If you provide a professional service (for example, legal or medical services), you probably need to follow some additional rules related to your profession. You could need to obtain special licenses and permits from state and local governments for yourself and your business.
Depending on your state, you might also need to form a special business entity, like a professional limited liability company (PLLC). Laws and requirements vary from state to state, but here are some general principles regarding PLLCs.
A PLLC is a business entity designed for licensed professionals, such as lawyers, doctors, architects, engineers, accountants, and chiropractors. While many businesses choose to form a limited liability company (LLC) because of the tax, limited liability, and other benefits, some states don't allow LLCs to be owned by professionals whose occupation requires a license. In these states, licensed professionals who want the benefits of an LLC must form a PLLC instead.
PLLCs and LLCs have a lot in common. Both provide owners with a flexible management structure, tax advantages, and limited liability. However, the two business structures differ in two important ways.
Who can form a PLLC vs. an LLC: Almost any business owner can form an LLC. An LLC can be formed by one or more people or companies as long as they're willing to register their business with the state. On the other hand, PLLCs can only be formed by professionals. States have different lists of who qualifies as a professional. But generally, the term "professional" applies to anyone who has to have a special license, registration, or certification with the state to provide their services.
Personal liability for malpractice: Both LLCs and PLLCs give owners limited liability, meaning owners aren't personally responsible for the business's debts and obligations. A PLLC additionally provides owners protection from malpractice claims against other owners. But you'd be responsible for any claims against your business that are caused by your own malpractice.
Most states that don't allow professionals to form regular LLCs do allow professionals to form PLLCs, with the notable exception of California. California allows professionals to form registered limited liability partnerships (LLPs) or professional corporations (PCs), but not LLCs or PLLCs.
In general, a PC is like a regular corporation that's reserved for professionals—just like PLLCs are mostly like LLCs but for professionals. A PC, like a corporation, has directors and shareholders, pays corporate income tax, and is governed by the articles of incorporation and bylaws.
In the same way, generally, only professionals form LLPs. LLPs also give owners hands-on, flexible management options and liability protection. But the level of liability protection ranges in LLPs, and LLPs can only be taxed as partnerships.
One of the major reasons to form a PLLC is because it creates a separation between the individual and the entity. In most cases, if a PLLC is formed, the individual will not be personally liable for the business's debts or any lawsuits against the business.
However, there are instances where a PLLC will not protect you:
Your own malpractice. Forming a PLLC doesn't protect you from malpractice claims for your own malpractice. Because of this, it's a good idea to carry malpractice insurance even if you form a PLLC.
Personal guarantees. In order to receive a loan, banks often require a personal guarantee to back up a loan to a PLLC. Upon signing this agreement, you'll be personally liable for any debts that you guaranteed.
Employee actions. Although a PLLC generally protects you from your employees' actions, if you act in a supervisory role, you can be liable for the actions of the employees whom you supervise.
Intentional or grossly negligent acts. You'll be responsible for any harm that comes from your intentional or grossly negligent acts. General liability insurance can cover negligent acts. But if you do something that's grossly negligent (reckless or willful), then you'll have to pay out of pocket.
Some states require members of certain professions or PLLC members to obtain professional liability insurance or another alternative (such as setting aside funds) to make sure the professionals can pay any claims related to the services they provide. These states usually have a minimum amount that you must be covered for, such as $100,000 or $1 million.
Your licensing authority might also have a similar requirement. You should check with the appropriate agencies to make sure you have the proper coverage.
Many states have restrictions on:
In most states, you can form a PLLC if you provide professional services. In general, professionals that would provide professional services include:
Your state might not only have rules about which professionals can form a PLLC but also how many professionals must make up the membership of a PLLC. For example, your state might require a majority of the PLLC's members to be licensed.
In addition, your state could restrict your PLLC to one service. In that instance, for example, you could provide physical therapy services but you couldn't also provide pharmaceutical services.
Your state might have additional rules that apply to only certain professions. Also, keep in mind that PLLCs and their members are subject to the regulation of the relevant state professional licensing authorities. Check the laws and rules for your particular profession or consult with a local business attorney for more details.
To form a PLLC, you usually must meet specific requirements. For example, in most states, only those who hold professional licenses can own a share of the PLLC. In a few states, a licensed professional must be the organizer of the PLLC and sign the appropriate organizational documents (meaning a private company cannot form the PLLC for you).
The process to form a PLLC will be very similar to the process to form an LLC with some additional requirements and tasks specific to your profession. In general, you'll need to:
Most states have naming restrictions for PLLCs. You should check your state's laws for specific requirements. Additionally, the laws for your particular profession could impose other restrictions on names. Usually, your business name must include one of the following entity designations:
Your entity designation might also include periods or other abbreviations. Depending on your state and profession, you might also need to include the full names or surnames of all members depending on your state and profession. For example, some state bars require law firms to include each law partner's surname.
Other than following your state's naming requirements, you should also choose a business name that's not the same as or too similar to any other name that's already registered with the state. States usually have databases of business names and trade names that have already been registered. You should check these databases and other sources to find out whether your proposed business name is available.
In some cases, the state licensing board for your profession must approve your articles of organization or similar organizational document. The requirements will differ depending on the state and the particular profession. Getting licensing board approval is an extra step in the LLC formation process and, as a result, it sometimes takes longer to form a PLLC than an LLC.
You can usually register your PLLC by completing and mailing in your articles of organization or by filing online. Your state's secretary of state's office or a similar agency will likely handle your company filings.
If you want to form a PLLC in your state, you need to review your state's PLLC laws. In general, your state's laws will include naming rules, membership restrictions, and registration requirements.
For more state-specific guidance, check out our articles on how to form a PLLC in these states:
You can also visit your state's website for instructions and additional guidance.
Once you've reviewed your state's relevant laws, forming a PLLC is fairly straightforward. You'll need to make sure that you can form a PLLC in the first place and that you're only providing the type and number of services allowed under your state's laws.
Most professionals can form a PLLC on their own. But if you're unsure whether you can provide additional services, whether you can allow new members to your PLLC, or need help drafting your operating agreement, consider reaching out to a business attorney.