate minutes. See, e.g., Cal. Corp. Code § 1500; NRS 78.105; Tex. Bus. Code § 3.151; W.S. 17-16-1601.
Which One Should I Choose For My Professional Practice?
Professional Limited Liability Companies are much easier to form as professional entities and, in some ways, have the best of both worlds: the liability protection of corporations and are simpler for tax purposes and operation like sole proprietorships. PCs have stockholders rather than members, which enables more people to financially be involved than in a PLLC. It is a simplification to say that larger companies tend to be corporations, while smaller business entities are more often PLLCs, but it is generally the case.
The burden of paperwork and administration is often too much for a small business to handle. However, incorporation opens up a company to more investment opportunities down the road. Further, depending on what state you live in, you may not have the option of opening a PLLC for your professional practice.
