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LLC versus PLLC

LLC Versus PLLC: In Depth Comparison [2024]

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If you’re a certified or licensed professional in the US, chances are you might be looking for opening your own business in the state you’re living in. 

Professionals like accountants, physicians, architects, and the like may feel the urge to open a limited liability company or LLC owing to its various benefits, including liability protection. 

However, not every state in the US will allow the professionals to do it. Instead, there’s an alternative to LLC, called PLLC or Professional Limited Liability Company. 

Essentially, LLC and PLLC share almost the same requirements and features except a few, such as the requirement of a state license. If you’re eager to learn about LLC versus PLLC, read on to explore more on these entities. 

What Is LLC?

An LLC refers to Limited Liability Company which is one of the approved types of business entities you can form in the US. LLC is a very popular type of business entity that offers a range of benefits for both US and non-US residents. 

In Essence

In an LLC business, the owner is separated from the business in terms of personal liabilities and debts. It means, the court can’t seize your personal assets to compensate for the business debts and liabilities. 

Steps to Form an LLC in the US 

Formation of LLC is comprehensive in the USA, given the support and transparent regulations in the states. If you can follow a few steps, forming your LLC in the US will be a clean shot. 

Below are the required steps to form an LLC in the US:

Step 1 # Choosing the State: The first thing you need to worry about for forming an LLC in the US is the right state for your business. Most LLC owners prefer to operate LLC in the state where they live in. 

The cost of forming and running an LLC may vary from state to state. Nonetheless, going with Domestic LLC or forming it in your home state will prevent excessive costs required for a Foreign LLC

So, research which state can give you the best offers for the type of business you want to run under LLC. 

Step 2 # Naming LLC: The very first step in forming an LLC in the US is to select a suitable and available name for your business. You must check with the directory or database of the state to find and choose the LLC name. 

Your LLC name must end with LLC, Limited Liability Company, L.L.C., etc. Besides, the name you choose must not be trademarked. 

Step 3 # Selecting a Registered Agent: The next step to form your LLC is to select a registered agent. A registered agent acts as a via between your business and the state. 

The agent will receive government notices, lawsuit documents, correspondences, etc., on behalf of your business. A registered agent must have a street address and be available during working hours. 

Step 4 # Filing COF or AOO: Once your registered agent is officially chosen, it’s time to file the Certificate of Organization or Articles of Organization depending on the state you’re planning to run your business in. 

Whichever document you need to file, it establishes your LLC in the state officially and outlines the details of the owners or members of your business. 

This document also elaborates whether your business is going to be run by a member (member-managed) or a hired manager (manager-managed). Moreover, you must enlist the location of operation in this document. 

You may check the website of the Secretary of State to learn more on this process. 

Step 5 # Creating an Operating Agreement: The next step is to create an Operating Agreement. It may not be a strict requirement in each state, but you’ll do better to have one. 

An Operating Agreement entails everything related to running the operation, including positions and responsibilities of each member of the LLC. It essentially outlines ownership terms, percentage, personal asset protection, voting power, and as such. 

Technically, an Operating Agreement is there to dissolve any dispute regarding business operation, liabilities, profits sharing, legal matters, etc., among the members of the business. 

Step 6 # Applying for an EIN: Getting an EIN or Employer Identification Number is a must for running an LLC in the states. It’s also known as the Tax Identification Number which you have to get from the IRS (Internal Revenue Services). 

The EIN is required for the LLC to maintain separate credit history, tax reporting, opening a business bank account, and hiring employees. 

You can get an EIN from the IRS within two weeks of the application if applied by fax. If you apply by mail, the IRS service center may send you the EIN within four to five weeks. 

Benefits of LLC Formation 

LLC is growing in popularity in the United States for its manifold advantages. Let’s take a look at those benefits you can get by forming an LLC in the US:

  1. Limited Liability: The topmost benefit of LLC formation is that you’re ensured of a limited liability. In other words, your personal assets are protected from business lawsuits or judgment. 

If there occurs any dispute between you and your customer and they sue you in court, the court won’t seize your personal property to compensate for it. 

