Attorneys, doctors, accountants and other licensed professionals can own their own practice or they can form a separate legal entity. One choice is to form a professional corporation.
Most states also allow licensed professionals to form a limited liability company. In some states, professionals may form an LLC under the regular LLC law. Others have a separate Professional Limited Liability Company Act that professionals must form under. Some professionals prefer an LLC because it provides more flexibility to the owners than a professional corporation. However, whether a professional corporation or LLC is best depends upon each unique situation.
State law sets forth which professionals must be licensed. It varies among the states, but typically they include:
- Mental health professionals
How is a professional corporation or PLLC formed?
Professional corporations and LLCs are formed in a similar manner to regular corporations and LLCs. They file a formation document with a state business entity filing office. The document is generally called Articles of Incorporation for a professional corporation and Articles of Organization for an LLC.
However, there are several significant differences from regular corporations and LLCs.
- Many states require that all shareholders or members be licensed professionals. Some states do permit non-professionals to be owners but usually limit them to less than 50 percent.
- Most states require approval by the proper state licensing body before the formation documents can be filed with the filing office.
- The corporation or LLC’s sole purpose must be to provide the services of the licensed professionals, such as providing legal or medical services.
- In addition to the standard state naming requirements, the name must clearly indicate that it is a professional corporation or LLC. Often this is done by including "Professional Corporation" or “Professional Limited Liability Company” or the abbreviation "P.C.," "PC," or “PLLC” or, in some states, "P.A." (professional association) or "S.C." (service corporation). And, depending upon your state, you may have to include your profession in your name.
- States may also require that the corporation or LLC carry insurance or have a surety bond as an additional means of protecting the public in the event of malpractice by one of the shareholders or members.
Ongoing responsibilities of the PLLC and professional corporation
Once you have formed your professional corporation or LLC, you must comply with the ongoing compliance responsibilities of the governing professional corporation or LLC law. In the case of a corporation, this includes issuing shares, adopting bylaws, electing directors, holding meetings, filing annual reports, and maintaining a registered agent.
While a PLLC generally has fewer state-mandated responsibilities, all states require that the PLLC maintain an in-state Registered Agent and most require the PLLC to file annual reports. Although it is not required by all states, it is strongly recommended that the members of a PLLC adopt a written operating agreement that defines the members' rights and responsibilities, details the process joining or leaving the PLLC, and provides rules for the management and operation of the PLLC.
It is also important to remember that the state laws governing the formation and ongoing responsibilities of professional corporations and LLCs can vary significantly and it is important to review the governing law of your specific formation state.