Professional LLC (PLLC)

Overview

There are about 30 states that have adopted provisions allowing the formation of a PLLC. Another 9 states allow a licensed professional to form a regular LLC. The remaining states not allowing PLLCs are either silent on whether a licensed professional may conduct business through a regular LLC or specifically prohibit it. All references below to a PLLC also include a regular LLC for states allowing a licensed professional to form a regular LLC.

Like a regular business LLC, a PLLC combines the advantage of limited liability protection of a corporation with the advantage of pass-through taxation of a partnership or sole proprietorship. However, there are substantial limitations on the limited liability protection afforded by a PLLC.

Many licensing agencies require licensees who form a PLLC to provide malpractice insurance or post other equivalent security to compensate any clients or patients who are harmed by the actions of the licensee. Secondly, most, if not all, states have a public policy that every individual is legally responsible for damages that are caused by his or her personal negligence or other misconduct. No limited liability entity will provide a shield against personal liability in these circumstances. For regular business obligations outside of the above limitations, however, a PLLC will provide the same limited liability protection for the personal assets of a licensee member as in a regular business LLC.

Though partnerships and sole proprietorships avoid double taxation as pass-through tax entities, they don’t offer any limited liability protection for owners. Similarly, a corporation offers limited liability protection but the potential of double taxation if taxed as a C Corporation.

An LLC may be managed solely by the owners, called members, or the members may appoint one or more managers to run the business on a daily basis. An LLC is therefore characterized as member-managed or manager-managed. Because of the special requirements imposed on a PLLC for all members to be licensed professionals, it would not be common to have a manager-managed PLLC for several reasons. Unlike a business LLC, the members in a PLLC would rarely have a passive role. Secondly, the licensee members would be very restricted on the duties and responsibilities that could be vested in any non-licensee manager.

A PLLC is formed by filing Articles of Organization with the Secretary of State (or equivalent formation agency) in each state. Some states require prior consent from a licensing agency before Articles can be filed for a PLLC. A PLLC allows members considerably greater flexibility in determining the organization’s management structure than a corporation. This is accomplished through a written operating agreement among the members to control matters such as how management will be organized, rights of members, allocation and distribution of profits and losses, and transferability of memberships. Again, a PLLC will be subject to additional restrictions or requirements not imposed on a business LLC because of the requirement that the members be licensed professionals. State PLLC Acts provide default provisions that will govern the LLC if the members do not enter into an operating agreement or if the operating agreement is silent on a given topic.

A PLLC has several tax classifications to choose from depending on the number of members and the formation state.


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