Difference Between LLC and Professional LLC

The main difference between an LLC and a Professional LLC is that an LLC (Limited Liability Company) can be formed by any business owner, whereas a Professional LLC (PLLC) is specifically for licensed professionals such as doctors, lawyers, and accountants who are required to have a license to provide their services.

What is LLC and What is Professional LLC?

LLC

An LLC, or Limited Liability Company, is a business structure that offers flexibility and protection. Its owners, called members, are not personally liable for the company’s debts or liabilities. This means their personal assets, such as homes and cars, are usually protected in case the company faces legal issues or bankruptcy. LLCs can be a great option for small businesses as they combine the benefits of a corporation’s limited liability with the tax efficiencies and operational flexibility of a partnership.

Professional LLC

A Professional LLC (PLLC) is a special type of LLC designed for professionals who need a license to practice in their field. This includes professions like medicine, law, and accounting. The main reason for this classification is to separate the professional’s personal liability from their business judgments and actions. While a PLLC provides the limited liability protection characteristic of an LLC, it also ensures that the professional services provided meet certain industry-specific regulatory requirements.

Key Differences Between LLC and Professional LLC

1. Formation Requirements: Forming a PLLC often entails additional steps compared to a regular LLC, such as obtaining approval from the state licensing board for the specific profession.
2. Membership Criteria: For an LLC, members can be anyone, including individuals, corporations, and other LLCs. In contrast, members of a PLLC must be licensed professionals in the same field.
3. Liability: While both offer limited liability protection, PLLC members must still adhere to the ethical and professional standards of their licensing body. This means that if a member commits malpractice, the PLLC does not protect against personal liability for professional negligence.
4. Regulation and Compliance: A PLLC is subject to more stringent regulatory scrutiny to ensure compliance with professional standards, which could involve regular audits or checks by the licensing authority.
5. Paperwork and Fees: Establishing a PLLC may require additional paperwork and higher filing fees due to the professional licensing requirements.
6. State-Specific Variations: Some states mandate that certain professions can only operate under a PLLC, while others provide an option. It’s important to verify the laws in the specific state of operation.
7. Taxation: Both entities typically have pass-through taxation, but professionals in a PLLC may face additional tax considerations related to self-employment.
8. Naming Conventions: The name of a PLLC must usually reflect the professional nature of its craft, often including the profession in the title (e.g., “Smith Law PLLC”).
9. Management Structure: While both LLC and PLLC can be member-managed or manager-managed, a PLLC often has specific governance requirements set by professional licensing boards.
10. Liability Insurance Requirements: Professionals in a PLLC may be required to carry professional liability insurance, which is not typically mandated for standard LLCs.

Key Similarities Between LLC and Professional LLC

1. Limited Liability: Both structures offer protection against personal liability for business debts and claims, safeguarding personal assets in most circumstances.
2. Pass-Through Taxation: Both LLCs and PLLCs usually benefit from pass-through taxation, meaning profits and losses are reported on the owners’ personal tax returns, avoiding corporate tax.
3. Flexible Management: Both entities allow flexibility in management. They can be managed by their members (owners) or appoint managers to handle daily operations.
4. Legal Entity Status: Both LLCs and PLLCs are recognized as separate legal entities from their owners, meaning they can own property, enter into contracts, and be subject to lawsuits independently.
5. Formation Process: The basic steps to form either an LLC or a PLLC involve filing articles of organization and paying the necessary fees, though a PLLC might require additional professional licenses.
6. Operational Flexibility: Both entities provide operational flexibility allowing the owners to create their own operating agreement, setting rules for governance, profit sharing, and other business matters.
7. Perpetual Existence: Unless stated otherwise in the operating agreement, both LLCs and PLLCs have perpetual existence, meaning the business continues even if an owner leaves or passes away.
8. Privacy: Both entities can provide a level of privacy, as the owners’ details may not need to be included in public records, depending on the state regulations.
9. Growth and Expansion: Both LLC and PLLC can add members and expand their operations across state lines, subject to compliance with various state regulations.
10. Annual Reporting: Both types of entities may be required to file annual reports with state authorities to remain in good standing.

Features of LLC vs Features of Professional LLC

1. Formation Process: To establish an LLC, one typically files articles of organization with the state and pays a fee. Forming a PLLC involves similar steps but also requires proof of professional licensing.
2. Ownership Restrictions: LLCs can have various types of owners, including individuals, corporations, and even other LLCs. A PLLC’s ownership is limited to licensed professionals within the same profession.
3. Limited Liability Protection: Both LLCs and PLLCs provide limited liability protection to their members. However, PLLC members must adhere to professional standards, making them personally liable for malpractice or negligence.
4. Tax Flexibility: LLCs and PLLCs typically have pass-through taxation, meaning business income is taxed on the owners’ personal returns. Both structures offer the ability to choose corporate taxation if beneficial.
5. Compliance and Regulation: Operating an LLC may involve meeting state requirements and renewing licenses periodically. A PLLC must meet additional regulatory requirements specific to the profession, such as maintaining necessary professional qualifications and submitting to periodic reviews.
6. Management Structure: Both LLCs and PLLCs can be managed by members or designated managers. A PLLC might have stricter management regulations imposed by the professional licensing board.
7. Name Requirements: The naming of an LLC usually includes a reference to its limited liability status. A PLLC’s name must often reflect the professional nature of its business, incorporating both the professional designation and the limited liability status.
8. Operating Agreement: Both entities benefit from having an operating agreement to outline management structure, allocation of profits and losses, and other operational details. This is especially crucial for PLLCs which might need to specify compliance with professional regulations.
9. Professional Conduct: PLLCs are subject to the professional conduct rules of their licensing board. This means maintaining ethical standards and continuing education, which is not usually a requirement for regular LLCs.
10. Insurance Requirements: Professionals operating under a PLLC might be required to carry professional liability insurance, unlike many standard LLCs. This insurance provides additional protection against professional malpractice claims.