A professional corporation and a professional LLC are business entities that licensed professionals may wish, or be required, to form.
Generally, professions that form professional LLCs or professional corporations include:
- Attorneys and law firms
- Accountants and CPAs
- Physicians
- Engineers
- Architects
- Psychologists
- Chiropractors
- Dentists
- Veterinarians
- Social workers
- Real estate agents
In this article, I’ll explain some of the characteristics of the professional LLC (PLLC) and professional corporation (PC) business structures, show how they are similar, and show how they differ from each other. I’ll also discuss some of the potential pros and cons of each. Ultimately, business owners should talk with their attorneys and tax advisors on which one (or some other entity type) will be best suited for their companies.
Similarities of a PLLC and PC
Like the LLC and C corporation business structures, PLLCs and PCs may have one or more owners. Either way, they protect their owners from personal liability in case of legal judgments or debt. It limits their liability to their investment in the company. Someone might still sue an individual owner for that owner’s negligence or malpractice, but the other owners are not held liable for the failure or malpractice of any other co-owner. It’s generally safer than operating as a sole proprietorship or general partnership, wherein owners share personal liability for all of the business’s legal issues and financial debts.
Not all states recognize the PLLC and PC business structures. Where they are available options, many states require that the business owners must be certified professionals in the same field.
PCs and PLLCs have some of the same business compliance requirements, such as:
- Filing formation paperwork with the state
- Filing an annual report with the state (where applicable)
- Obtaining an EIN
- Maintaining a registered agent
- Obtaining and renewing all necessary business permits and professional licenses
Differences of a PLLC and PC
PLLCs and PCs differ in some of their business compliance requirements and income tax treatment.
Business Compliance
Professional corporations often have more extensive formation and ongoing compliance than requirements than PLLCs. States have different rules, so business owners must research what they must do. It can be helpful for business owners to talk with an attorney. Also, many state government websites provide a lot of information, along with contact email addresses and phone numbers for submitting questions.
Forming a PLLC involves filing Articles of Organization with the state, and incorporating a PC involves filing Articles of Incorporation. While PLLCs should have an LLC Operating agreement in place, it’s not usually required by the state. However, PCs must have bylaws that establish the governing rules of the business. They must also appoint a board of directors (who elect officers, such as a CEO or CTO, to run the day-to-day business operations). Some states require that a PC’s board members and officers be licensed to practice in the same profession as the owners of the PC.
Tax Treatment
Like regular LLCs and C Corporations, the default taxation treatment for PLLCs and PCs are different.
By default, a PLLC is taxed as a pass-through entity. Its profits, losses, and income tax obligations pass through to the PLLC’s owners (members). They are reported on the individuals’ personal tax returns. PLLC members must also pay self-employment taxes (Medicare and Social Security) on their net earnings from the business.
A PC is by default treated as a C Corp for income tax purposes. As such, the business pays income tax on a corporate return, and then a PC’s owners (shareholders) pay income tax on their wages, salaries, and dividend income from the business on their personal tax returns. You’ll often hear the term “double taxation” used to describe this taxation method. That’s because some business income gets taxed at both the corporate and individual level; profits paid as dividends get taxed at the corporate level when earned by the business and then at the personal level when distributed to shareholders.
Both PLLCs and PCs, if they meet the IRS’s eligibility criteria, may elect for S Corporation tax treatment by filing IRS Form 2553.
For a PLLC, S Corp taxation remains on a pass-through basis, but members (who are put on the company payroll) pay Medicare and Social Security tax only on the wages and salaries that the business pays them. In other words, it’s handled as a FICA deduction from their paychecks, with the individual paying half of the tax burden and the PLLC paying the other half to the IRS. Company profits received by members as distributions are subject to income tax but not Social Security and Medicare taxes. This can help lower individuals’ personal tax burdens if they find the default pass-through tax treatment results in an oppressive self-employment tax situation.
For a PC, S Corp taxation eliminates the sting of double taxation. It allows the PC to be taxed on a pass-through basis so that profits, losses, and income tax obligations flow through to the shareholders’ individual tax returns.
Potential Pros and Cons
Now let’s look at some of the possible advantages and disadvantages when comparing the professional limited liability company and professional corporation structures. Keep in mind that which structure will best serve a business will depend on many factors. That’s why I strongly encourage business owners to discuss all of the variables with their attorney and a trusted tax expert.
Professional LLC Pros
- Protects the PLLC members from personal liability for the legal issues and debts of the company
- Protects individual PLLC members from liability for the malpractice of fellow members
- May choose to be taxed as a disregarded pass-through entity or as an S Corporation
- May choose to be member-managed or manager-managed
- Fewer formation and business compliance requirements than a corporation or PC
- Has perpetual existence (if stated in its Operating Agreement), allowing the PLLC to continue when individual members leave the company or pass away
Professional LLC Cons
- Not recognized in all states as a legal business structure
- May be limited to only certain licensed professions
- Might result in a heavy self-employment tax burden on members (if not eligible for S Corp taxation)
Professional Corporation Pros
- Protects PC shareholders from personal liability for the legal issues and debts of the company
- Protects individual PC members from liability for the malpractice of fellow members
- Allows for the company to sell stock to raise funds for business initiatives and expansion
- May opt to be treated as an S Corp for income tax purposes (if it meets IRS eligibility requirements)
- Has perpetual existence, allowing the PC to continue when individual shareholders leave the company or pass away
Professional Corporation Cons
- Not recognized in all states as a legal business structure
- May be limited to only certain licensed professions
- Subject to double taxation (if choosing default tax treatment method)
- Must deal with more formation paperwork and tasks than a PLLC
- Has more extensive ongoing business compliance requirements than a PLLC
How to Get Started With CorpNet’s Help
If you’re a licensed professional considering which business entity type will offer the most advantages to you, I suggest you discuss your options with an attorney and accountant or tax advisor. There are many variables, costs, and benefits to weigh!
After you’ve made an informed decision, contact CorpNet to help you prepare and file all of the necessary state registration forms and other compliance paperwork. Our filing experts have experience helping tens of thousands of business owners throughout the entire United States.
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We look forward to helping you launch your company, no matter which business structure you choose!
