PLLC VS LLC for Independent Contractors

Professional LLC VS LLC

As a 1099 professional, knowing if you're choosing the right business structure can be challenging. This decision is critical because it significantly impacts your legal liability and taxation. So, if you've found yourself weighing the choice between a PLLC versus LLC, you've come to the right place.

While many independent contractors prefer LLCs for their flexibility, some professionals will benefit more from forming a PLLC.

PLLCs are tailor-made for licensed professionals who require a business entity that aligns with their specialized services and provides specific legal safeguards.

What is an LLC?

LLCs are a business structure that blends the tax advantages of sole proprietorship with personal liability protection. This structure appeals to small business owners, freelancers, and those starting new ventures largely because of its flexibility.

As a 1099 professional operating under an LLC, you can enjoy pass-through taxation. This means the business's profits and losses pass to your personal tax return and avoid the double taxation that corporations face.

Moreover, an LLC provides a protective barrier for your personal assets. In the event of legal action against your business, your personal property is generally protected.

What is a PLLC?

PLLC Definition

What is a PLLC company? PLLC stands for professional liability company. They are a specialized business structure for 1099 professionals licensed in fields such as law, medicine, or architecture.

Like an LLC, a PLLC offers the key benefits of pass-through taxation and liability protection. However, the distinctive feature of a PLLC is its focus on licensed professionals. States that recognize PLLCs typically require all members to hold a license in the profession the PLLC operates in.

This requirement ensures that PLLCs maintain a standard of professional expertise and integrity in specialized fields.

Similarities Between LLC and PLLC

1. Limited Liability Protection: Both offer protection for personal assets against business debts and lawsuits.
2. Pass-Through Taxation: Both are pass-through entities. They allow profits and losses to pass through to the owner's personal tax return to avoid double taxation.
3. Operational Flexibility: LLCs and PLLCs provide flexibility in management structure without the rigid formalities required by corporations.
4. Formation Process: The process of forming an LLC or PLLC involves filing Articles of Organization and drafting an operating agreement.
5. State Law Governance: Both are governed by state laws and regulations, which vary by state.
6. Separate Legal Entities: Both are distinct legal entities from their members, offering personal liability protection.

Membership Restrictions

The main difference between LLC and professional LLC is that a PLLC is specifically for licensed professionals.

Professional Licensing Requirements

PLLC owners must hold valid professional licenses in their field, a requirement not applicable to LLCs.

State Availability and Regulation

Not all states recognize PLLCs, some states require approval, and in general, there are more regulations.

Liability Protection

LLCs offer broad liability protection for business-related issues. PLLCs do not protect from liability arising from professional malpractice.

Who Qualifies for a PLLC

1099 professionals who typically need to form a PLLC are usually those in regulated professions requiring state licensure. These professions often include:

1. Lawyers
2. Doctors
3. Dentists
4. Accountants
5. Architects
6. Pharmacists
7. Chiropractors
8. Engineers
9. Psychologists
10. Veterinarians

How to Form a PLLC

Forming a PLLC involves several key steps and is similar to forming an LLC. Here's a general outline of the process for business formation:

1. Verify Eligibility: Ensure your profession is eligible to form a PLLC in your state. Typically, this includes licensed professionals such as doctors, lawyers, accountants, and architects. Each state has its own list of eligible professions.
2. Choose a Business Name: Select a unique name for your PLLC that complies with state naming requirements. Often, the name must include "PLLC" or a similar designation. Conducting a name search through your state's business filings is advisable to ensure that your chosen name is not already taken.
3. Prepare and File Articles of Organization: Draft and file the Articles of Organization with your state's business filing agency. This document includes basic information about your PLLC, such as the business name, address, and members' names. Some states require approval from the state's professional licensing board before filing (filing fees may apply).
4. Obtain Necessary Licenses and Permits: Ensure that all members of the PLLC have the required professional licenses. You may need to provide proof of licensing as part of the PLLC formation process.
5. Create an Operating Agreement: This internal document outlines the management structure, member roles, and financial arrangements of the PLLC.
6. Register with Tax Authorities and Obtain an EIN: Register your PLLC with the appropriate tax authorities. Obtain an Employer Identification Number (EIN) from the IRS. This is necessary for tax purposes and to open a business bank account.
7. Compliance with State Requirements: Comply with any additional state-specific requirements.
8. Open a Business Bank Account: Open a bank account in the name of the PLLC. This will keep your business finances separate from personal finances. This is crucial for maintaining the liability protection offered by a PLLC.
9. Maintain Compliance: Ensure ongoing compliance with state laws such as annual reporting, renewing professional licenses, and paying necessary fees.
10. Obtain Malpractice or Professional Liability Insurance: It's advisable for members to carry their own malpractice or professional liability insurance.

How PLLCs are Taxed

The IRS does not specifically recognize LLCs or PLLCs as distinct tax entities. Therefore, these entities have options for their taxation.

• Default Tax Status: By default, both LLCs and PLLCs are treated as "disregarded entities." If you are the sole owner, your business taxation will be sole proprietorship. This means the profits and losses will pass through to your personal tax returns.
• Electing S Corporation Status: LLCs and PLLCs can elect S Corporation taxation. This election can offer serious tax benefits, particularly with self-employment tax savings.
• Avoiding Misclassification: To elect S Corp status, the LLC or PLLC must file Form 2553 and meet all the S Corp criteria. The timing of this election has specific deadlines to adhere to. Failing to timely elect S Corp status or incorrectly filling out tax forms can result in unintended tax consequences.
• C Corporation Option: Both LLCs and PLLCs can also elect C Corporations taxation by filing IRS Form 8832. While this is less common because of the double taxation, it might be beneficial in certain high-income scenarios.

State Considerations for PLLCs

State-specific considerations for forming a PLLC can vary significantly across the United States. Here are some specifics for a few states:

New York

• Certain professions like attorneys, architects, accountants, and physicians must form a PLLC if they want a limited liability structure. The state will require approval from the appropriate licensing board before first.
• Names of PLLCs must meet specific naming guidelines and include "Professional Limited Liability Company" or an abbreviation.

Texas

• The main difference between a PLLC vs LLC in Texas is that only professionals like doctors, lawyers, dentists, and accountants are eligible.
• The PLLC must obtain approval from the state licensing board for the specific profession.
• Texas PLLCs are subject to periodic franchise taxes.

California

• California does not recognize PLLCs. Instead, professionals must form Professional Corporations.
• The state has specific naming guidelines for PLLCs, and certain professions have to obtain regulatory body approval.

Florida

• Florida allows professionals like lawyers, doctors, CPAs, and others to form PLLCs.
• PLLC vs LLC Florida: The state requires that all members of a PLLC must hold a professional license.
• Florida PLLCs need to file an annual report to maintain active status.

Washington

• Washington permits PLLC formation for professionals, including lawyers, doctors, and architects.
• The state requires PLLCs to submit an annual report and renew their licenses as needed.
• PLLCs in Washington must adhere to specific naming rules outlined by the state.

North Carolina

• PLLCs in North Carolina are available for a range of professionals requiring state licensure. Approval from the state licensing board is required.
• The state mandates that PLLCs comply with state laws and professional ethical standards.

How to Know if a PLLC is Right for You

Each state has unique rules regarding the formation, operation, and maintenance of PLLCs.

The best way to ensure you make the right decision is to consult a law firm, PLLC attorney, or tax professional.

At Formations, we’ve helped thousands of self-employed professionals determine the best structure for them. If you’d like to schedule a free consultation session, speak with one of our advisors today.