PLLC vs. LLC: Which Structure Fits Your New York Business Best?

How do you choose between a PLLC vs. LLC? Most businesses have no choice because some businesses cannot form a PLLC while others cannot form an LLC.

An LLC is a limited liability company that combines the limited liability of a corporation with the flexible management structure of a partnership. A PLLC is an LLC for licensed professionals with unique liability protection offered to members.

This article compares a PLLC vs. LLC for New York entrepreneurs so they understand the differences before they meet with their New York LLC attorney.

What Is a Limited Liability Company (LLC)?

A limited liability company is owned by its members. It may have multiple members or only one member. LLCs provide personal liability protection. Members can only lose their investment when it incurs liabilities.

An LLC provides a flexible ownership and management structure. Members need not own equal shares or participate in the company's operation. Finally, you can elect to have the IRS treat your LLC as a pass-through entity, thereby avoiding double taxation.

Many business owners choose to form an LLC, including:

• Restaurants
• Shops
• Entertainment venues

The state provides a simple process for how to start an LLC in NY.

What Is a Professional Limited Liability Company (PLLC)?

A professional limited liability company (PLLC) is identical to an LLC, with two exceptions. First, every member of a PLLC must be a licensed professional. Thus, compliance with licensing requirements is critical to the company. Second, members are personally liable for their professional negligence. They are not liable for other members' malpractice.

Some professional services businesses that can form a New York PLLC include:

• Lawyers
• Physicians
• Chiropractors
• Dentists
• Veterinarians
• Physical therapists
• Optometrists
• Engineers
• Surveyors
• Architects
• Accountants
• Mental health professionals
• Dietitians
• Acupuncturists
• Interior designers

You should consult a lawyer before filing an LLC or PLLC since this list is not exhaustive.

Key Differences Between PLLCs and LLCs

The choice between a PLLC vs. LLC is not just crucial but existential. Certain licensed professionals can only be incorporated as a professional limited liability company or a professional corporation. Choosing the wrong type during business formation might result in a rejection of the articles of organization.

Some key differences include the following:

1. Liability Protection

Liability protection is a primary benefit of LLCs and PLLCs. Both types of limited liability companies protect members from company liabilities. For example, when someone sues a company for breaching a contract, both LLCs and PLLCs protect the members from incurring personal liability that would place their personal assets at risk.

Instead, company liabilities are the company's. Members can only lose their investment in the company. The only exception happens when a member gives a personal guarantee.

A difference arises when an individual member's conduct creates liability for the company. A traditional LLC protects members from all business liabilities regardless of which member created them. In professional limited liability companies, members have personal liability for their own malpractice lawsuits. They are not liable for the malpractice of other licensed professionals in the company.

To summarize:

• In PLLCs, there is no protection from the member's own professional liabilities.
• In an LLC, there is full protection from all company liabilities.

Thus, each licensed professional will need to maintain their own malpractice insurance.

2. Ownership and Management

A key difference between LLCs and PLLCs arises from who can own and manage the company:

• New York law does not limit who can own an LLC — any business owner can run an LLC.
• New York law limits who can own a PLLC to only licensed professional.

However, you should keep one caveat in mind. A PLLC is a legal business entity formed to provide the services of licensed professionals. Professionals can join together with or without non-professionals to conduct other types of businesses.

For example, if doctors get together to practice medicine, they must form a PLLC, and it cannot have non-physician members. If they form a business to market and sell a product invented by one of them, they will form an LLC, which can include non-physician owners.

3. Professional Restrictions

Under New York law, LLCs cannot provide professional services. Those wishing to provide services under their professional license can only operate as:

• Sole proprietorships
• General partnerships
• Professional limited liability partnerships
• Professional corporations
• PLLCs

However, this restriction does not limit the scope of a PLLC's business. It can provide other services in addition to its professional services. For example, licensed acupuncturists practicing in a PLLC can also operate a health food shop under the same PLLC. Other industries have stricter guidelines. For example, lawyers cannot provide non-legal services through a law firm PLLC.

