[IMGCAP(1)]Ready to launch your own practice and wondering how to legally structure your business?
Many firms choose to become an LLC (limited liability company) or a PLLC (professional limited liability company).
Overview of the LLC
The LLC has become a very popular choice for small businesses. In some ways, it offers the best of both worlds: the limited liability protection of a corporate structure, but with fewer administrative formalities than a corporation. A key purpose of the LLC is to limit the personal liability of the owners from events that happen in the business. Personal liability protection means that if you’re one of the owners of an LLC and the business gets sued or can’t pay its debts, you won’t be expected to use your personal assets to pay off the debts and settlement. Of course, this assumes you’ve been operating the business according to the letter of the law and have kept the business in good standing.
However, some states don’t allow licensed professionals, such as accountants, to form an LLC since they don’t want them to escape personal responsibility for professional malpractice by “hiding behind” the personal liability protection of an LLC. In addition, because the LLC has fewer corporate formalities, it’s harder for the state to monitor LLCs—and states want to make sure that these professionals are properly licensed.
PLLC—an LLC for Licensed Professionals
A PLLC is a special type of LLC that’s designed for licensed professionals, such as accountants. While the specifics vary by state, generally speaking a PLLC has the specific purpose of rendering the professional service and its owners (members) are licensed for this professional service. In some states, all owners of the business must be licensed.
The LLC and PLLC are state constructs; as such, rules vary widely by state. For example, professionals in New York cannot form an LLC, but may form a PLLC. Professionals in California cannot form an LLC or a PLLC, but can form a RLLP (Registered Limited Liability Partnership) or PC (Professional Corporation). And professionals in Arizona can choose between an LLC or PLLC.
To find out the rules for accountants in your state, you’ll need to call the Secretary of State’s office in your state and ask whether or not you can form a PLLC. You can also call an online legal filing service or attorney. And, take a look at what everyone around you is doing. If most of the accountants in your state are operating as a PLLC, it’s a safe bet that the PLLC is permissible, but the LLC is not.
Forming a PLLC
As expected, the process to form a PLLC is more involved than forming an LLC. You’ll need to draft up Articles of Organization (just like a standard LLC), but your state licensing board needs to approve this document before you can file your formation paperwork.
Once you have their approval, you’ll need to submit the Articles of Organization and any other required formation paperwork with the state. You can either do this directly with the Secretary of State’s office, or have an online legal filing service or attorney handle it for you.
Liability and the PLLC
Like an LLC, the PLLC creates a separation between the individual owners and the business. But there’s a very important distinction. As a professional in a PLLC, you will still be personally liable for malpractice claims related to your own actions.
For this reason, you’ll need to have a good malpractice insurance policy even if you form a PLLC. However, a PLLC will typically protect you from personally liability for the business’ debts, as well as the malpractice of other owners within the company.
The Professional Corporation (PC)—Another Option
While some states may not allow professionals to set up an LLC or PLLC, they do allow a Professional Corporation (PC). A PC is a corporation designated for licensed professionals. As with a PLLC, you form a PC by drafting up Articles of Incorporation and getting the approval of your state licensing board. And like PLLCs, a PC protects owners from personal liability related to business debt and malpractice suits directed at other associates, but it doesn’t protect against malpractice suits aimed at you.
Since a PC is a corporation, it involves more administrative formality than a PLLC. For example, you’ll need to create a formal structure consisting of shareholders, directors and officers. In addition, the PLLC is taxed like an LLC, which offers pass-through taxation. But a Professional Corporation is generally taxed like a C Corporation, which can lead to double taxation should you take some profits out of the company. However, keep in mind that a C Corporation can still elect S Corporation status with the IRS.
The bottom line? When you’re ready to form your own business, keep in mind that most states have special rules that apply to accountants and other licensed professionals. Check with your state’s Secretary of State office or online legal filing service to find out which entity types are permissible in your state. And remember to determine the level of liability protection that’s provided by your business entity; in most cases, you’ll need malpractice insurance to protect you against malpractice claims.
Nellie Akalp is a passionate entrepreneur, small business advocate and mother of four. As CEO of CorpNet.com, a legal document preparation filing service, Nellie helps entrepreneurs start a business, incorporate, form an LLC, set up sole proprietorships and DBAs, and maintain a business in compliance with state filing requirements for a new or existing business.
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