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Whether you're a sole proprietor or a multiple-member business, you might consider forming a limited liability company or professional limited liability company if you want to protect your personal assets when conducting business.

While these two business models have many similarities when it comes to taxation benefits and asset protection, the main difference between LLC and PLLC entities lies in how only certain types of professionals can form a PLLC. Understanding these two types of companies can help you decide which you should form in your state.

Basics of an LLC

Business owners usually consider forming an LLC when they want to create a legal business entity but don't want to go through the complex process of setting up a traditional corporation. This simpler type of business model provides an important separation of business debts from personal debts so that each owner just stands to lose the funds put into the business itself.

So, if the LLC can no longer pay its bills or gets sued, then the owners have protection for their private residences and other personal assets. However, they can still lose the business assets. It's important to note, though, that this limited liability doesn't extend to mean that the business can commit illegal acts or be negligent without the owners being held responsible.

This type of business structure also involves pass-through taxation by default, where the LLC itself doesn't need a file a tax return. Instead, the owners report any losses or earnings on their personal income tax returns. This helps avoid the costly problem of double taxation that traditional corporations face.

How a PLLC Differs

While the business setup of a PLLC works about the same as an LLC, states limit this business model to certain occupations that require professional licensure. Often, this applies to accountants, health care professionals, attorneys, engineers and architects. In fact, states often ban these types of professionals from forming a regular LLC since individual members still legally need to have liability for malpractice claims that people make against them.

The PLLC model handles this problem since members will have personal liability for malpractice but won't face legal or financial issues if another member gets sued. However, UpCounsel warns that there are some potential issues if you supervise an employee who commits malpractice. Therefore, PLLC members usually have to obtain some malpractice insurance of their own.

PLLC vs. LLC: Advantages

When deciding between a PLLC or LLC, know that you'll get the following advantages with either option:

  • Freedom with management and ownership: LLC and PLLC members make an operating agreement where they get the freedom to decide how to operate the company. This includes how much of the company's profits and losses get allocated per member, how much ownership percentage each person has, how assets get transferred and which daily responsibilities they'll perform. These types of companies can also have as many members as they want, which makes it easier to expand the business.

  • Personal liability protection: Both PLLC and LLC members enjoy the financial protection that comes from separating business and personal assets. PLLC members only have to worry about being responsible for their own malpractice.

  • Credibility for business: Especially important for one-person businesses, forming a legal entity like an LLC adds credibility that can give customers peace of mind. LLCs and PLLCs can also use their official status to get business loans.

  • Simple formation in most states: Compared to forming an S corporation or C corporation, states usually make the LLC and PLLC filing process simpler with less documentation and fewer steps. There are also fewer requirements to meet to qualify for these statuses versus other business formats that limit members and require more business filings.

  • Flexibility with tax treatment: Thanks to the default pass-through treatment of taxes, LLC and PLLC members only need to pay taxes using the election they choose. For example, a single-member business can elect to be taxed as a sole proprietorship, while those with multiple members get taxed like partnerships. At the same time, LLC and PLLC members can elect for tax treatment as a corporation if they desire.

PLLC vs. LLC: Disadvantages

These two types of companies share some disadvantages, but PLLCs have some that set them apart from plain LLCs. These considerations include:

  • Business costs: The filing cost for these types of businesses can run up to $500. Your state may also require you to pay an additional fee yearly or biyearly to keep the business active, and while it often costs less than $100, it can cost up to $500 in some states.

  • Potential for poor management: Whenever you operate a company with multiple people, you can run into conflicts over how to run things. Whether another member takes too long to make decisions or works unproductively, your success and profits can suffer.

  • Varying state rules for PLLCs: You can run into a wide variety of issues when considering a PLLC, meaning the requirements for forming this business type or even having it recognized can vary from state to state. In fact, Nolo warns that professionals in California can't form an LLC or PLLC at all and instead have to look at alternate partnership and corporation models. You also have to consider whether your state requires all or just some members to have professional licenses.

  • Banking and tax considerations: When you have an LLC or PLLC, you have to obtain a special corporate bank account that can come with higher fees than regular business accounts. Members often have to pay self-employment taxes since the IRS usually considers them as business owners rather than as employees.

  • Longer setup time for PLLCs: Compared to starting an LLC, you can expect a longer setup time since the state licensing board will need to check your professional licenses before you can get approved to operate.

Forming an LLC or PLLC

After considering the requirements, pros and cons for a PLLC vs. LLC, you should consider your line of business and investigate your state's requirements to determine which format you can use. If you plan to operate in multiple states, keep in mind that you'll have to complete the formation process in each state.

Some common steps for forming an LLC or PLLC include:

  1. Naming your business: This usually means including terms or abbreviations in the business name indicating you're an LLC or PLLC. You'll need to check with the state to verify the name is original and avoids any forbidden words.

  2. Selecting your registered agent: This person needs to live in the state where you're registering and handle things like receiving official documentation for your business.

  3. Drafting and filing your articles of organization: This document will include information about your LLC's or PLLC's owners, management plans, professional services and registered agent. You'll usually pay a fee to submit this to your state.

  4. Making your operating agreement: This goes into complete detail on how your LLC or PLLC will function and may need to be sent to the state if requested.

  5. Register with tax and licensing authorities: This can include handling sales tax registration, getting state and federal tax IDs and applying for all licenses and permits needed to begin operations.

  6. Get approved by the state professional licensing board (for PLLC): Check your state requirements to find out whether you need preapproval before registering your business with the state. The licensing board will verify that you have an active license and meet any other requirements for your profession.