Business Entity Formation Considerations for Attorneys and Other Licensed Professionals

Contributors: Allen Schaefer, CPA, MBA at Perelson Weiner LLP
Chris DeVito & Ruvin Levavi, Esq. at Power Forward Group

For many entrepreneurs, forming a business entity is an essential way to protect yourself from liability, to save money on taxes, to create structured business operations, and to build a solid foundation for your business. But for licensed professionals, that can be challenging, as many U.S. states don’t allow certain licensed professionals — such as attorneys, doctors, dentists, architects, engineers, CPAs, etc. — to form businesses unless they form a professional corporation (PC) or a professional limited liability company (PLLC).

In this article, we will examine the business considerations when choosing between forming a PC versus a PLLC with a focus on attorneys and other licensed professionals.

PCs and PLLCs are both legal entities that are often used by attorneys and other licensed professionals to conduct their business. While these entities have some similarities there are notable differences between them. For attorneys, choosing between PC and PLLC involves specific considerations and distinctions, given the highly regulated nature of the legal profession.

Below are some key points to consider:

Business Structure:

Professional Corporation (PC): A PC is a traditional corporation that is formed to provide professional services. It is typically structured with shareholders, directors, and officers, similar to a regular business corporation. Shareholders in a PC are often required to be licensed professionals in the field in which the corporation operates.
Professional Limited Liability Company (PLLC): A PLLC is a hybrid entity that combines elements of a traditional LLC with the requirements and restrictions of a professional entity. Members of a PLLC are typically licensed professionals in the same field as the business.

Professional Licensing:

Attorneys must ensure that the chosen entity type complies with their state's legal and ethical requirements. Different states may have specific rules governing the structure and organization of law firms.

Limited Liability Protection:

Both PCs and PLLCs offer limited liability protection, shielding the personal assets of attorneys from the firm's debts and legal liabilities. In the case of malpractice or negligence by another member of the PLLC, the other members cannot be held responsible, which is a huge advantage over sole proprietorships and general partnerships. This is a crucial benefit for professionals in a litigious field like law

Governance:

PCs are typically governed by a board of directors, officers, and shareholders. In contrast, PLLCs often offer more flexibility in management, allowing attorney-members to participate in decision-making.

Ownership & Management and Transition & Succession Planning:

PCs are often more structured in terms of ownership and management, with attorneys having ownership interests in the corporation’s stock but not necessarily direct involvement in the firm's day-to-day operations. Shareholders hold ownership interests and elect directors who oversee the company's operations. Officers, such as the president and CEO, manage the day-to-day affairs of the corporation.
PLLCs are generally more flexible in terms of ownership and management as they allow attorney-members to have both ownership and management roles. Members of a PLLC have greater control over the company's operations and can choose to manage it themselves or designate a manager to handle daily affairs.
PLLCs often have more flexibility in transferring ownership interests. However, this can be subject to the terms of the PLLC's operating agreement and state regulations.
Consider long-term goals and how the chosen entity will accommodate changes in firm structure, leadership, and succession planning, especially if you plan to bring in new partners or retire.

Taxation:

Tax considerations may influence the choice of entity structure.
Both PCs and PLLCs can be structured to pass through taxation, meaning the firm's income, deductions, and credits "pass through" to its owners, who report this income on their federal and/or state personal tax returns.
PCs can elect to be taxed as a C corporation or an S corporation. C corporations are subject to double taxation (at the corporate and individual levels), while S corporations pass through their income to shareholders who report and pay taxes accordingly, thus avoiding double taxation. Regarding ownership, C corporations have minimal restrictions and virtually anyone can be an owner of the corporation and there is no cap on the number of owners permitted. S corporations, however, face certain IRS-mandated restrictions, and are limited to having no more than 100 shareholders that must be domestically based and are individuals or certain trusts and estates.
PLLCs are generally taxed as sole proprietorships for single-member PLLCs and partnerships for multi-member PLLCs.
PLLC income is typically subject to self-employment taxes. The self-employment tax rate is 15.3%; this amount is a 12.4% Social Security tax on up to $160,200 (for 2023) of your net earnings and a 2.9% Medicare tax on your entire net earnings. If your earned income is more than $200,000 ($250,000 for married couples filing jointly), you must pay 0.9% more in Medicare taxes).
Whereas PLLC income is typically subject to self-employment taxes, income earned by an S corporation, a pass-through entity, is generally not subject to self-employment tax. Instead, the portion of income distributed to S corporation shareholders as profits is not subject to self-employment tax, as long as it is not characterized as salary or wages. However, it's essential to note that the salary paid to S corporation shareholders must be reasonable and in line with what someone in a similar position at an unrelated company would receive. The IRS closely scrutinizes S corporations to ensure that shareholders are not inappropriately avoiding payroll taxes by classifying excessive amounts of income as distributions.

Regulatory Compliance:

In some jurisdictions, there may be specific requirements for attorney PCs, such as mandatory malpractice insurance or compliance with the state bar's rules and regulations. PLLCs may also need to meet state bar requirements.

State Regulations:

The regulations governing attorney PCs and PLLCs can vary from state to state. Further both PCs and PLLCs may have ongoing registration and reporting requirements, but these may vary depending on the entity type and the state's regulations. Attorneys should be aware of their state's rules regarding the formation and operation of these entities. For example, North Carolina generally prohibits licensed professionals from forming LLCs to render their services. Instead, they can opt for either a PC or a PLLC. California, however, allows licensed professionals to form registered PCs but not PLLCs.
Only recognized in some states, PLLCs are subject to the same laws as ordinary LLCs. However, each state’s licensing board may verify each owner’s professional license and approve the PLLC’s articles of organization.
The following states allow licensed professionals to start PLLCs: Arkansas, Arizona, Colorado, District of Columbia, Florida, Idaho, Iowa, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Montana, Nevada, New Hampshire, New York, North Carolina, North Dakota, Oklahoma, Pennsylvania, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington and West Virginia.
The states noted below don’t recognize PLLCs: Alaska, Alabama, California, Connecticut, Delaware, Georgia, Hawaii, Illinois, Indiana, Kansas, Louisiana, Maryland, Missouri, Nebraska, New Jersey, New Mexico, Ohio, Oregon, Rhode Island, South Carolina, Wisconsin and Wyoming.

Professional Responsibility:

Attorneys need to maintain compliance with ethical, ongoing education, and professional responsibility rules. The choice of entity should not compromise an attorney's ability to adhere to these standards.

To make an informed decision between a PC and a PLLC for your law practice, it's highly advisable to consult with an attorney experienced in legal ethics, business law, and entity formation, as well as a certified public accountant (CPA) who can advise on tax and transactional implications. Additionally, it is recommended to contact your state bar association or regulatory agency to understand any specific requirements and regulations for your jurisdiction.

Want to learn more?

Registered representatives of, and securities and investment advisory services offered through Hornor, Townsend & Kent, LLC (HTK), Registered Investment Adviser, Member FINRA/SIPC, 600 Dresher Road, Horsham, PA 19044. 800-873-7637, www.htk.com. HTK is a wholly-owned subsidiary of The Penn Mutual Life Insurance Company. Power Forward Group is unaffiliated with HTK. HTK does not offer tax or legal advice. Always consult a qualified adviser regarding your individual circumstances.

Allen Schaefer and Perelson Weiner, LLP are not affiliated with HTK.

The information presented is for educational purposes only and derived from sources assumed to be reliable – it is not to be relied upon as tax, legal, or financial advice, nor used for the purpose of avoiding any tax penalty. 6032905RG_Oct25