What to Consider When Choosing the Business Structure of a Professional Services Firm | Levenfeld Pearlstein, LLC
There are different entity structures available for a professional services business, each with advantages and disadvantages. In this article, we discuss the key features of LLCs, PLLCs, and LLPs to help you determine which is best for your business. All three business entities must have a partnership or operating agreement detailing matters such as retirement, covenants, voting rights and governance.
In all of these entities, the key is that by creating a limited liability entity, business owners protect their personal assets.
Limited Liability Company (LLC)
A key feature of an LLC is the limited liability of its members for business debts and obligations. However, in an LLC, if a member commits professional misconduct, all of the company’s assets are at risk. An LLC also offers tax flexibility. Most LLCs choose to be taxed as a flow-through entity like a partnership, but in some cases they can choose to be taxed as an S-Corp or even a C-Corp. Some states do not allow licensed professionals to operate as LLCs.
Professional Limited Liability Company (PLLC)
A PLLC is a business structure available to business owners who must be licensed in their profession, such as medicine, law or accounting. An LLC offers members limited liability for business debts and obligations more limited liability for malpractice claims. With a PLLC, a member is not liable for another member’s malpractice claims, only their own personal malpractice claims, including lack of supervision.
Not all jurisdictions have a PLLC and in some states businesses owned by licensed professionals are required to register as a PLLC. For example, in New York, you must obtain a Certificate of Authority from the Bureau of Professions and then file a Certificate of Registration with the New York Department of State. In Illinois, with some exceptions, businesses listed as LLCs providing professional services licensed by the Illinois Department of Financial and Professional Regulation (IDFPR) are required to register as PLLCs with the Office of the Illinois Secretary of State.
Limited Liability Company (LLP)
In an LLP, there is liability protection for malpractice claims. Thus, like a PLLC, a partner is not liable for the malpractice claims of another partner, but only for its own negligence or malpractice, including lack of supervision. However, unlike an LLC, in some states a partner may be liable for the debts of the partnership. Additionally, there is no tax election for an LLP. An LLP is taxed like a general partnership with pass-through taxation.
Choose the business structure
The most advantageous business structure will depend on several factors, including the state of the organization and the profession.