A Limited Liability Company, also known as an LLC, is a very popular entity for small businesses and freelancers, and for good reason. In fact, over 80% of all business registrations are LLCs. With an LLC, you get the liability protection offered to larger corporations plus the tax advantages of a partnership, as well as simplified management. However, did you know that an LLC is not available to many types of businesses in many states? If you are a professional who needs to be licensed by a state licensing board, you will likely need to be registered as a Professional Service Company. To achieve some level of liability protection, your options are to be organized as either a special type of LLC called a Professional Limited Liability Company or PLLC or as a corporation as a Professional Company or PC.
Many states require professionals such as accountants, lawyers, doctors, architects, chiropractors, and the like to have a license to practice. Government agencies have a fiduciary duty to protect the citizens they serve; as a result, they create minimum standards for the industry and for individuals that have a practice in that industry. These agencies create a state licensing board and set thresholds that practitioners must meet to become licensed. Moreover, many professions are constantly evolving and require licensed professionals to maintain and improve their skills through continuing education courses and other opportunities for professional development.
As consumers, we can’t keep up with all the rules and regulations in an industry we are not directly involved in. Therefore, we place our faith in professionals in these industries who, we hope, are. State licensing boards exist to make sure that these professionals remain current in a profession so that consumers need only verify that the person they are hiring or contracting has an active license and has therefore met the minimum standards of the profession. Without the oversite of state licensing boards, the standards for a profession would be compromised.
Historically, many professionals simply operated as a sole proprietorship. When one or more professionals joined forces to share resources, they organized themselves into a partnership. The problem with partnerships is that the partners are each liable for the debts of the business. Each partner was “jointly and severally” liable for the partnership’s debts, that is, each partner is not only liable for their share of the partnership’s debts but also liable for all the debts. In addition, each partner is liable for the actions of the other partners. One of my associates use to say:
“A partnership is twice the risk with only half the rewards.”
Additionally, when you are an employee of a partnership, you can participate in benefit plans that allow employee and employer to use pre-tax dollars to pay the premiums for such benefits as health insurance, retirement programs, and others. However, partners are considered owners and, as such, are treated differently than employees for tax purposes, so these benefits are not available to them.
Therefore, as professional services businesses become more and more complex and their tax rates increased, more professionals wanted to organize themselves as corporate entities for liability protection as well as being able to fund benefits programs such as retirement plans that were not available to them if they organized as a partnership.
For a long time, the organization of professionals into corporations was opposed by the Internal Revenue Service (IRS). That was until states took it up and began to legalize them.
So why is it not allowed for professionals to simply create an LLC like many other businesses? The answer is over concerns about what would happen to the standards of practice in that industry. Imagine if professionals could simply avoid malpractice claims by creating an LLC. Therefore, the Professional Limited Liability Company (PLLC) was born to combine many of the benefits of an LLC with the additional oversight of individuals by state licensing boards.
PLLCs create a separation between the individual and the entity, something practitioners do not get with a sole proprietor or organized as a partnership. In most cases, if the business is organized as a PLLC, the individual members will not be personally liable for the business’s debts or lawsuits filed against the business similar to a standard LLC. However, there are instances where a PLLC will not protect you. The following are three of the most common exceptions from liability protection in PLLCs.
1. The chief limitation on liability protection is related to personal malpractice claims. Professionals can be held personally liable for their own actions. This is why most members of PLLCs carry malpractice insurance.
2. While a PLLC protects the members from business debts, this is nearly never the case. In order to receive a loan, lenders almost always require a personal guarantee from the PLLC’s members to back up the loan. Once a member signs a loan guarantee, they become personally liable for the PLLC’s debts that they guaranteed.
3. While a PLLC generally protects members from an employee’s actions, if the member acts in a supervisory role, they may be liable for the actions of employees they supervise.
The laws and requirements that govern PLLCs vary from state to state, so be sure to do your research. That said, here are some general principles that apply to all PLLCs.
The state licensing board of an industry may likely have to approve your entity’s governance and organizational documents. Getting licensing board approval is an extra step required as part of the process when forming a PLLC, so forming a PLLC takes a bit longer to get registered.
Only when the governance and organizational documents are approved by the state licensing board is the PLLC allowed to register the actual entity with the Secretary of State or Commonwealth.
In most states, only individuals that hold a current professional license in that industry can be a member of the PLLC. In fact, in a few states, only someone that is licensed in that profession can organize the PLLC and sign the appropriate organizational documents. This means that you can’t hire a private company such as a law firm to form the PLLC for you.
Does your industry require that you organize as a PLLC?