  1. Paperwork Simplicity: You won’t have to worry too much about paperwork in an LLC business. Apart from the simple formation process, you can easily deal with less required meetings, simple decision making, and less required record-keeping. 
  2. Pass-Through Taxation: In an LLC, you can choose how your business will be taxed. It’s possible by the pass-through taxation system of the LLC. 

Here, all your LLC business profits will transfer to your personal tax return and you can determine the profit share among the members based on capital share and efforts given. Then you’ll have to file tax accordingly. 

  1. Credible Entity: LLC refers to a legitimate and trustworthy business entity which investors, customers, partners, and other stakeholders would rely on.

Having formed an LLC means you’ve gone through all the legal and systematic processes to build your enterprise. It simply conveys a sense of professionalism and credibility. 

  1. Compliance Flexibility: Even though the LLC is a popular choice for many small to large entrepreneurs in the US, it comes with minimum compliance requirements. 

You can be at ease running your LLC business for not having too many state-imposed compliance requirements and ongoing formalities. It offers less hassle in paper-work and record-keeping during operation.   

What Is PLLC? 

If you’re a certified or licensed professional, wanting to open your service in the form of an LLC in the US, then Professional Limited Liability Company or PLLC is the optimum business structure for you. 

In Essence

PLLC is only required for the businesses that specifically require any professional license to operate in the states. This type of business structure is applicable for the licensed professionals like doctors, architects, lawyers, accountants, physical therapists, and so on.

Some states in the US even go on to allow social workers and real estate agents to have PLLC permission.    

Formation of PLLC

While LLC is permissible in all the states of the US, PLLC isn’t nationwide recognized. So, the first thing you need to care about is finding whether your state allows to form a PLLC or not. 

The simplest way to find this information is looking up the website of the Secretary of State. This is where Rocket Wave can help you to get the correct information. Our accurate service will make your task a lot easier. 

However, you must check with the Secretary of State and the state licensing board. Find out what forms and information you must file with the state to form a PLLC. 

Step 1 # Naming your PLLC: It’s similar to the naming of an LLC we’ve discussed above. You must choose a unique name for your PLLC, considering the names already available as PLLC or regular business in your state. 

Besides, the name must end with PLLC, P.L.L.C., or Professional Limited Liability Company like it’s required for an LLC. You must check with the directory of the Secretary of State to cross-check names you can or can’t keep. 

Step 2 # Hiring a Registered Agent: A registered agent comes next in the steps of forming a PLLC. It’s also known as a statutory agent. The registered agent will receive service of process and other official documents on behalf of your business. 

Usually, PLLC receives legal notices from the state licensing board. Besides, if they get sued, notices must be received by a registered agent on time for necessary action. 

Step 3 # Applying for Business License: By default, you and other members must acquire professional licenses for the services you want to render. 

However, there might be a requirement of other licenses based on the state you’re going to operate in. Here, particular business licenses or zone licenses might be a requirement. 

Check with the county, city, or state authority which type of license you need before you can apply for a PLLC. 

Step 4 # Filing an Articles of Organization: You must file an Articles of Organization with the state as the first legal step of forming a PLLC. Most states may require that each member of your organization must be licensed. 

Furthermore, at least one licensed member of the organization must sign the Article of Organization before submitting to the state. 

Step 5 # Filing an Operating Agreement: Selected states will require both LLC and PLLC to create Operating Agreement. New York, California, and a few more states are among them. 

Although your state might not ask you to do this, however, having an Operating Agreement drafted for your PLLC could prove wise. 

Since an Operating Agreement details the contribution, profit share, and daily operations & responsibilities of the business, carrying this document will save the members from unexpected disputes or lawsuits down the line. 

Step 6 # Publishing the Notice of Formation: Once you’ve filed your Articles of Organization for the PLLC, it’s time to publish a Notice of Formation within the next 120 days from its effectiveness. 

The process involves publishing a copy of Articles of Organization or notice of PLLC formation in two local newspapers within the stipulated time. Once published, the publisher of the newspaper is supposed to provide you with the affidavit of publication. 

Step 7 # Obtaining an EIN: Like in the LLC, you have to get an EIN or Employer Identification Number for PLLC from the IRS. An EIN is required for many purposes, including taxation, acquiring necessary business licenses, opening business bank accounts, etc. 

