Professional corporations and PLLCs: who has to use one
If your work requires a state license, the ordinary LLC or corporation may not be available to you. Most states have separate entity types for licensed professionals, and using the wrong one can mean a rejected filing or a problem with your licensing board.
Who this applies to
The list varies by state, but it commonly includes:
- Doctors, dentists, chiropractors and other health professionals
- Lawyers
- Accountants
- Architects and engineers
- Veterinarians, psychologists and therapists
If your state licenses your profession, check whether it also restricts the business form you can practice through.
The two options
A professional corporation (PC or PA) is a corporation where the shareholders must be licensed in the profession. It is available in every state.
A professional LLC (PLLC) is the LLC version, with the same ownership restriction. Most states offer it, but not all, and some states limit which professions can use it. California, for example, does not let many licensed professions such as law, medicine and accountancy practice through an LLC at all, so a professional corporation is the route there.
What is different from a normal company
- Owners must be licensed. Usually every owner, and often the directors and officers, must hold the license. You generally cannot give a share to an unlicensed spouse or investor.
- The board may approve first. Some states require a certificate or approval from the licensing board before, or as part of, the filing.
- The name may have rules. Many states require a designation such as PC, PA or PLLC, and some licensing boards restrict what the name can say.
- Selling is restricted. Shares can usually only be transferred to someone else holding the license.
What it protects, and what it does not
A professional entity protects you from the company's general debts and, in most states, from a colleague's malpractice.
It does not protect you from your own professional negligence. If you make the mistake, you remain personally responsible for it. That is what malpractice insurance is for, and many states require a minimum level of it.
Taxes
A PC or PLLC is taxed like its standard counterpart. A PLLC can be taxed as a sole proprietorship, a partnership or an S corporation. A PC is taxed as a C corporation unless it elects S corporation status. Many professionals choose S corporation status once profits are high enough that the payroll tax savings outweigh the extra cost of running payroll.
Getting it right first time
- Confirm with your licensing board which entity types your profession can use
- Get any board approval before you file, if your state requires it
- Use the required designation in the name
- Keep your license and malpractice coverage current, because the entity depends on both