January 29, 2020
Individuals interested in starting their own business must first decide upon an appropriate business structure. The choice of structure—in this context, also called an entity—is a preliminary, yet fundamental decision for any aspiring owner. The legal distinctions between the various business structures can be complicated and nuanced. Nonetheless, these types of structural decisions can have serious consequences on an operation and are generally best handled with assistance from a legal professional or a tax advisor.
Briefly, there are two broad classes of business structures: incorporated entities and nonincorporated entities. Incorporated structures, such as Limited Liability Companies (LLCs) and Corporations, offer owners a layer of liability protection that unincorporated structures simply don’t provide. Thus, proper business incorporation effectively creates a legal distinction between the owner and their business. This is an attractive aspect of LLCs and corporations, as legal issues surrounding the business then remain on the business itself and typically don’t threaten owners’ personal assets.
Importantly, however, the rules of incorporation are slightly different for what are called “professional” occupations. What is considered a “professional” occupation varies depending on local state jurisdiction, but commonly includes licensed and regulated careers, like doctors, lawyers, and engineers. When these types of individuals want to start their own incorporated business, such as their own private practice, they may be unable to form a typical LLC or corporation and instead be required to form a professional LLC (PLLC) or professional corporation (PC).
PLLCs and PCs are called “professional entities” and they’re largely analogous their non-professional counterparts, however, there are important differences in terms of liability protections. The key distinction is that owners of professional entities aren’t shielded from claims brought against themselves. A second difference between professional entities and their non-professional counterparts is that, unfortunately, the rules regulating professional entities are highly variable state-to-state.
Professional Entities and Florida-Specific Legislation
All 50 states allow professionals to create professional entities, however, not all states permit the formation of both PCs and PLLCs. Most states permit PCs, while a fewer number allow PLLCs. For example, California allows professionals to form PCs, but not PLLCs. On the other hand, West Virginia doesn’t allow the formation of PCs, but does allow PLLCs.
In short, most states allow the formation of both. This includes Florida, where many of the rules regarding professional entities are governed by the Florida Professional Service Corporations and Limited Liability Companies Law.
Since Florida law permits the formation of both PLLCs and PCs, an obvious next question for aspiring owners is: which structure best suits my practice? Again, these types of structural decisions are nontrivial and can have long-term consequences on a business. Therefore, it’s always best to consult an expert before making any commitments to a particular business entity.
PLLC or PC: which is Best for my Practice?
Professional entities are mostly equivalent to their non-professional counterparts. For instance, PLLCs are mostly subject to the same rules and regulations as regular LLCs. Likewise, the application process is similar, they receive comparable tax treatment, and they enjoy some of the same liability protections. The same can be said of PCs and traditional corporations; both have similar regulations, tax treatment, application procedures, and ownership structures.
So if you’re familiar with the concept of normal business incorporation, you’re likely familiar with professional incorporation. However, if you don’t know much about business incorporation, it’s a good idea is to first review 1) the Florida-specific regulations and 2) the fundamental concepts of traditional incorporation.
The act of forming a professional entity isn’t necessarily difficult. Rather, the real challenge is determining the best entity for your particular operation. Here are a few distinctions every owner should understand before making any drastic decisions regarding business incorporation:
Corporate Formalities and Ownership Structure
PCs are generally more regulated than PLLCs. In many ways, LLCs are more like to unincorporated structures when it comes to ownership structure.
Taxation
PLLCs—like regular LLCs—are pass-through tax entities, meaning that the profits/losses generated by the business can be declared on the owner’s individual tax return. PCs are taxed per the corporate tax rate. Importantly, qualified PCs can elect to be taxed as S Corps which, like LLCs, are pass-through entities. Nonetheless, pass-through entities aren’t always the superior option, and it’s best to consult a knowledgeable professional before opting for any sort of alternative tax treatment.
Formation Documents
In terms of documentation, PLLCs and PCs are required to submit different filings to incorporate their business. For PCs, this typically includes the Articles of Incorporation, Corporate Bylaws, and Shareholders Agreement. For PLLCs, however, the process is a bit less involved, usually requiring the Operating Agreement and the Articles of Formation. The exact forms (as well as their associated filing fees) can be found on the Florida Department of State’s website.
Since the Florida legislature allows the formation of both types of professional entities, it’s critical to familiarize yourself with the structures in order to make an informed, prudent decision for your business. Nonetheless, the decision should undoubtedly be made with the help of a professional.
It’s important to keep in-mind that regardless of which structure you choose, professional entities cannot protect owners from their own malpractice. In other words, while PLLCs and PCs offer many of the same limited liability protections as normal incorporated entities, they cannot shield an owner from their own professional negligence.
