In all states except California, licensed professionals are allowed to operate under an LLC. In some states, you can actually form a specific entity called a professional limited liability company (professional LLC or PLLC for short), and in other states, you just file a regular ol’ LLC and then abide by some best practices to make sure that you remain in compliance.
The best way to do so is to look up the laws for a professional corporation (a separate entity in most states) and apply as many of those rules and constraints as you can to your LLC.
If you’re a licensed professional in the state of California, you cannot operate under a limited liability company. You have to structure your practice as a professional corporation, a sole proprietorship, or a general partnership.
Simply wearing a suit doesn’t make you a professional
Now, just because you are a professional at something and happen to be licensed doesn’t mean that this legal “professional” designation applies to you. For instance, in some states, architects are considered professionals, but in other states they are not.
The states differ so widely on which professions are required to be licensed that you could be required to operate as a PLLC in one state while being a standard LLC in another state. Therefore, if you think that professional licensing rules may apply to you, it’s important to check your state’s laws on the issue before filing your limited liability company.
To make your life easier, check out this website containing all state laws regarding business entities, real estate, and taxation. Enter the password onesmartdummy. Here, you can view your specific state’s laws, organized by topic.
Different liability protection
A licensed professional generally has a much bigger impact on his individual clients than, say, the manufacturer of a mundane household product. The effects of an accountant failing to do his job properly are much more profound than the outcome of your bath soap not delivering on its promise.
Because personal responsibility is a mainstay of being a licensed professional, the states want to make sure that these professionals don’t shirk responsibility for their negligent acts by hiding themselves — and their assets — behind the liability protection of a corporation or an LLC.
Just like regular LLCs, a professional LLC protects you personally from debts and lawsuits against the business, with one major exception: Most states do not allow liability protection to extend to malpractice claims.
If you’re a licensed professional, this sort of liability is a serious concern, so professional liability insurance is a must. Often referred to as malpractice insurance, it indemnifies professionals from their mistakes. If you are a licensed professional, you’d be crazy not to have it.
Also, when one of the partners in a PLLC is liable for negligent acts while practicing her profession, the rest of the partners usually do not share in her personal liability. Assuming that they took no part in the negligence, their assets should remain safe.
This provision not only protects your personal assets should your partner accidentally slip up during surgery, but it also keeps your malpractice claims separate so that your premiums don’t rise if your partner screws up. This protection is a huge benefit over operating as a general partnership, in which you are jointly, personally responsible for your partners’ mistakes.
Although the personal liability protection of professional LLCs is somewhat different from that of standard LLCs, charging order protection (the second layer of liability protection unique to LLCs) remains intact.
Restrictions on ownership
All states have pretty strict restrictions on who can own and operate a professional LLC. Many states restrict membership in professional LLCs to individuals in the licensed profession. For instance, if a legal practice decides to operate as a professional LLC, then non-lawyers cannot hold an interest in that practice.
Some states require only a 50 percent majority of licensed professionals. Others allow previously licensed and retired practitioners to be members, and some allow heirs and/or beneficiaries to inherit membership interests upon the death of a licensed practitioner member.
Restrictions on business activities
Like the ownership restrictions described, professional LLCs are statutorily confined to transacting only the sort of business or service for which the licensed professionals who own it are licensed.
If you’re the entrepreneurial sort and, say, want to develop a software solution for your client base, you can’t do it through your professional LLC. Simply form another, nonprofessional entity to manage your other business objectives.
Forming a professional LLC
Forming a professional LLC isn’t difficult. The process is roughly the same as forming a standard LLC, with a few major exceptions:
You may need to show that you and your other members have been approved by your industry’s licensing board before being able to operate under your professional LLC. In most states, you have to attach to your articles of organization a copy of the members’ professional licenses and/or include in the articles the members’ license numbers obtained from the state licensing board.
One or more of the licensed professionals usually has to sign the articles of organization. Unless you are preparing and filing your articles of organization yourself, getting the articles to a qualified member may cause significant lag time compared with forming a standard LLC, for which a third party can usually file the documents by signing as the organizer.
You may have to add a special designation at the end of your business name that identifies your company as a professional LLC. While the options vary somewhat from state to state, the required designation is usually a Professional Limited Liability Company, a PLLC, P.L.L.C., or PLLC. Some states also allow such designations as Limited, Ltd., or Chartered.
Your business name cannot make reference to any services other than the services for which your PLLC’s members are licensed. In some states, such as Nevada, the law is even more strict: Your business name must contain the last name of one or more of the PLLC’s current or former members.
In states where the last name of a professionally licensed member is required, you can often still operate under a different name. You simply file a fictitious firm name statement (also called a DBA) with your local country clerk.