Many states require certain licensed professionals to form either a professional limited liability company or a professional corporation if they want to band together to form a business. Find out which option is best for you.
Plenty of paid employees may eventually opt to form their own business as well, and these include licensed professionals such as lawyers and doctors. But in many states, certain licensed individuals cannot simply form their own business. They have to do so formally, registering with the state either as a professional limited liability company (PLLC) or a professional corporation (PC).
If you’re a licensed pro who wants to band together with others of your fellow doctors or lawyers to form your own business, in some states you have to pick either the PLLC or the PC route. But which one is best for you? You’re the one who can decide what’s best, but you should know the similarities and differences between the two options so you can make an informed decision.
Common Ground: Similarities between PLLCs and PCs
PLLCs and PCs do share a lot of similar features.
The Only Way for Licensed Pros to Form a Business
First off, you have to note that a PLLC and a PC have certain significant similarities. For one, they’re both ways for you and your licensed professional friends to form a business together. In many states, you won’t be able to form that business without opting for one of these two options.
Both types also generally have rather similar rules as to who can be the owners of the business. Most states with the PLLC and PC requirement for licensed pros require that at least half the owners are certified professionals in the same industry this particular business was formed for.
In other words, if you’re a certified attorney and you want to start a law firm with a group, half of that group must be certified attorneys as well.
But in some of these states, the requirements are more stringent. They may require that all of the owners are certified professionals in that field your business will be in. In that case, all the owners of your theoretical law firm must be certified attorneys as well.
Both the PLLC and the PC have advantages over a regular partnership, especially when it comes to liability. With a partnership, if one owner is sued for malpractice, the other partners may be held liable as well. It’s an all for one and one for all proposition.
With the PLLC and the PC, that’s not the case. Each of the lawyer-owners may be sued for malpractice, but only because of their personal actions. But the other lawyer-owners in this law firm are shielded from the malpractice of the other members of the ownership group.
Crucial Differences Between PLLCs and PCs
Now let’s come to how these two entities differ so that you’re able to pick the better option between the two for your situation. If you already know the differences between a regular LLC and a regular corporation, then this should be easy. The differences between PLLCs and PCs are basically the same.
This is one crucial area in which the PLLC is very different from a PC. In most cases, PLLCs are better in this regard.
You have several options when it comes to taxation if you’ve formed a PLLC. But regardless of which option you choose, it’s more likely to save you and your fellow owners quite a bit of tax money.
Theoretically, when you have a PLLC you can still opt for your business to be taxed as if it were a C corporation or an S corporation. But the most common option for a PLLC is to be taxed as a pass-through identity.
In this situation, your business in itself doesn’t really pay taxes at all. Instead, the profits (or the losses) you and the other owners gain simply “pass-through” the PLLC and then to you and the other owners. All you owners then just pay your taxes on your personal returns.
With the PC, taxation is generally a greater burden. This starts when the IRS taxes your business when it makes money. Since you most likely have a C corporation, that means the IRS imposes a 21% tax rate on what your business makes.
But that doesn’t end there. As one of the owners, you then get a share of the profits, right? Well, in this case, you still have to pay another tax on those profits on your personal returns. This will happen to all your fellow owners, too. Basically, it’s “double taxation”.
This is why, in most cases, you pay less taxes personally when you’ve formed a PLLC. The only possible exception is when you are part of the mythic 1%, when most of your income is taxed at the highest marginal tax rate bracket of 37%.
It’s also much easier for PLLCs to meet ongoing compliance requirements, compared to PCs. For a PLLC, the most “burdensome” task for compliance requirements is filing an annual report.
With a PC, the maintenance requirements are much more extensive. You have to hold meetings for directors and shareholders. Minutes for all PC meetings must be recorded. You have to keep stock ledgers. None of these tasks apply to PLLCs, and PCs have other compliance requirements to meet as well.
This is another area in which there’s a stark difference between the two entities. With the PLLC, management is much looser and informal. You can decide which members of the ownership group handle which management aspects they want to deal with.
Or, all the owners may simply decide not to participate in the management of the company at all. In which case, you can then just hire a manager to run your company while you do the work you prefer to do.
(This is a rather common option for businesses such as health clinics owned by a group of doctors. The doctors just want to heal patients, so they hire a manager to handle the company minutiae that doesn’t involve actually healing people.)
With the PC, the management structure is much more formal. You need a board of directors, whose job is to oversee the operational big picture. Then you have corporate officers like the Chief Executive Officer, the Chief Operating Officer, and the Chief Financial Officer. These are the ones who handle the day-to-day operations.
Which Is Your Better Option?
Before you pick one over the other, check first to make sure that you actually have a choice in the matter. You may be based in a state where a certain type of licensed professionals is required form a PC instead of a PLLC (or vice versa).
If you do have a choice, then in most cases the PLLC seems like the preferable option. You get personal asset protection, a more generous taxation method, fewer maintenance requirements, and more leeway in terms of managing the company. But you may opt for the PC option if it turns out that even the double taxation is better than your current personal tax rate!