Many states have legal requirements which indicate that providers of licensed professional services, such as doctors and lawyers, must form either professional limited liability companies (PLLCs) or professional corporations (PCs). In this PLLC vs PC article, we’ll describe both structures so you can determine which one will meet your business needs.
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PLLC vs PC
The decision on forming a legal entity and your business structure can depend on your industry. Retail businesses often form a corporation while freelancers that offer services may form a sole proprietorship.
If you’re running a professional service such as a law firm, a medical firm, an accounting firm, and so on, you have to form a professional limited liability company (PLLC) or a professional corporation (PC) instead of the typical sole proprietorship, LLC, or corporation.
What is a PC?
Professional corporations (PCs) allow a group of licensed professionals to form a legal entity that is treated as a corporation under state and federal tax rules.
A professional corporation is very similar to a standard corporation in many ways, which include the provision of liability and debt protection. The major difference between a professional corporation and the standard corporation is that professionals cannot operate as regular corporations and only professionals that are licensed to practice can be shareholders in a PC.
The law of some states does not allow shareholders of different professions to own shares of another PC. You must make sure that shareholders in a PC are all be licensed in the profession in which the business is authorized to operate. For instance, a doctor cannot serve as a shareholder in law practice, and vice versa.
Pros and Cons
Pros
- Higher contributions to 401(k) plans
- Employee benefits on a tax-free basis
- Shareholders may gain tax benefits
- Although with restrictions, ownership is easier to transfer
- A PC can move on in perpetuity even when the owner dies.
- Shareholders can easily be removed or added
Cons
- No owner protection from personal liability for individual malpractice
- Can be subjected to double taxation
- Not every profession can form a PC
- Shareholders of different professions are not be allowed to own shares of a PC
What is a PLLC?
A professional limited liability company (PLLC) is an LLC designed for licensed professionals. It also requires a similar incorporation process to form an LLC and you must draft articles of organization and operating agreement for your state business filing.
Rules also vary widely by state. For instance, professionals in New York or Arizona can file a professional LLC while professionals in California can’t file a professional LLC. They need to form a PC or RLLP (Registered Limited Liability Partnership).
Like the LLCs, professional limited liability companies separate the owner’s liability from the business entity. If a business should ever get into legal or financial issues, the personal assets of the owner won’t be at risk.
Like a PC, the PLLC provides an additional layer of protection against lawsuits arising from actions taken by other PLLC members. Owners would only be responsible for malpractice suits owing to their own negligence.
Every state permits a PC but not every state permits PLLC. You’ll need to visit or call the Office of the Secretary of State in your state for advice or seek legal advice from an attorney about forming your legal entity. Some online filing services also provide guidance on what you can form.
Pros and Cons
Pros
- Owners and members of a PLLC are not liable for business lawsuits
- Can choose to be taxed as a pass-through entity or as a corporation
- Easier to set up
- Fewer compliance requirements
- Less expensive than a corporation
Cons
- Not recognized and permitted in all states
- Eligibility may be limited to certain licensed professionals
- Earnings are subject to self-employment taxes
Similarities Between PC and PLLC
- Both PLLC and PC are meant to meet the needs of licensed professionals when forming a new business.
- Both have similar rules for who can be an owner, which are professionals that are licensed to practice in the same field the business was formed for.
- Both the PLLC and PC give liability protection to the business owners against the lawsuits of other shareholders and members, though each owner can still be sued for individual negligence.
Differences Between PC and PLLC
A PC is usually considered to be a C-Corp [1] by the IRS and its profits are taxed at the corporate tax rate. A PC is also subjected to “double taxation.” The difference for a PLLC is that though a PLLC may choose to be taxed like a C-Corp or an S-Corp, the business doesn’t pay taxes. Instead, profits and losses pass through the PLLC to the individual owners, who are obliged to pay tax on their returns under the pass-through entity option.
There is a significant difference in compliance requirements. A PC requires extensive requirements which include keeping stock ledgers, holding meetings for directors and shareholders, meeting minutes, and so on. Professional LLCs have the requirement of filing an annual report but none of the other requirements for a PC applies.
There is a difference in management structures. A PC has a rigid structure where a board of directors oversees strategic decisions and corporate officers oversee the daily business operations. For professional LLCs, the operations can either be managed by a hired manager or the members who will share the duties.
Why Should You File a PLLC or a PC
A PC also involves more administrative work than a PLLC. For instance, a PC requires creating a formal structure that consists of shareholders, directors, and officers. A PC offers pass-through taxation which can lead to double taxation should owners take some profits out of the business.
To make things easier for you, also consider hiring exceptional LLC formation services we listed here.
Which One Should You Choose For Your Business
A PLLC is much easier to form than a PC and, in some ways, features the best of both professional entities. It features the liability protection of corporations and is simpler for tax purposes and operating requirements like sole proprietorships.
A PC, on the other hand, has shareholders which enable more people to be financially involved.
If you’re planning to operate a large firm, a PC is better but if you’re planning a small professional service, a PLLC is better.
If you have a PC and want to change it into PLLC in the state of Illinois, here are the ways on how to dissolve your corporation in Illinois, State. Read next!
FAQ
What type of entity is a PC?
Is a PLLC the same as an LLC?
What are the benefits of a PLLC?
Conclusion
To summarize this PC vs PLLC overview, if you want flexible taxation options and fewer maintenance requirements, a professional limited liability company is more suitable for your new business. On the other hand, for high-income companies that can take advantage of the corporate tax rate and for owners who want to bring in new shareholders easily, a professional corporation would be more suitable.
Take note though that your state may have restrictions on who can form a PLLC or a PC, so you have to check before making your final decision.
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