January 14, 2020
Professional LLCs (PLLCs) and professional corporations are two types of incorporated business entities through which business owners can run their operation. Importantly, PLLCs and professional corporations are exclusively used by business owners in “professional” occupations. What exactly constitutes as “professional” varies state-by-state, but generally includes individuals of licensed occupations, such as doctors, lawyers, and financial professionals. When these types of professionals incorporate their business (ie. form a PLLC or a professional corporation), it’s called a professional entity.
Professional entities are mostly equivalent to their non-professional counterparts. For example, PLLCs are largely 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 professional corporations and the corresponding traditional corporations; both have similar regulations, tax treatment, application procedures, and ownership structures.
So fortunately, if you’re familiar with the concept of normal business incorporation, you’re probably somewhat familiar with professional incorporation. On the other hand, if you don’t know much about business incorporation and wish to form a professional entity, a good idea is to first review the fundamental concepts of traditional incorporation.
Why Should I Incorporate my Business?
The first step to starting a new business is declaring a business entity. There are a number of entities to choose from, so which is best for your particular operation? This depends on a few factors, such as the type of service the company provides, its risk-level, it’s yearly revenue, and its ownership structure.
Entities can be rightly divided into two classes: unincorporated structures and incorporated entities. When an owner chooses to form an incorporated entity (or, alternatively, decides to convert their unincorporated business into an incorporated entity), it’s called business incorporation. Upon successful business incorporation, owners establish a protective barrier between themselves and their company.
This point is worth reiterating, as it’s the most important facet of business incorporation: once a business is incorporated, it’s generally treated as its own legal entity (akin to treating it like any other individual). This is in contrast to unincorporated business structures, like sole-proprietorships or general partnerships, where the business is not its own legal identity, but rather an extension of its owners.
There are a number of benefits to treating a business as a separate entity. Perhaps the single most attractive advantage is the separation of personal and business liability. By forming an incorporated entity like an LLC or corporation, an owner is legally distinguishing their personal assets from the assets of the business. In other words, the liability of the business—things like financial obligations, company loans, legal claims, and other business debts—are mostly disjoint its owners’ personal accounts.
Importantly, these same principles apply to professional entities like PLLCs and professional corporations. When a professional entity is formed, owners are granted the valuable liability protections associated with business incorporation, but with one important caveat: while a professional entity protects its owners from the malpractice claims of the other owners, it cannot protect them from their own malpractice or negligence.
PLLCs vs Professional Corporations
Since PLLCs and professional corporations are largely analogous to their non-professional counterparts, it follows that the differences between PLLCs and professional corporations are generally the same as the differences between non-professional LLCs and corporations. While both types of entities offer important liability protections, there are key differences to consider before choosing one over the other.
First things first, it’s worth mentioning that some states allow the formation of both PLLCs and professional corporations, while many only allow one or the other. For example, most states like Nevada and Colorado allow both PLLC and professional corporation formation, whereas California only allows professional corporations and West Virginia only allows PLLCs. Thus, many professional owners don’t have the “PLLC or professional corporation” option.
That being said, if you operate in a state that 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. This is best done with the advice of a legal or tax professional, as choosing an entity can have long-term consequences on your business. Upon professional consultation, you’ll likely discuss the following distinctions between PLLCs and professional corporations:
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. Professional corporations, on the other hand, are by-default taxed (per the corporate tax rate) as C Corps. Importantly, qualified professional corporations 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. An experienced business attorney can be of great assistance when choosing the most tax-friendly structure for your particular business.
Formalities and Ownership Structure
Generally, professional corporations are more highly regulated than PLLCs, as they’re subject to a greater number of formalities and procedures than LLCs. In many ways, LLCs are more similar to unincorporated structures when it comes to ownership structure.
Formation Documents
In terms of administrative state filings, PLLCs and professional corporations are required to submit different documentation to incorporate their business. For PLLCs, this typically includes an Operating Agreement and Articles of Formation. For professional corporations, the administrative requirements are somewhat more involved, often involving Articles of Incorporation, Corporate Bylaws, and a Shareholders Agreement.
The “PLLC vs professional corporation” decision should always be made with the help of a professional. Remember, regardless of which structure you choose, professional entities cannot protect owners from their own malpractice. In other words, while PLLCs and professional corporations offer many of the same limited liability protections that normal incorporated entities enjoy, they cannot shield an owner from their own professional negligence.
