Getting Professional: A guide to forming PLLCs, PAs, and other professional entities
About Professional Business Entities
If you are considering forming your business as a professional corporation, professional limited liability company, or professional service corporation (also called a professional association or PA), there are some things you should know before you get started. Professional business entities are created according to a state’s statutes. Their purpose is to create an entity exclusively for practicing professionals such as lawyers, accountants, or doctors. Because traditional corporations and LLCs offer liability protections, these entities were often seen as incompatible with the public interest of holding professionals liable for malpractice. Prior to the development of professional entities, some professionals were unable to form corporations to practice their profession. Professional entities allow a balance between protection of the professional’s personal assets and the need to hold professionals to certain ethical standards. Not every state has a statute regarding professional business entities, so not every state will recognize them. In many of the states that do have professional entities, professionals forming a business to practice their profession are not simply permitted, but required, to form a professional entity. A state-by-state guide to professional entities should help you understand what your state requires.
Form a professional entity
Here are some basic steps that will help you navigate the requirements for professional entities:
- Choose your entity type. Typically, entrepreneurs forming a new business entity have to weigh potential tax benefits and decide what structure will best fit their business plan, but professionals may have limited options. Your state will have its own statutes regarding professionals creating a corporation, limited liability company, or association. All states (except for West Virginia) allow professionals to create some form of a professional corporation. Most states allow professional LLCs. Some states offer a choice between the two. Some states also allow professionals to form limited liability partnerships and a couple of states offer professional associations.
Some states use the terms professional corporation and professional association interchangeably. Other states, like Texas offer a professional corporations and LLCs, but require some professionals to form professional associations. This sounds confusing, but it is less overwhelming when you are only looking at your state.
- Choose a business name. Aside from having to decide which one of your partners’ names will come first, your business name must also meet the state’s name requirements, as names must correspond to your entity type. Examples of acceptable abbreviations include PA for professional associations, PC for professional corporations, or PLLC for professional limited liability companies.
Other restrictions may also apply to your business name. You may be required to indicate your name or profession in your business name. For example, a pair of lawyers forming their business may be required to call it something like “Smith and Smith, Attorneys at Law, PLLC” because the state bar association requires that language. Alternatively, there may be words you are not allowed to have in your business name. Keep in mind that this will all depend on your state (scroll down to your state’s requirements to learn more).
- Get approval from your state licensing board. These entities are for licensed professionals only. Professional corporations, LLCs, or associations can be formed by a single professional or by a group of members, directors, or associates, if they are all licensed in the same profession. Many states limit professional entities to licensed professionals such as doctors, lawyers, accountants, and engineers. Some states define professional services more broadly, including any occupation that requires a license. In most states business owners must show proof of licensure and the professional licensing board must approve your articles of incorporation, organization, or association before filing your formation documents with the secretary of state.
- File your paperwork with the Secretary of State. Once your articles have been approved by your licensing board, you may file them with the Secretary of State to legally form your business.
Protection from Liability
A main goal in the formation of any business entity is the protection of its owners from liability for business debts and lawsuits. Professional corporations and LLCs provide these basic liability protections with one major difference. A professional is not protected from liability for their own malpractice. Operating as a professional corporation or LLC can protect a professional from the malpractice of his or her fellow members or associates, but not from the professional’s own malpractice.