By contrast, LLCs have no restrictions on the services they can provide.

4. Taxation

PLLCs and LLCs have the same tax options. Strictly speaking, the IRS does not recognize LLCs or PLLCs as a separate legal entity class. Instead, it allows LLC and PLLC owners to choose whether to be taxed as a pass-through tax entity or a corporation.

Pass-through taxation happens when the company does not pay taxes on its revenue. Instead, the members pay income taxes on their share of the company profits. This type of taxation also applies to other business structures like a partnership or S-corporation.

Corporate taxation happens when the company pays taxes on its revenue. Members pay taxes again when the company issues member distributions. This type of taxation, called double taxation, usually only applies to a C-corporation.

Most PLLCs and LLCs elect tax treatment as an S-corporation rather than a C-corporation. Small business owners typically cannot afford to pay double taxes, so pass-through taxation is an attractive option.

To summarize, the taxation of LLC and PLLC entities:

5. Formation and Registration Process

Both LLCs and PLLCs lack any limits on the number of members. You can form them to operate as a sole proprietorship with a single member. You can also form them with dozens of members.

For the formation of LLC entities, you must submit articles of organization to the New York Department of State. The articles must be signed by an organizer and identify at least one member. Approval takes a few days to a few weeks.

The name of your PLLC may need to meet licensing requirements for your industry.  For example, certain medical licenses require the full license to be identified in the legal entity name.  Other industries do not allow for “trade names” or “doing business as” (DBA) names.  It’s important to ensure you follow naming guidelines, or you may experience weeks of delays or even rejection of your legal entity formation by the licensing board, the New York State Department of State, or both.

The formation of PLLC entities requires approval from the state licensing board for your profession. You will submit to the board:

• Articles of organization
• Application
• Affidavit

The board will verify that your PLLC is directed to the same profession as your license. It will also verify that your members and managers have licenses in good standing. This step could take a few weeks to a few months. If the board approves your application, it will issue a certificate.

You will submit the certificate with the articles of organization to the Department of State. The state will register your PLLC as long as you submit all the necessary paperwork and choose an available name. Registration will take a few days to a few weeks. Your company must have an operating agreement, but you do not need to submit it to the state.

6. Annual Reporting and Compliance

New York does not require LLCs or PLLCs to file annual renewals. Instead, it requires a biennial statement that identifies the company's address or its resident agent's address.

LLCs have no other filing requirements. PLLCs have an additional requirement that your articles include the names and addresses of all members. As you add or remove members, you must amend your articles. You should conduct a periodic compliance review with your lawyer to stay on top of deadlines and required filings.

In addition to the company filings, each member of a PLLC must maintain their licenses. Any member or manager who allows their license to lapse cannot practice through the PLLC. Failing to comply with these regulations may include fines or even criminal charges for practicing without a license.

Should I Consult with an Attorney or a Business Advisor Before Making a Decision?

Forming a professional practice can raise complicated issues. More importantly, forming it incorrectly can expose you to sanctions from a licensing board and the Department of State. It may even trigger criminal charges for unlicensed practice. You should consider seeking professional advice before forming your LLC or PLLC to avoid these consequences and ensure your filing is correct the first time.

Business advisors bring significant value to your company. They use their experience and knowledge to provide strategic insights based on financial and legal considerations. These insights will help you plan and structure your business.

Contact Our Business Formation Attorney

PLLCs are very similar to LLCs. But there are differences.

Professionals form a PLLC to practice their profession. Owners and managers must each have a professional license. They have liability protection from other members' actions but not from their own.

You do not need a professional license to form an LLC, and you can form one as a sole proprietorship or with others.

Lawyer For Business can help you navigate New York law and its limits on how you can form your practice. Contact us for professional advice about the business structure you should form in New York.