You may apply for an EIN online on the IRS website. The IRS may take 4-5 weeks to issue your EIN. 

Step 8 # Ensuring State Regulation & Compliance: After all the requirements are met to form a PLLC, there may be additional state regulations you have to comply with after formation. 

Such regulations may include buying workers compensation insurance, acquiring business credit cards, maintaining separate financial records of personal and PLLC accounts, and so on. 

Benefits of PLLC Formation 

Benefits of LLC and PLLC are almost the same in terms of formation, liability, privacy, etc. Let’s have run down on the PLLC benefits below: 

  1. Safety of Members: PLLC entity saves its members from unexpected dispute or lawsuit occurred due to the malpractice of any member within the business. Simply, one’s wrong action won’t put other members into legal complications. 
  2. Taxation Facility: In PLLC, you can enjoy the pass-through taxation facility where business tax will transfer to personal return. Besides, you can choose to file tax as a corporation. 
  3. Limited Liability: PLLC members aren’t personally liable for any lawsuits or debts of the business itself. If any judgments are to be made at the court, members’ personal assets are safe from being confiscated. 
  4. Formation Simplicity: Forming a PLLC doesn’t require you to go through much hassle like an LLC formation. The formation process in both LLC and PLLC is almost similar. 

However, although PLLC comes with some additional state regulations, they’re not as complicated as you would find in corporations or other business structures. 

Taxation in LLC and PLLC Businesses 

Taxation in both LLC and PLLC business works in the same manner and renders the same benefits. If you own an LLC or PLLC business, you can choose how it will be taxed. 

Furthermore, all the business profits will come down to your personal tax return. 

By default, this system is known as pass-through taxation where business’s income will transfer to your personal return. Moreover, you and the other members in your LLC or PLLC can decide whether you want to be taxed as corporations.

There are two options of corporation taxes: C corp and S corp. For C corp, you have to pay tax twice; once, the business pays the corporate tax, and next when the shareholders pay the personal taxes. 

As for the S corp, you pay tax as a member based on the profits disbursed by the company.

For further breakdown and comprehensive explanation, you may consult an attorney, which Rocket Wave may help you with. You can get all the legal support in this regard.

Downsides of LLC

Being practical, you have to know the other side of the coin. Hence, learning about the downsides of forming an LLC can help you make your final decision. 

Below, we’re outlining some disadvantages of a Limited Liability Company in the US:

  1. Limited Liability Bindings: Although it’s ubiquitous that LLC offers you a limited liability, meaning, your personal assets are safe from lawsuits and judgments on your business, there are exceptions. 

There’s a thing called ‘piercing the corporate veil,’ which occurs due to operating your business in forgery or disputable manners. 

Besides, failing to maintain personal and business transactions separately may also put you in such complications. In this case, your personal assets might get into legal jeopardy. 

  1. Member Turnover Complications: In the US, when an LLC member dies, leaves the business, or declares bankruptcy, the LLC has to be dissolved. 

However, the remaining members have to take the responsibility of the business’s debts and liabilities. And to continue their business, they must again go through the LLC formation process from the beginning. 

  1. Transferring Ownership: Unlike corporations, it’s tough to transfer partial ownership of an LLC  to outsiders, be it investors or other entities. 

Corporations have stock-issue options for unlimited outside investors, nonetheless, it’s quite difficult to do the same with LLC. Outside investors can earn ownership interests in LLC, but maintaining it is tough. 

  1. Federal Taxation: LLC has an option to be taxed personally, derived from the corporate earnings to the personal returns. 

However, in this case, you have to file personal federal tax returns which are usually higher than in corporations. Only way to resolve this is to file tax for your LLC as an S corporation. 

Downsides of PLLC

Like in LLC, there are some disadvantages of PLLC you have to go through if forming one. 

