What to Consider When Choosing the Business Structure for a Professional Services Firm
July 27, 2022
There are various entity structures available for a professional services firm, each with pros and cons. In this article, we discuss the key features of LLCs, PLLCs, and LLPs to help you determine which is best for your firm. All three business entities should have a partnership or operating agreement detailing matters such as retirement, restrictive covenants, voting rights, and governance.
In all of these entities, the key is that by establishing 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 a LLC, if one member commits malpractice, all of the business assets are at risk. An LLC also offers tax flexibility. Most LLCs choose to be taxed as a pass-through entity like a partnership, but in some cases, they may choose to be taxed as an S-Corp or even as a C-Corp. Some states do not permit licensed professionals to operate as an LLC.
Professional Limited Liability Company (PLLC)
A PLLC is a business structure available for business owners who are required to be licensed in their professions, such as medicine, law, or accounting. A PLLC offers members limited liability for business debts and obligations plus limited liability for malpractice claims. With a PLLC, a member is not liable for the malpractice claims of another member, but only for their own personal malpractice claims, including failure to supervise.
Not all jurisdictions have PLLC and in some states, businesses owned by licensed professionals are required to register as a PLLC. For instance, in New York, you must obtain a Certificate of Authority from the Office of the 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 a PLLC with the Illinois Secretary of State’s Office.
Limited Liability Partnership (LLP)
In an LLP, there is liability protection for malpractice claims so, like a PLLC, a partner is not liable for the malpractice claims of another partner, but only for their own personal negligence or malpractice, including failure to supervise. However, unlike an LLC, in some states a partner can be liable for the partnership’s debts. In addition, there is no choice of taxation for an LLP. An LLP is taxed as a general partnership with pass-through taxation.
Choosing the Business Structure
The most advantageous business structure will depend on several factors, including the state of organization and profession. If you have any questions, please don’t hesitate to reach out to a member of LP’s Corporate Group.