Professional LLC (PLLC)

Overview

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(All references below to a PLLC also include a regular LLC for states allowing a licensed professional to form a regular LLC.)

• 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.
• 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.
• 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. Also, 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.
• 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.
• 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.
• A written operating agreement typically covers how management will be organized, rights of members, allocation and distribution of profits and losses, and transferability of memberships, though 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
• A PLLC has several tax classifications to choose from depending on the number of members and the formation state.