Starting a business involves many critical choices, and one of the most important decisions is choosing the right type of legal entity.

The most popular entity choice in the United States is the limited liability company (LLC). However, before you rush to file any documents with the state, consider that the LLC may not always be the appropriate entity type.

If the entity engages in a specific type of business, state laws may require the owners to use a different entity than the standard LLC.

What is an LLC?

A Limited Liability Company (LLC) is a legal entity created under state law by filing a Certificate of Formation or Articles of Organization with the relevant state authority.

The LLC offers the owners (also known as members) protections from personal liability for the company’s debts and other obligations. LLCs are a popular choice for most active businesses, and investors also use them to hold assets like real estate, stocks, bonds, and cryptocurrencies.

LLCs are, by default, flow-through entities for federal tax purposes, which makes them preferable in many cases over using a corporation. An LLC is also a domestic eligible entity, meaning it can generally change its tax classification by filing Form 8832 (Entity Classification Election).

What is a PLLC?

A Professional Limited Liability Company (PLLC) is a specific type of LLC. The PLLC is designed for licensed professionals, such as doctors, lawyers, certified public accountants, dentists, architects, and others who provide services that require a state license.

In many states, certain licensed professionals cannot use a regular LLC to operate their business. Instead, they must use the PLLC or other form of professional corporation.

States that Use the PLLC

It’s important to remember that only some states offer the PLLC structure. For example, states like Delaware, Alaska, and California do not have professional LLCs. Instead, professionals in these states often use the Professional Corporation (P.C.) or a limited liability partnership (LLP).

As of 2024, Washington D.C. and 28 states allow licensed professionals to form a PLLC. Those states include Arkansas, Arizona, Colorado, Florida, Idaho, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington & West Virginia.

Before launching a PLLC, check with your state’s Secretary of State website for more information on whether a PLLC is an option for your business. When in doubt, consult with an attorney in your area.

Differences Between LLCs and PLLCs

The LLC and PLLC are similar entity types. The two primary differences between LLC and PLLC are the types of business activities the entity conducts and who can be an owner.

Type of Business Activities

A standard LLC can generally engage in any lawful business, such as operating a restaurant, hotel, car dealership, lawncare business, etc. A company cannot use the standard LLC for certain business activities if state statute provides the business must use a different structure. For example, many U.S. states require that banks and insurance companies organize as corporations and cannot use an LLC.

In states that recognize PLLCs, the professional LLC is organized for the sole purpose of rendering professional services and has owners who themselves are licensed or otherwise legally authorized to render the same professional service as the company. Those licensed professionals may include a certified public accountant (CPA), chiropractic physician, dentist, doctor of medicine, surgeon, architect, veterinarian, attorney, or life insurance agent.

Restrictions on Ownership

A standard LLC generally has no restrictions on who can be an LLC member. Members can include individuals, corporations, trusts, nonprofit organizations, governments, etc.

For a PLLC, only licensed professionals who are authorized to engage in the practice for which the PLLC was created can be an equity owners in the PLLC. For example, if three individuals want to open a law firm in Florida using a PLLC, each individual must be a licensed attorney by the Florida Bar Association. The PLLC cannot have an owner who is not a licensed attorney in Florida

The Certificate of Formation and the PLLC Operating Agreement should provide that ownership in the PLLC is restricted to individuals who hold the license required to engage in the PLLC business. If the individual were to lose their licensure, he should be removed from the company and can no longer participate in the company’s business activities. In addition, if the individual desired to leave the company and sell or transfer their PLLC membership units, he would only be eligible to sell or transfer the units to another person who meets the same licensure requirements.

For example, assume 3 CPAs in Connecticut open a PLLC to operate a public accounting firm in Samford, Connecticut. All three CPAs are licensed CPAs in Connecticut. After 10 years of practice, one of the CPAs wants to retire and dispose of his equity interest in the PLLC. The CPA can sell his PLLC units to the existing two owners as a buyout, or he could find another CPA licensed in Connecticut to acquire his interest.

Tax Considerations

The LLC and PLLC have similar tax treatments. By default, both entities are flow-through entities for federal tax purposes, which means the net profits and losses flow through to the members and are reported on their income tax returns. An LLC or PLLC with one owner is a disregarded entity, while an entity with two or more members is, by default, a partnership.

The members of the LLC or PLLC can generally elect for the entity to be taxed as an S corporation or a C corporation if they determine that is more tax advantageous for their business. An S corporation election is filed using Form 2553 (Election by Small Business Corporation) while a C corporation election is filed using Form 8832 (Entity Classification Election).

Final Thoughts

Choosing between an LLC and a PLLC boils down to the nature of your business, the ownership structure, and the state where you plan to operate the business.

If you’re a licensed professional whose state mandates your business operate under a particular legal structure, the PLLC may be one of several options. We recommend you consult a knowledgeable attorney in your state to choose the best entity for your business.

For a discussion on Florida PLLCs, view our video here: