A professional limited liability company (PLLC) is a variation of the standard LLC. An LLC is characterized as a hybrid entity because it provides limited liability protection similar to that of a corporation and has pass-through tax treatment similar to that of a partnership or sole proprietorship.
Most new businesses have zero restrictions on the type of legal entity they can use under state law. However, some business sectors have statutory restrictions on how they are organized.
For example, under Florida statute, a law firm can only have equity members who are licensed attorneys. A Florida law firm cannot be organized as a regular for-profit corporation (Inc.) or a regular limited liability company (LLC). Under Florida law, there are five types of entities permitted for the practice of law, which include:
- Sole Proprietorship
- General Partnership
- Limited Liability Partnership (LLP)
- Professional Association (PA)
- Professional Limited Liability Company (PLLC)
PLLC Formation & Management Structure
A PLLC is formed by filing the Certificate of Formation or Articles of Organization with the relevant state authority. The entity name should indicate this is a PLLC and not a standard LLC.
The PLLC operating agreement should restrict equity membership to those individuals or entities authorized to be members under state law. For example, the PLLC operating agreement for a law firm should prohibit the PLLC from admitting an equity member who is not a licensed attorney.
Management of the PLLC is vested in either a PLLC Manager(s) (i.e., Manager-managed PLLC) or its members (i.e., Member-managed PLLC).
Management should conduct the operations according to the terms of the operating agreement. Not every state requires a PLLC to have an operating agreement; however, it is highly recommended that one be in place, even if the PLLC has only one member.
Federal Tax Treatment
For U.S. federal tax purposes, the PLLC is a “domestic eligible entity,” which provides greater tax flexibility. A PLLC can, within certain limitations, file an election to be taxed differently than its default tax treatment.
A PLLC with one member is, by default, a disregarded entity for federal tax purposes. A PLLC with more than one member is, by default, a partnership for federal tax purposes.
The PLLC can file Form 8832 (Entity Classification Election) to elect corporate tax treatment. If the PLLC meets specific requirements, it can also file Form 2553 (Election by Small Business Corporation) to be taxable as an S corporation.