  1. Acceptance Limit: Professional Limited Liability Company aren’t allowed to be formed in all 50 states of the US. The states that recognize PLLC may also vary in permitting particular business licenses to operate. 
  2. Member Turnover: Like in LLC, PLLC entails the member turnover situation where the business must be dissolved according to the state statutes once a member leaves the entity. In order to continue, your PLLC must be reformed. 
  3. Self-Employment Tax: In PLLC, although having a pass-through taxation system, all business earnings are subject to self-employment taxation. 
  4. Licensing Barrier: Apart from all the steps involved in forming a PLLC, you may find it difficult to get additional business licenses to operate according to many states. 

LLC Vs. PLLC: Considerable Factors

When it comes to determining between an LLC and a PLLC, there are a few factors you must consider to make the right decision for your enterprise. 

Let’s shed some lights on those vital factors below: 

Your Business Nature

Considering the business nature, you must choose between an LLC and PLLC. While LLC can cover almost all types of businesses in the US, PLLC only covers individuals with professional licenses. 

If your products or services don’t require a professional license and additional business or zoning licenses, opting for LLC will be a wise move. 

Conversely, if you’re a licensed professional, such as an accountant, architecture, doctor, therapist, attorney, etc., PLLC is the only option to go with. 

Tax Implications

Both LLC and PLLC enjoy the similar pass-through taxation system. It means, all your business earnings are going to transfer to the personal returns, so members can pay taxes individually based on profit share.

Besides, you have to choose how you want to be taxed as an LLC or PLLC structure; sole proprietorship (if one-member LLC/PLLC), partnership, C corporation, or S corporation. It’s because the IRS (Internal Revenue Services) doesn’t recognize these two entities for taxation.  

However, unlike in LLC, you also have to pay self-employment tax in PLLC for the professional licenses you have. 

Liability Concerns 

Both LLC and PLLC let you enjoy limited liability, i.e., no lawsuits or judgments will affect your personal assets for the legal cases against the business. 

Nonetheless, in LLC, you may have to suffer legal complexities due to running your business in unacceptable manners or mixing up personal and business transactions. 

Regulatory Requirements 

Regulatory requirements for both LLC and PLLC are very few in the US. Apart from the simple formation process, there are not many strict statutes to operate any of these two types of business structures. 

However, in contrast with an LLC, PLLC has a strict requirement of having professional license and particular business licenses before applying for the formation of an entity. 

Besides, different states may ask for some additional business licenses after formation is complete. 

Cost of Formation and Operation

Forming an LLC in the US may cost you from $150 to over $4,000, including filing, operating agreement, DBA, registered agent, publication, annual report, etc. 

The similar costs may apply to forming a PLLC as well. 

Apart from the regular costs mentioned above, there will be additional operational and ongoing expenses involved. These expenses may be related to marketing and promotional activities, website development, training and skill development of employees, office rents and bills, and as such. 

Side By Side Comparison (LLC Versus PLLC)

Who can form it?AnyoneLicensed professionals only (e.g., doctors, lawyers, accountants)
Available in all states?YesNo (check with your state’s Secretary of State)
Liability protectionLimited liability protects personal assets from business debts and lawsuits, exceptions exist Limited liability protects personal assets, exceptions exist (similar to LLC)
TaxationPass-through taxation (profits reported on personal tax returns), option to choose S corp or C corp taxationPass-through taxation, additional self-employment tax applies
Formation complexityRelatively simple: file Articles of Organization, obtain EINSimilar to LLC, but additional steps (e.g., meeting licensing board requirements)
Member turnoverRequires dissolving and reforming the LLCRequires dissolving and reforming the PLLC
Transferring ownershipDifficultDifficult
Cost of formation and operationSimilar (filing fees, operating agreement, etc.)Similar, may require additional licenses
Suitable for?Most businesses (except those requiring professional licenses)Businesses requiring professional licenses

It’s Your Call 

After all that we’ve covered so far in this resourceful article, it’s your final call to start an LLC or a PLLC. You must consider the factors like your home state, business nature, costs, number of owners, etc., before making the final decision. 

Furthermore, if your business requires a professional license in the US to operate, going with the PLLC will be a surefire deal. Don’t forget to check with the local authorities what structure is suitable for your business.

However, if you need full-fledged information and service regarding these two types of entity, give Rocket Wave a buzz for comprehensive and guaranteed services.