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, or professional liability companies, 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?
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.
What are the similarities between LLCs and PLLCs?
LLCs and PLLCs share many core features, like limited liability protection, pass-through taxation, operational flexibility, and being treated as separate legal entities. The key differences lie in how they are formed and who can own them.
Here's a full breakdown of the similarities:
- Limited Liability Protection: Both offer protection for personal assets against business debts and lawsuits.
- 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.
- Operational Flexibility: LLCs and PLLCs provide flexibility in management structure without the rigid formalities required by corporations.
- Formation Process: The process of forming an LLC or PLLC involves filing Articles of Organization and drafting an operating agreement.
- State Law Governance: Both are governed by state laws and regulations, which vary by state.
- Separate Legal Entities: Both are distinct legal entities from their members, offering personal liability protection.
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:
- Lawyers
- Doctors
- Dentists
- Accountants
- Architects
- Pharmacists
- Chiropractors
- Engineers
- Psychologists
- 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:
- 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.
- 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.
- 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).
- 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.
- Create an Operating Agreement: This internal document outlines the management structure, member roles, and financial arrangements of the PLLC.
- 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.
- Compliance with State Requirements: Comply with any additional state-specific requirements.
- 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.
- Maintain Compliance: Ensure ongoing compliance with state laws such as annual reporting, renewing professional licenses, and paying necessary fees.
- 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:
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.